Important stock investment concepts
Beginner Stock Market Investing, Stock Market Investing Advice
Even seasoned stock investors sometimes needed a refresher course in the important concepts of investing whereas beginners should always study these concepts to get an idea of the basics of stock investing. Here we describe some important investing concepts:
Dollar Cost Averaging. One of the most difficult things in investment in the stock market is to identify tops and bottoms on the market. Timing the market is difficult to execute and accomplish and, as a result, you will find it well-nigh impossible to extract the maximum profitability from a trade by buying at the very lowest price and selling at the very highest price. This is why you should look seriously at practicing Dollar Cost Averaging (DCA). Though this may sound very complicated, it is in fact a very simple and useful technique to overcome the problems of identifying market peaks and troughs. The process itself consists of investing a fixed amount at periodic intervals in a selected stock regardless of the ruling market price. Naturally, the assumption is that you find the investment to be an attractive long-term one.
As a result, you could buy more shares when prices are low and less when prices are high. Over a period of time, your costs will average out. As you can see, you can overcome the problem of making a single large investment in your stock especially if the market timing is not correct. This is also a useful technique for investors who do not have the wherewithal to invest large sums of money at one time but do have money to spend in small amounts over a period of time. You may take a loss over a period of time if the market is declining steadily but otherwise, things should work out quite well.
Asset allocation. It is no great trade secret that statistics show investments in stocks have outperformed investments in other forms of investment vehicles often by a considerable margin. However, it would be dangerous to put all your money in a single stock and even more dangerous to use stocks for your entire investment portfolio. Asset allocation is a technique that was devised to diversify away both from single stock investments and all stock portfolios. Risk is managed and balanced by investing in other asset categories such as bonds or real estate in addition to stocks.
Because each asset category has its own particular characteristics, each one will behave differently over the long term. The idea is that declines in value in one asset category will be compensated for by increases in other asset categories. For instance, bond prices have an inverse relationship to stock prices and, in theory, the declines in bond prices should be offset by increases in stock prices so that the overall value of your portfolio remains largely unaffected. The other principle of asset allocation is that your risk of reference changes with your age and you can reallocate your assets to reflect this change. For instance, the older you get the more risk averse you become and you should de-emphasize the stock component of your investment portfolio to stress investment in income investments.
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