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Investment rules for beginners

HUSTLE GANG
By | October 16th 2010

By Tania Ngima

Whether you’re seasoned or a novice investor, there are some basic principles that are applicable to successful investing.

While the major difference between an investor and a speculator is that the former looks at a stock or share as part of a larger business with long term potential, the latter places the value on a share depending on the best price he can get on it.

Not all speculating is bad; the key lies in knowing which skill to develop. Here are a few guidelines:

The power of compounding

Give your money enough time to grow. If you choose to become a long-term investor, whichever avenue you use, whether a stock or mutual fund, chances are that you will gather two things as you go along; you will become more knowledgeable in your craft and as you make profits little by little you will build a cushion, which you can use to hedge your investments.

Debt versus investing

It is common sense that if you have credit card debt, which you’re paying at, say, 17 per cent while your investment is granting you 10 per cent, you need to rethink your priorities and the long term effects of your money goals.

While some debt is good, namely debt incurred to acquire appreciating assets and debt which has tax-deductible interest, some debt such as credit card and other high interest debt is preferably avoided at all costs.

Review your investing decisions in terms of the proceeds of compounding interest versus the interest being currently paid on the loan as well as the time value of money that is the basic principle that money now is worth more than money two or three years down the line due to inflation, taxes.

Avoid the crowds

Unfortunately, investing tends to be driven by fads; what our friends, colleagues, fellow chama members are doing.

When this public perception is created regarding a particular stock or share, it leads to a rush, driving the market price up due to the laws of demand and supply.

In the end, the people who buy the shares end up paying a lot more than the instrument’s intrinsic worth, making it hard and lengthy to recover and make money on the stock.

Sometimes, you will come across smaller emerging and promising companies selling stocks at a discount. A little research is inevitable to avoid losing money.

Discipline

You have worked too hard for your money to throw it into any and every random investment without putting any thought into it.

Do not panic just because you feel a certain stock in your portfolio is doing badly. However, do not ignore what the market is telling you.

Even the highest selling stocks can be affected by political unrest and poor management.

Know when to hold on and when to let go, and avoid putting more good money into bad money even if it is in a bid to make good on what you’ve already lost.

 

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