It is important to take note that when you buy a company's shares you become a part owner. As a part owner you are then entitled to a proportionate share of its profits and also to participate in its management by voting during shareholder's meetings. On the other hand, if the company makes losses, you lose too because you do not receive dividends (unless they're paid out of retained earnings) and the value of your stocks decreases. In extreme cases, you could lose your entire investment if the company collapses.
In the long run, stocks of well managed companies often deliver high returns compared to other investments. However stocks are volatile, and their prices swing dramatically up and down without notice, which means there could be long periods of depressed prices as you know that higher returns go hand in hand with higher risks.
How can this risk be reduced? You need to make competent stock selection, cost averaging i.e. purchasing a fixed amount of money worth of stock periodically over the years, and by diversifying holdings by buying stocks of companies in different sectors of the economy. Since stocks can be bought in small tons, have a high long-term return and are liquid; they can be ideal investment vehicles for individuals who need to invest a little money at a time to fund a major long-term goal. Building a retirement nest egg, university education fund or raising a down payment for a house all become practical through investing in stocks.
However, in order to succeed, you should invest in a company only after you have a thorough analysis of its suitability as an investment. Such analysis is a technical skill which most individuals do not possess. If you're not competent in an investment analysis, it is imperative that you use the service f a qualified professional before you commit your money. You should also remember that stocks are long-term investment so you must not commit money you plan to use in the next five years or more. In addition, you must be prepared for volatility since the price will fluctuate over time.
Investing, in itself, is not a goal; rather it is a means to achieve your financial goals. Those who want to speculate should do so with funds they can afford to lose. However, one cannot base their financial life on speculation, it is not dependable. Whenever you invest, your aim should be to move your financial agenda ahead and the easiest way to measure such progress is by checking your net worth changes. All is not lost if you don?t have the skills to select stocks yourself or the resources to attract professional asset management services. The avenue that is most practical for most people to invest in stocks that are competently selected diversified and the portfolio managed without a huge cash outlay is unit trusts.
Do not move by the wind, consult a competent financial advisor that you can trust to put your interests before their own and to point you in the right direction towards a better financial future. Become a patient and analytical long-term investor. Do not be lured by the desire to make a quick buck, it hardly ever works. As the pendulum of the stock market swings from greed to fear, it is the patient and analytical long-term investor who reaps the greatest profits. Be wise!
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