Investment strategy, risk tolerance, and research are three concepts that act as the foundation of any beginning investor’s education of stock investing. Investment strategy establishes rules and criteria to select stocks. Risk tolerance is how much an investor is willing to risk on each investment. Research help investors to select the right companies for investment and to minimize the risk involved with stock investing.
Investment strategy will vary; therefore, investors should be most comfortable with the investment strategy that will help them meet their financial goals. It should expose them to least amount of risk. The type of investment strategies that investors could use are value, growth, or income. Since each strategy differs in the rules used to pick stock, it also means that certain levels of risk are assumed with various strategies used. Investors can change their investment strategy as their financial needs change. By choosing an investment strategy, it will influence how financial data of a company is interpreted.
Risk tolerance shows how much an investor is willing to risk to make a profit. Some investors are willing to take a high level of risk; therefore, they would be considered aggressive stock investors. An aggressive stock investor may choose growth stock investing strategy to pick their stock. Since stock price can decline there is always the possibility of losing money invested in a stock. Therefore, investors need be aware of their comfort level regarding the loss of money. The fluctuation of the market can be quite volatile; therefore, investors should also establish what too much volatility is for them before making an investment.
Investors use research to uncover information regarding corporations to determine if the company is investment-worthy. Research can begin with investors looking at a prospectus, but they are several ways to conduct research. It is important for investors to learn how to use financial statements such as a balance sheet, income statement, and cash flow statement. The financial statements will reveal past performance of company and that is helpful when investors need to compare financial data from year to year. Research for investor’s means they must learn to use various financial ratios to uncover information to determine the financial health of companies. Investors will use research to find out about an industry and other economic conditions that influences stock price.
Novice investors should be aware investing strategies do not eliminate all risk. However, investment strategy is important, because it provides investor some structure when selecting stocks for investments. Risk tolerance must be established to ensure investors are comfortable with risk that may occur when investing. It is always important to conduct research before making any type of substantial investment. Investors must understand there is a risk of losing their money when investing in stock; therefore, they must be comfortable with a certain amount of loss if and when it occurs. Research minimizes risks, but it will not eliminate all risks.
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