Important tips and information
1. Diversification and risk
In finance, diversification is a very important part of creating your portfolio. A portfolio is basically list of your financial investments.
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Diversification is the practice of not having all your investments in place. Remember the saying "don't put all your eggs in one basket"? This applies to finance too. Having a diversified range of investments lowers your risk and prevents you from suffering huge losses.
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If all of your stock is invested in one company, this means if the share price drops, your whole portfolio falls in value. However, if you have a diversified portfolio, a fall in one company's share price only affects a small portion of your portfolio.
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However, diversification is only a part of a larger term called risk mitigation. Other ways to reduce risk is included in this page.
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2. Speculation
In addition to diversification, investors must also be wary of Speculation. Speculation is the act of buying and selling of financial assets on a short-term basis and is essentially, a glorified form of gambling.
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Remember that holding for the long-term produces the best yields and lowers risk. Speculation is nothing but luck.
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In investing, remember Rome wasn't built in a day.
In trading, remember Hiroshima was destroyed in one
Speculation was no basis in fact can lead to speculative bubbles. A bubble is described as a sustained increase in prices fueled by the hopes of future higher returns. Like all bubbles, speculative bubbles will "pop" when investors realize the future profits are not materializing.
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The 2001 dotcom bubble and the 2008 financial crisis are examples of bubbles that ultimately cost thousands of jobs throughout the world. Avoid speculation
3. Types of markets
In finance, traders commonly say there's two types of markets: Bulls and Bears. The term derives from how the two animal attacks. A bear strikes down to capture it's prey whereas a bull strike up with it's horns. Thus, traders have taken to use the two animals to describe market behavior.
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A Bullish market is said to be a market where prices are increasing and is usually used to describe a exchange in good health. A short-term bullish market can be described as a rally. A bull market denotes good investor confidence in the future.
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A Bearish market is a market where prices have been falling steadily. If a market falls beyond 10%, it is said to have entered a correction. Any further and a recession occurs. The ultimate nightmare beyond a recession is a depression. The great depression of the 1920s is a famous example.
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The charging bull sculpture south of wall street. Created to encourage traders working in wall street.
4. Inflation
Here lies your worst enemy. Unlike recessions and bear markets, inflation cannot be beaten. It is eternal, perhaps we can add it to the list of death and taxes.
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But what is it?
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It is the sustained increase in everyday prices. Simply put, it is your money losing it's value. Have you ever complained about how everything is expensive nowadays? That is inflation; a decrease in your purchasing power.
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Therefore it is important to note that your goal is to beat inflation. Even if you managed to gain 1%, if inflation is 2%, you just lost 1% of your investments.
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