Yesterday I gave you 5 investments that make you richer. Today we take a look at investing money and trying to make a consistent amount of cash by dabbling in shares.
If you want to increase your money, keeping your ticking over consistently in a bank account can create wealth for you (albeit a little at a time with our appalling UK interest rates). Investment in financial assets like bonds and stocks will earn you more revenue. Experts advise that shares are better to invest in because they tend to outperform corporate bonds, government bonds, and property investments. So what are the benefits of investing in shares? Shares generate capital for investors in the long run. Therefore, if you invest in shares of a large company, you will get the chance to earn more as your asset grows over time.
You do have to be careful though. The prices of shares can fluctuate up or down from time to time. It goes to explain why many people perceive shares investment as being risky. Reports have shown though that this kind of investment is one of the best for people looking for more substantial returns in the long term. If you are looking to make a long-term investment, let’s say for the next 10 or 15 years, investing this way might be a rewarding investment decision.
If you don’t know where to start, here are five things to look out for when investing money.
Consider why you want to buy shares in a company
Why do they appeal to you? Would it be risky to buy shares in a company just because you like their services or products? Do your research to establish if the company has a sound financial outlook, including best valuation and proper management. If you base your criteria on this rather than how you feel about a company, then you will probably end up investing wisely.
Market cap vs price per share
Once you have found a company you want to purchase shares from, the next step is to establish the value of the whole company. Commonly referred to as market capitalisation or merely market cap. The calculation of market cap is worked out by multiplying the current price per share by the outstanding shares. If the outstanding shares are 2 million while the price per share is £60, then the market cap equals 2,000,000 x £60 which is £120,000,000. The good thing about knowing the market cap of a company is that you will not end up paying more for a share.
The prices of shares tend to fluctuate in the short term
If you are looking to invest in shares for the short run, then it is advisable to look elsewhere. The prices of shares tend to be highly volatile in the short term. One day the share price might go up by 0.5% then drop by 1% the next day. It’s wholly dependant on the demand and supply for that share. If everyone wants to purchase said shares, this will result in the price going up. If no one wants to buy the shares, and investors are trying to sell, the share price will go down. As a result, you may experience slumps in share price in the short term.
Diversification helps to spread out the risk
It is no secret that share buying is a risky investment. Investing all your money in buying shares in one company can result in losses if the market goes against you. That is why diversifying your portfolio is something you cannot afford to ignore. If you purchase shares in 15 different companies in different market conditions, you can significantly reduce the chances of incurring massive losses. Reason being that it is implausible for all of them to suffer losses at the same time.
Decide how much to spend investing
In the field of finance, the basic rule is that the higher the risk, the higher the return. Therefore, the amount you spend on shares should be the same money you are willing to sacrifice. If you think it is too risky to invest significant capital in buying shares, then don’t. To avoid the risk of investing all your cash at once, you can make regular investments over a specified period. This strategy will help you purchase increased shares at lower prices and reduced shares if the rate is still high.
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