3 Ways To Avoid Getting Burnt In The Stock Market

Most people get their first taste of the stock market by "throwing in money" and hoping to make a quick buck, more often than not, likely because some relative or friend told them it's a great way to make fast cash. But we've seen it before; chances are, they have no idea what they're doing and end up losing money and getting burnt. Then they just give up and say that investing doesn't work.

What do you think? Does investing not work? Or do they not know how to make it work? You probably know the answer to that.

The truth is, the stock market is a platform where some can accumulate massive wealth while others can lose their shirts! If you're considering dipping your toes, here are 3 quick tips to make sure you don't become a "burn victim".

Invest, Not Trade

What's the difference? Very briefly, investing is putting your money in a great company knowing that the stocks of the company will continue to grow in value as long as certain criteria are met. Trading on the other hand, is often speculative and people who trade hope that whatever buy or sell signals they are betting on are correct.

Don't get us wrong; some traders do make some money. But the constant monitoring of charts and complex software and the compulsory commission fees for your frequent buying and selling makes it a challenge for the average person on the street to accumulate wealth. In the grand scheme of things, some of the richest people in the world are investors, not traders.

Invest In What You Understand

This is otherwise known as investing in your circle of competence. Invest in companies and industries that are familiar to you. For example, if you have been working in a transportation company for over 20 years, it's safe to say you know a thing or two about transportation systems, what's up and coming, what's becoming obsolete and possibly even what major shifts might take place. Your dentist, on the other hand, will know way less as compared to you.

In that context, you're in a better position to study, research and find out which companies in the transportation industry are worth investing in. Play in your own backyard; don't invest in the next hot darling you know nothing about.

Know The Worth Of The Company You're Investing In

This means knowing what the intrinsic value of the stock you are buying is. i.e. how much is the company really worth? When you know the intrinsic value, you'll know whether the stock price at that point in time is way too high, at fair value, or undervalued.

This way, you won't overpay for a stock and you're equipped to buy great companies at undervalued prices.