Investing can offer a great opportunity for you to grow your wealth and better prepare yourself for retirement.
Whether you park your money in growth stocks or dividend stocks, you can see the fruits of your labour over time as the value of your investment grows.
For income investors, they can enjoy a growing stream of passive income to help them offset inflation.
Of course, investing is not without its risks.
Beginner investors may wonder how to get started while intermediate ones may face hurdles in attaining their investment goals.
Here are four important characteristics you need to possess to do well in investing.
Understanding financial statements
Remember that share prices are not just numbers bouncing around on a screen.
They represent a real business selling goods and services.
Share prices reflect how well the business is performing and what investors are willing to pay for a slice of it.
But, to understand if the business behind the stock is doing well, you need to be equipped with basic knowledge of how to read financial statements.
Don’t worry, you need not be a trained accountant or know how to read complex reams of financial information.
What I am talking about are simple ratios that you can calculate using a pocket calculation along with an understanding of whether the company is performing well, or not.
You should look at each company’s financial statements to see if it is improving its revenue and profits.
At the same time, spend some time reading up on management’s discussion on the period’s results to get a sense of whether the business will go well in the future.
You can also learn to calculate simple ratios such as free cash flow, gross profit margin, and return on equity.
These simple computations will go a long way in helping you to understand and manage your investments better.
As dividends represent a tangible return on your investment and are a crucial part of income investing, you should also find out if the stock pays a reliable dividend.
You can calculate the increase in dividends over the years as well as the dividend yield (the dividend per share divided by the share price) to get an idea of how attractive the business is.
Patience
The great Benjamin Franklin once quipped: “He that can have patience can have what he will.”
This is true for investing, too.
Remember that businesses need time to grow and execute their plans.
Business development efforts take time to bear fruit and corporate initiatives always have a gestation period.
Hence, patience is needed to see a business grow its revenue and profits.
And as a company’s profits rise, its share price should also rise in tandem, yielding valuable capital gains for the investor.
An impatient investor who sells too early will miss out on the bulk of the great stock’s future gains as it continues to steadily grow its profits.
Controlling your emotions
Investing your hard-earned money also involves a mix of emotions.
Greed and fear are the two most prominent emotions in investing.
As share prices soar to the heavens, greed may take over and cause you to plough more money into the stock as its valuations get ever more expensive.
The converse is also true.
When a stock plunges, you may hurriedly sell it off for fear that it may fall even more and cause all your money to disappear.
Both actions may not be optimal unless you have thought through the situation calmly and rationally.
A rising stock price may imply that investors are bullish over a stock but you need to find out the underlying reasons to avoid overpaying for it.
If not, you could be stuck holding on to an overpriced stock as the business suffers from declining profits.
The same goes for a falling stock price.
Instead of selling a stock that is plunging, you need to assess if it may make sense to either hold on to it or buy even more at bargain prices.
The key here is to control your emotions so that you can make rational decisions that will improve your financial well-being.
Tolerating volatility
Finally, investors need to face constant volatility in stock prices.
Share prices may move up and down, sometimes sharply, for no apparent reason.
These fluctuations may cause worry as the value of your investments rises and falls.
You can read about several ways of coping with this volatility over here.
The bottom line is – for you to do well as an investor, you should tolerate the volatility as it is the price you need to pay to enjoy a good long-term return from share investing.
If you’re nervous, confused, or worried about buying your first stock, then our latest beginner’s guide to investing can help. It’s easy to read yet packed with valuable insights. Download it for free today, and buy your first stock in the next few hours. Click here to get started.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
