Only invest in things you understand

As a stock investor, you should only invest in companies and industries that you understand completely. There are thousands of companies out there and it can be tough to decide which company to invest in. A lot of companies out there are complex and extremely hard to understand the operations and how the company generates income. If you don’t understand it then it’s not for you. You should always play to your strengths and not your weaknesses. Warren Buffet, one of the greatest investors of all time follows this rule and it has amounted him to his success. He says that you don’t need to be right about thousands of companies, you only need to be right about a couple. You don’t have to invest in every opportunity that comes your way. Take your time, understand where your advantage comes into play and focus on that.

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What are Stocks?

When you’re buying a company’s stock, you’re buying part of the company. This doesn’t necessarily mean you have the power to make decisions regarding the company but it does mean you have the right to vote at meetings. Essentially you have the right to a part of the company’s profits. Not all companies are listed on stock exchange and the prices vary every second. Companies go through an initial public offering when they begin to publicly offer their shares. People buy, sell and trade these shares through bank, online platforms, or through financial advisors. Investors invest in stocks to generate return through stock appreciation and you selling it for a higher price or through dividends. Dividends are what companies pay their shareholders out of the profits they make. How much you make depends on how many shares you own and how much dividend is paid out. It’s important to note that not all companies pay dividends, some prefer to reinvest this money back into the business for operations and future investments. Stocks are a great way for corporations to raise capital and a good instrument for investors to invest in. But like any other investments, prices fluctuate and there are always risks involved. It’s extremely important to do your due diligence and understand how stocks work before diving straight in.