Do You Make This Mistake When Investing?

One of the biggest mistakes that investors make when investing is that they confuse investing and trading. They are two completely different things – and shouldn’t be mixed together. A confusion of the two can lead to significant losses for investors.

Read on for information on how you can avoid the mistake – and potentially save a fortune by doing so.

So – what is investing?

Investing is the art of buying a (or a part of a) company in order to benefit from its future prospects. In other words, as an investor you focus on the business and its future prospects.

It’s normal to consider a number of factors when evaluating a business and its future prospects. Such factors are called “the fundamentals” and normally include:

  • The business model (how they make money)
  • Competitive situation in the business’ target market
  • The business’ competitive advantage (why customers chose their products)
  • Growth prospects
  • Profitability
  • Management team’s qualifications and experience
  • The industry
  • Risk factors
  • And of course… Valuation! (How much it is worth)

Most investors invest through the stock market. This is often the easiest way to invest, as you have access to several thousands of investment opportunity across the whole world from one brokerage account.

In practices this means buying stocks. Stock prices can be very volatile and irrational sometimes. However it remains crucial to remember that a stock is simply an ownership interest in a company.

The value of a stock is therefor ultimately determined by the value of the underlying business.

So if an investor focuses on valuing the underlying business he should be able to buy stocks when they are undervalued and sell them when they are overvalued. A lot of investors have done this – and made a fortune.  One of these investors is multi-billionaire Warren Buffet.

This kind of investing is called value investing.

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