We all know that investing is one of the great keys to financial freedom. Investing is one of the key in staying ahead of inflation and taking advantage of the power of compounding interest which according to Albert Einstein is the eighth wonder of the world and he who understands it, earns it while he who doesn’t pays it.
The stock market is the number one investment instrument that yields the highest rate of return. Return on Time deposits, Savings account and Government Treasury bills all comes behind the Stock Market. Unfortunately there are still a lot of people who are not invested in this wonderful instrument, probably because stock market are mostly associated with gambling or high risk investment and people just stay away of it and not even dare ask how it really works and how one can get started.
How to get started in Stock Market
It is very easy to get started in the stock market. You will need to find a stock broker that fits your need and opening an account with them, after that you are all set to buy and sell shares of stocks of any listed companies. How to be successful in the stock market is all together a different thing than starting in stock market. The main factor in being successful in the stock market is the way you pick your stocks. Of course there are still other factors like money management and trading psychology but without a great stock picking strategy your performance will not be as great.
Correlation between Growth and Risk
In finance the relationship of risk and reward is the greater the potential reward, the higher the perception of potential risk. This golden truth can be applied to just any activity, like sports, education, gambling and investing. Before you even nod your head to agree to the above premise, it is very important to understand first what is risk.
One of the extreme relationships between risk and reward is the combination of paying a high premium for quality in exchange for greater confidence in a potential winning outcome. It is like buying a company 50% more than the overall market and the likelihood of its having superior earning growth justified the premium. The other extreme on risk reward relationship is maximizing potential gain by buying cheap with the hope of hitting it big but this one obviously carry a high degree of risk not only from potential loss but most of all the appearance of foolishness once it fails. Since people are naturally risk-averse, they avoid this kind of decision and are compelled to pay a premium in order to hide behind the average crowd. This is the same when investor falls into quality traps, it is somehow more accepted trading principle to buy Apple or Google at any price than to buy a lesser-known emerging growth stock at a low price but looking at this at a different perspective this acceptable trading principle falls short of making sense.
Finding the Stars of tomorrow
Identifying Mega trends in the Industry, this will be a top down approach that is why we are starting in identifying the industry that will be growing at an enormous sustainable phase for the next 20 years.
Company Selection, once we have identified the industry with mega trends, we narrow down our focus to companies that belongs to this industry. We will evaluate the companies through the management that drives them, the products they offer and will be offering, company’s growth potential in a mega trend industry and lastly there predictability in terms of recurring revenue and return.
Stock Price Valuation, using financial ratios to identify stock price future valuation discounted at current price to identify the acceptable price to buy and accumulate a stock at a certain point in time.
It is good to have an eye on the shorter time frame of the market but it is in being at the same side of the longer time frame trend that will yield you the most profit. Remember to keep your trade align with the longer time frame trend but you should always consider the shorter time frame trend to enjoy the ride.