Tips on investing in stock market to enjoy high return

This article is a continuation of a series of articles that we have been running for the past five weeks which details some of the essential tips that could be useful for those who have interest in investing in financial instruments which are listed in the stock market.

So far we have covered factors that determine prices of listed securities i.e. demand and supply, we discussed how variables such as economic (GDP) growth, inflation, interest rates, exchange rate, current account balance, etc. affects the performance of the listed share prices.

We also covered how company news impacts the increase or decrease in share prices. Last week we dwelt on a discussion that focused on how psychology and market cycles affect market prices.

As we stated in previous pieces, when you buy a stock, you are not buying a lottery ticket., rather, you are actually becoming a part owner of the real operating business. The value of your shares will rise or fall based on the company’s perceived fortunes. Many stocks also pay dividends, which are periodical distributions of profits back to the shareholders.

By investing in a stock, you are making the shift from being a customer to being an owner. For example, if you buy a beer or cigarette, you are a consumer of TBL or TCC products, but if you buy a TBL or TCC stock/share, you are buying your ownership of the company — and a entitled to a percentage of its future earnings, as well as its assets.

What and how much can you expect to earn as an investor of a stock? Much as this is impossible to predict, but we can use the past as a (very) rough guide on the potential earnings and gains.

Historically, for those stock markets with long time of existence and experience and bigger markets, the stock market has returned an average of 10 per cent a year over more than a century. But of course if these figures are looked separately, they may seem deceptive because stocks can be wildly volatile along the way — in the process of averaging 10 per cent per annum.

It is not unusual for the market to fall by more than 20 or even 50 per cent in a period of time and every few years. Analysts and observers tell us that on average the market is down once in every four years.

You need to recognise this reality so you wont be shocked when stocks tumble — and so you will avoid excessive risks. However, as you do that remember and usefully recognise that the market has made money three out of every four years and continues this tend even today.

In the short term, the stock market is entirely unpredictable, despite the claims of some “experts” who here and there would pretend to know what is going on about the market!

A vivid example which in more recent is that in January of 2016 the S&P 500 sank by 11 per cent — but then it made a U-turn almost during that same period and rose nearly as rapidly. Same has been in the past few days where it lost by more than 7 percent — but then changes to the positive can be seen even today — for those who follows up; why? some analysts and long time followers of stock markets trends say — there are no good reasons for the decline. equally there are no good reasons for the recovery.

This is true even in our market, a keen observe would have noticed this, albeit for us the context may be a bit different given our market size and lack of sophistication.

Despite the above, in the long run, nothing reflects economic expansion or the shrink thereof more than the stock market — that’s why it is called the barometer of the economy.

As it is, overtime the economy and population grow, and workers become more productive. The rising economic tide makes businesses more profitable and predicted to trend the same in the future, which then drives up the stock prices. That explains why markets soared in the twentieth century, despite all wars, crashes and crisis.

By now I presume that you might have guested or reasoned out why it pays to invest in the stock market in the long term. This seemingly fact of matters makes me almost suggest that: over the long term stock markets news will be good.

If you can buy into this seemingly factual statement, it will help you to be patient, unshakable and ultimately relatively rich by investing in stocks of companies listed in the stock market — and of course choices of stocks to invest into matters as well.

So what exactly does this mean — it means that if you believe that the economy and businesses will be doing better 10 years from now it them makes sense to allocate a portion of your investments in the stock market.

Of course, it is undesirable that it may be a bit of a challenge to stay in the market long enough to enjoy these gains, given that needs for money for individuals may be abrupt as emergencies may dictate.

In all these, the last thing you want is to be a forced seller during a prolonged bear market. But then how can you avoid such fate? For a start — either don’t live beyond your means or saddle yourself with too much debt/loans — both of these are reliable ways to putting yourself in a vulnerable position.

As much as possible try to put a financial cushion, you will reduce the chances of raising cash by selling stocks when the market is crashing. Of course one way of achieving such an objective is to invest in fixed income instruments such as bonds — given their contractual nature of paying fixed amounts in pre-agreed periods.