Whenever you buy anything, you first check that Is the product suitable for you ? Do you need that product ? Is your budget is allowing to buy the product? This is what you should also check before buying any stock. The general trend is people see some stock in news channel which is going up and buy it thinking that they would also take profit from this higher price movement.It should not be like that. If it would be that easy to earn profit just following some news channel or expert advise, then everybody who invests in stock market would be millionaire.
It doesn’t matter how good any stock is, even if its ten bagger or multi bagger, you must evaluate yourself before buying any stock.
In this article I am going to explain three parameters that need to be checked before you buy any stock.
- Do I need a house?
Before you invest in stocks, you first consider investing in house. It’s one of the best investments that anyone can manage. Many people who are not professional in real estate have invested brilliantly in house. There are rare cases when people move quickly and sell house at loss.
Purchasing a house is in favor of owner. The bank let you acquire it for 20% down and some cases less, and giving you benefit of leverage. Let’s consider this case in stock. You can buy stocks with 50% cash down, which is called “Buying on margin”, but every time a stock bought on margin drops in price, you have to put more cash. That does not happen with house. If the house is located at not that valuable area or market value of house go down, you never have to put up more cash. If you have bought your shares on margin then your broker would call you to sell the shares. It never happen in house, your broker never calls to tell you “you will have to pay some X amount of money or sell two bedrooms”
There is a saying “Never invest in anything that eats or needs repairs”. This may apply to racehorses but not to house.
People frequently change their stock portfolio, but they invest in their house for long term. So that house gives them attractive returns over the period. The reason of not holding stock for long term is that, if one wants to sell a stock what would he required to do? A phone call only. In contrast, exit from house in not that simple.
People make money in real estate and not in stock market. Do you know why? The answer is simple. They spend months to choose a house and spend minutes to choose their stocks. In fact, they spend more time shopping a refrigerator than shopping for a good stock.
2. Do I need Money?
First review you family budget then consider buying a stock. It may happen you have many upcoming expenses like child’s education, Marriage, Hospitalization.
Stocks are relatively predictable over 10 to 20 years. Even blue chip stocks can remain down for 3 to 5 years.
If you are old age person who need fixed income or young person who has limited income for family survival, then you should keep distance from stock market.
There is simple rule of investing in stock market “Only invest amount which in case if you lose, there would be no effect on your daily life in the foreseeable future”
So conclusion is First park money which you think you would need in future, and then only invest extra money in stock market.
3. Do I Have personal qualities to be successful in stock market?
There are some primary qualities that required being successful in stock market. You might be thinking one needs so much knowledge or sixth sense for predicting future price of stock:) Its nothing like that. The qualities one needs are Patience, common-sense, open-mindness, detachment, pain tolerance, persistent, humility , flexibility, a willingness to do independent research, willingness to admit mistakes and the ability to ignore general public.
It’s also important how you can derive from incomplete information. Things are almost never clear in stock market. Or when they are its too late to profit from them. It’s all about how you make decisions without complete or perfect information.
Though It is impossible to predict market, people can’t control their gut feelings. I am talking about the gut feelings which let them predict that stock price would go high now or economy would improve now.
There is an example here. From 1930 to 1960 market did well but many investors having gut feeling that market would not perform well and they didn’t invest. In contrast, from 1970 to 1987 market didn’t perform well and investors invested assuming that market will do very well.
There are three phases of investor community feelings.
- They don’t buy when market falls. Fear of loss resists them here. Ultimately they lose an opportunity of buying stocks at lower prices.
- Then price starts getting up. They start buying at higher price having faith that market would perform well ahead too.
- At the end, market starts falling and the investor community starts selling.
Now, you would be thinking “I would buy when everybody is selling and vice versa”. It is also not workable solution here. You have to wait for the things to cool down and then buy a stock having great fundamentals and nobody cares about . The two simple things you have to follow for being a successful investor.
- Don’t trust you gut feelings, instead learn yourself to ignore them.
- Hold your investments as long as the fundamentals are good.
Source: One Up Wall Street