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Buying stocks is an easy thing to do. The hard part is selecting which company stock to buy because you want one that has a track record of outperforming the market.
This is something that an ordinary person can’t do very well. This is why going simple like investing in a diversified mix of low-cost index funds and exchange-traded fund is an effective strategy for the average investor. It’s so effective that even stock market geniuses turn to indexing when they have money they’re not using to buy individual stocks.
But this article is to help you become better at investing in stocks. We will have to assume that research is your passion, you’ve got time to let your investments navigate the occasional storms in the financial market and have set boundaries for the amount of money you’ll be putting on the investment line.
Tip #1 – Start Simple And Start Early
Maybe you feel a tinge of envy when you see certain company stocks soar and you did not buy a single share. Or perhaps you’ve heard of some early birds in the Bitcoin game who are now living a life of luxury. The urges can become uncontrollable when you hear about these investing fairy tales. The feeling is normal, valid and so true. But remember that these things did not come on a silver platter – these people took risks to get rewards.
When you’re a beginner in the investing field, it’s foolish to go all in.
In investing, experience count but a lot of people think that intuition will make them successful. ETF’s and index funds aren’t too exciting but they have a long track record of outshining the market. If you’re the type of person who checks the prices every day and struggles to decide whether to buy or sell with a small amount of money, you won’t get very far in the business.
We’ve said it before, many stocks are boring and they don’t make waves. All they do is move in one direction, one slow day at a time. But beneath all this, there’s the mathematical power they call the compound interest that allows them to reach far and wide. Take a look at this: If you had $5,000 today that you put into an index fund that grows steadily at 6% each year, it’s going to grow to $50,000 in 40 years. Time is indeed money. Each year that you don’t optimize your investments means smaller returns in the future. Those who invest early can usually retire early. Those who invest later may have to work longer to get their dream retirement condition.
Tip #2 – Control Your Emotions
A good investor must be able to control his emotions so that he can make logical decisions.
If not, he would be prone to make haphazard moves that might expose his portfolio to bigger and unnecessary risks. You can say that the prices of the company stocks in the market is a picture that mirrors the collective emotions of the investment community. A prevailing worry over the investors about a company would drive its price down. A company’s stock price tends to gain when the majority of investors feel positive about it.
When stock prices are not moving as well as you expect them to or worse, in the opposite direction – you can become tense and insecure. Should you then sell your holdings and prevent losses? Should you hang on to the stock and have faith that the price will recoil? or maybe you should buy more?
The amazing thing is that even when things are going as you expect them to, you still become emotional. What if the price falls? Maybe I should sell now? What if the price continues to climb? Maybe I should hold on to my stock longer? These thoughts will come and they will come more often if you keep checking the price of a security. The bad thing is, they could create undue pressure that may push you to take unplanned steps. Most often, when you use emotions as the driver of your decisions, you are susceptible to making a mistake.
What you should remember is that before you buy a stock, you should have a valid reason for doing so and a reasonable expectation of how its price will behave. At the same time, you must already predetermine at which price you will sell your holdings, more so if you find that your basis was wrong in the first place or the price behavior isn’t anywhere near your expectations. What we’re saying is that you should have an exit strategy before you buy the security. And then, no matter how it feels, you should execute and stick to the strategy.
Tip #3 – Understand How Market Expectations Work
You may have realized now that stock price depends not on the company’s performance but on how the investors perceive it will do.
Sure, there are a lot of Cinderella stories in the investment world. A company no one’s ever heard of hits it big, its stocks climb like crazy and all the stockholders become millionaires. There’s one important element here: you always begin with a little-known company.
So many investors do not see the connection between the market’s expectation and the price of a stock that they always go together. It is not enough that you invest in a company that you think will have above-average growth. You need to search for a company that will grow more than what the market expects it to reach. The way to do this is to do a more excellent analysis of the company’s growth rate and outdo all of the financial industry’s collection of expert professionals. That is a very tall order and we’re highly doubtful that anyone can do it.
Tip #4 – Investing is Not Trading
Always remember that you are an investor and don’t panic if your stocks are making a correction.
Look at it as an opportunity to add more shares to your collection. As a smart investor, patience should be a key virtue. There are times when you will have tough times of recession. Impatient investors often lose while patient investors sit and collect dividends. They then wait for the right time to add more stocks to their portfolio that gives them a higher ROI. Observe the golden rule for both investing and trading: to have higher returns, you need to reinvest your profits back.
Tip #5 – Understand The Basics of Stocks
Every time you buy a piece of stock, you’re effectively buying a small fraction of ownership in a company – that is why they call it a “share”. Every share represents an apportioned part in the ownership of a company. For example, if a company has a million shares of outstanding stocks, one share means one-millionth ownership of a company and 300,000 shares is equal to 30% ownership of it. Since having a share makes you a quasi-partner/owner of the corporation, you receive some special rights and privileges.
Among them is the right to vote on issues that could affect the future of the company. It’s a small voice – but it’s a voice nonetheless. Another important thing is that you will share in the profits of the business. So, when the company pays out the profits in the form of dividends, you get your equitable share as a stockholder. Companies issue stock as a means to raise capital for expansion, special projects or operational needs.
One of the main factors that drive the stock price up or down is the company’s profitability (or non-profitability). The shareholders (people/entities that own shares of stock in the company) naturally stand to make money as well when the company is bringing in lots of profits. Conversely, if the company is losing money, the shareholders stand to also lose money on their investments. If things really get so bad, the company may go bankrupt and eventually close down. The stockholders are usually the last to get their money back from the company (if any is still left later) and therefore at the losing end from their investments. This is the inherent risk when you invest in stocks.
Tip #6 – Losses? Take a Look At Your Current Portfolio And Don’t Panic
As an investor, when you are becoming jittery about the recent deterioration of stock prices, you should think about re-aligning your holdings by lowering the percentage of stocks you hold.
People with a lower risk tolerance lose sleep when there is a market decline that appears to head right into a bear market where the prices fall by more than 20%. The solution to this is to lower their stock allocation at once. A simple adjustment of 10% to 20% in the stock-to-bond ratio is a better move than buying or selling everything of any asset class. If you have allocated a good part of your investments in non-stock assets or anything that can grow like stocks, you may need to work longer or save more money to have enough for your retirement.
Maybe you’d think it’s a good idea right now to make harsh moves regarding your investment portfolio like converting majority or all of them into cash. These emotionally-motivated judgments are almost always a bad idea. As an investor, it’s essential to have a long-term investment plan that you can follow through the unavoidable ups and downs of the market. If not, your emotions will get the best of you and you might end up buying stocks when the prices are peaking and selling them when the prices are near their lowest points.
Tip #7 – Be Sure to Diversify
Another way to protect yourself from the fluctuations in the market is to ensure that your money goes into more than one type of investment.
You should invest in bonds as well as stocks, and observe a mix of stocks in big and small companies located in the U.S. and elsewhere with involvement in different industries. The quickest and most efficient way to do this is by investing in mutual funds that let you own a small corresponding fraction of hundreds of stocks and/or bonds all at once.
- Diversify by asset types. Have a combination of assets such as stocks, government bonds, corporate bonds.
- Diversify by sectors. Invest in different industry sectors. If you’ve got everything in the construction sector and the construction industry takes a dive, it can wipe out all your investments in an instant.
- Diversify by geography. Spread out geographically all over the world as much as you can. If your mix of stocks, bonds, real estate, and other assets are all Hongkong based, what would happen when there’s another political turmoil in Hongkong? Your total investment value would go down tremendously just because of one country.
It’s a good idea to work with a financial planner to come up with the right asset allocation for you according to your age and risk tolerance. You can also get help online from free apps (like the one from Vanguard) to get a range of the mix. If you’re not planning to involve yourself actively, get a target-date fund. It will automatically allocate your investments and modify it according to your life stage and overall timeline.
Tip #8 – Do Your Research
One bad habit of many investors is that they do not put in enough time to research their investment opportunities. They are okay to part with their money just because one “expert” said this or said that. You could get lucky this way once or twice, but it’s not going to work in the general scheme of things.
Knowledge and information are extremely valuable especially in the world of investing.
But it’s also easy to get lost in the financial jargon and the highly technical language of the market if you do not have the training and education for it. Think about investing first in a few financial literacy books that can give you easy lessons on the principles of investing in the stock market and what it is all about. Pick the top-rated books for a quick course in investing that college education didn’t give you.
Additionally, doing comprehensive research into an investment will give you the confidence in your investment choice and minimizes the uneasiness that normally comes with it. Make certain that you really understand what you are putting your money into. It’s never a good practice to buy something that you don’t comfortably comprehend. Ask the representative questions, compare products, and also ask around from other people. Don’t get carried away because of the salesperson’s sweet talk or the grand advertising campaign they lay out.
Tip #9 – Keep Investing In Yourself
Good job for reading this far – we hope you’ve already learned a lot. But this barely scratches the surface: there’s a trove of information available for you out there. Never think that you can’t or don’t need to learn anymore. Just be careful to filter the source where you get your information regarding investing news and the financial markets. Pick the ones that are not afraid to help you to become successful. It has even been more convenient now because of the Internet because there are thousands of investment guides and tools right at your fingertips.
The first dimension where you need to invest is in yourself. There are many areas where you can focus on. It could be on your knowledge of the stock market. It could be learning the different strategies that other great investors used or are using. You can also invest in yourself through learning and growing emotionally.
Tip #10 – Have Enough Cash On Hand
If you still can’t see it, we are promoting that you invest to reach your goals.
For many, investing means putting in the money and leaving it to grow. In such a case, if you need to tap into them when there are emergencies or major life events (like your daughter’s wedding), you effectively reduce their value and push your timeline longer. So, before you begin investing, build up a cash fund for emergencies and/or savings. This way, you won’t have to liquidate your portfolio in case of need or fall into credit card debt.
Three month’s equivalent of monthly expenses is a good starting point for your emergency fund. Make sure it’s easy to access. If you still don’t have one, build it up first as your priority because inevitably, unplanned expenses will occur such as car repairs or doctor’s bills. When you have an emergency fund stashed away in a safe place, you can let your investment grow untouched and uninterrupted. Your emergency money will have your back covered.