Investing in stocks can be very risky and volatile if you don’t know what you’re doing. Understanding the fundamental principles when it comes to investing in stocks is essential for your success. With all the different ways to invest in stocks, investor have more choices than ever to choose from. Here are 10 tips for investing in stocks that will assist you in achieving your investing goals.
10 Tips for Investing in Stocks
1. Different Ways to Invest in Stocks
Besides buying individual stocks and owning them, you can also purchase stock indirectly through a variety of investment funds. When you buy a mutual fund, you (and other small investors) are investing in a portfolio of stocks created by a professional money manager. If you don’t have any knowledge of investing, this is an easy and affordable way to start investing in stocks.
Another great way to own a portfolio of stocks is by investing in an Index Fund. This has been said to be one of the best ways to own a portfolio of stocks. Index funds are passively managed funds that match a market index by holding a portfolio of stocks in the same proportion to their weight in the particular index. Index funds also run at very low management costs giving you more return on your investments.
If you currently have an employer provided 401K, you most likely already own a portfolio of stocks! Most 401K will allow you to select which type of fund you want to be in or how you want to allocate your money. Many also provide targeted retirement funds that let you pick the year you want to retire and the fund automatically re-allocates your funds to the appropriate investments based on your age.
2. Building a Portfolio of Stocks
The safest way to invest in stocks, if you plan on buying them individually on your own, is to own a portfolio of them. By building a portfolio of stocks you spread out your risk amongst the various companies you invest in. When selecting stocks to invest in you want to choose companies that are in different industries, as this will diversify your portfolio. Once you accumulate around 30 different stocks, your portfolio should be properly diversified. Once diversified, you will eliminate your company risk and be left with market risk, reducing you risk exposure.
If 30 stocks sounds like a lot to buy, you might be better off investing in a mutual fund or an index fund. If you can’t afford to be properly diversified, investing in a mutual fund or index fund allows you to have ownership in a portfolio of stocks setup by a professional with low initial investments.
3. Investing on a Regular Basis
By investing on a regular basis, you are able to always be investing in the market. You’ll invest when the market is low, and when the market is high, to receive the average market return. By receiving the average stock market return (around 10%), your investment will grow to huge amounts over time.
Mutual funds and index funds will allow you to set up an automatic payment each month that gets invested in your account. This investment can be as little as $25 a month. At that rate almost anyone can afford to start investing! And the longer you’re invested, the more money you make, so start investing young!
4. Buy Low, Sell High
Although you cannot accurately predict the market and past returns have no indications on future returns, there are a few simple things to keep in mind:
Buy low and sell high – If you are investing in stocks for the sole purpose of making a quick gain and don’t have any need to stay in the market, then follow the common sense approach of buying low and selling high. If you see an opportunity to invest in stock that you believe is undervalued in the hope of a quick revalue, then why not try to make a quick gain if you can. The question is how low is low and how will you know the stock won’t continue to drop.
5. Be Invested for the Long Run
Sometimes it’s the simplest strategy that makes the most sense! Investing your money for the long run is a simple and safe way to grow your money. The longer time you have to ride out the market’s highs/lows, while accumulate more and more stock, will have a huge impact on your resulting wealth!
This strategy will also lead to cheaper taxes and fees because you will only get taxed when you cash out a stock. The longer you hold your stocks the longer you are deferring income tax, allowing your principle investment to grow even more!
6. Research Before Investing in Stocks
Know what you’re buying before investing in stocks! Yahoo finance is a very good resource for the most current news concerning your investments. You can simply type in the name of the stock and yahoo will search the web for you to find all current news on the stock. Yahoo also includes the fundamentals of the stock including latest price, graphs, ratios, and other essential info to help you invest. And it’s Free!
7. Fees From Investing in Stocks
When you buy and sell stocks you pay a transaction fee. This fee can range from $5-$10 per transaction every time you buy or sell shares of a stock. The more you buy and sell within your portfolio, the more fees you are charged. Investing in stocks for the long term will help avoid excessive fees attached to buying and selling stocks too often.
8. Taxes When Investing in Stocks
When you sell a stock for more than what you paid for it, you make a monetary gain. This gain is additional income and must get reported on your taxes as such. Depending on how long you hold the stock (long vs. short) will determine the tax rate you are charged. If you don’t sell any stocks this year then you won’t make any additional income stock-wise, so no taxes…yet.
9. Pay Your Credit Card Bills Before Investing in Stocks!!
Credit cards can carry huge interest rate charges when your bill is not paid in full each month. There’s no point in investing your money to try to achieve a 10% return when you are paying 24% on interest fees on your credit card debt. Don’t let your credit card spending get out of control as it’s very important to live within your means. Remember, it’s not what you spend, but what you save that determines your wealth! Read my article Debt: How to Quickly Pay it Off.
10. Different Types of Stocks
Common stock and preferred stock are two forms of ownership in a corporation. Common stock holders have voting power to help elect a board of directors. Common stock also has higher appreciation opportunities, and their prices fluctuate more. Compared to common stock, preferred stock has a higher ranking. If a company went bankrupt and liquidated their assets, preferred stock’s claims on assets are paid in full before common stock holders get their chance. Preferred stock also receives dividends on a regular basis, similar to a fixed income security. Dividends are only paid to common stock shareholders if their board of directors decides to do so.
Stocks are also identified by the size of the company (market capitalization). Small-cap, mid-cap, and large-cap are the three different sizes you can pick from when investing in stocks. Small cap stocks are exactly what they sound like, small companies, and because of their size, they tend to be more risky. When investing in stocks, large cap stocks are generally safer because of their huge size. The S&P 500 index, the most common market index, consists of the 500 largest corporations, i.e. 500 of the largest cap stocks.
Value stocks and growth stocks are two more common types of stocks. Value stocks are traded at a lower price compared to their intrinsic value. This is why they’re a good value – the stocks are undervalued! Investors will take advantage of the low price and sell it for more when other investors realize the stocks intrinsic value and the price goes up. Growth stocks are characterized by their ability to achieve above average earnings. These companies usually have an advantage over other companies in their industry that allows them to outpace their competitor’s earnings.