If you are investing in stocks for the first time, or perhaps plan to dabble in stock investment, then read on for 5 tips that can help you invest more effectively and shrewdly.
Why Invest in Stocks?
Investment itself is always an excellent idea, but there are a number of compelling reasons to try your hand at stocks versus other types of investment.
The main reason that most people invest in stocks is that stock has the potential to rapidly increase in value.
Whereas many investments take a number of months or years to mature, stocks can climb daily. A smart investor can see a strong, almost immediate return on an initial investment if a stock rapidly ascends.
The downside is that stocks can crash in a way that other forms of investment do not. Stocks that rise and fall with regularity are known as volatile stocks.
For most people, investing in steadier stocks that climb a bit more slowly will be a better approach. But for those who want to see a near-immediate return on their investment, buying into rapidly-climbing stocks can be a very effective way to make money.
The other way to make money from stocks is to invest into a company long-term and collect dividends.
A dividend is a company’s profit share divided among shareholders based on the amount of stock a person owns. In general, dividends are paid out quarterly, lending themselves to a more patient approach to stock investment.
Overall, there are some very solid reasons to invest in stocks. The next question for each investor will then be how much overall to invest, and which stocks potentially to invest in.
Overview for Investing in Stocks
If you are investing in stocks for the first time, there are a number of terms and concepts that you should probably familiarize yourself with.
As you know, stocks rise and fall. Stock can be a bit like calculated gambling, in that you can’t automatically expect interest to accrue on the money you invest. It’s very possible to take a loss on a stock investment, and sometimes even a significant one.
When you buy a stock, you’re purchasing into a publicly-traded company, and if you buy a certain number of shares within a company, you may earn shareholder rights such as being able to vote on some company decisions.
Publicly-traded companies participate in stock exchanges in which participants can buy and sell stocks. If you decide that investing in stocks is for you, then you will likely participate in one of the major stock exchanges such as NASDAQ.
Companies issue stocks in order to raise capital. The companies then use this capital in a number of different ways, such as purchasing additional assets, research and development, or expanding marketing.
By investing in stocks, you are buying into a given company. While it’s not obligatory that you support the company or the company’s products, a lot of people tend to invest in companies that they have a personal or emotional connection to.
While this is far from a full overview on stock trading, this should help give you an idea of what the process entails. You can investigate further before deciding if investing in stocks is something you want to fully pursue or decide how much income you want to invest in stocks.
- 5 Tips for Investing in Stocks -
If you decide that investing in stocks is for you, then there are a handful of tips and suggestions that numerous experts recommend for first-time stock investors. These are presented below.
1. Decide Who Will Handle the Investments
You can personally handle your stock investments, or you can pay a brokerage firm to do your buying and selling. The fees from brokerage firms tend to be fairly high, so this is something to consider carefully.
2. Pick an Approach for Investing in Stocks
Depending on your level of interest and education on stocks, you can do all the investing yourself, pay a brokerage firm to do your investing, or use an automated online service (AKA “robo-advisor”) for your investing.
While using a brokerage firm or online service to manage your investments might be a good idea at first, you will eventually want to manage your own investments, if at all possible. It’s fairly simple to do so, and eliminating excessive brokerage fees is simply more money in your pocket.
3. Open an Investment Account
A stock-specific account is called a brokerage account or online brokerage. This is where your investment funds will be withdrawn from.
You can check out some of the benefits of different brokerage accounts, and decide which type best suits your needs.
First-time traders will want to look for firms that offer free trades, low commission rates, and possibly commission-free investment opportunities. You may also want to look for online services that include additional education and tips, if you’re
new to stock trading.
4. Consider Automatic Transfers
If you plan to have your stock account serve as your de facto savings account, then you may want to set up an automatic transfer from a given checking account.
If your goal is to dedicate 15% of your monthly income to investment or stock investment, then setting up an automatic transfer from a checking account is one way to maintain discipline and ensure that you do not frivolously spend extra income.
If you decide that investing in stocks is the way that you want to build for the future, then setting up an automatic bank transfer – and taking away the temptation to spend money immediately – is a good tip for better money management.
5. Diversify Your Assets or Investments
This is one of the basic tenets of finance and investment, and accordingly deserves the most explanation: don’t put all of your eggs in one basket.
Even if you decide that investing in stocks is the way that you want to go, you shouldn’t overinvest into one stock in particular – even if the company or product behind the stock is incredibly strong.
For that matter, investing completely into a stock market isn’t a great idea. Stock markets are notoriously volatile, and placing all of your investment capital into stocks isn’t especially wise.
There are many other forms of investment, including CDs and bonds, just to name a few examples. You can investigate both further to see if one or the other is a more appealing form of
But for a moment, let’s say you decide to devote your entire investment budget to investing in stocks. Any smart investor would still want to invest in a variety of stocks within different markets, in order to maximize and protect their investment capital.
One way in which a person could diversify their stock investment would be to invest in companies of different sizes. Companies are broken down into different capitalizations (or “cap”) based on how much revenue they generate annually.
A rough breakdown would be Micro Cap companies worth $250 million or less, Middle Cap companies worth between $2 billion and maybe $10 billion, and Large Cap companies whose annual revenues exceed $10-$15 million.
Diversifying your portfolio in this way likely maximizes the potential for return on your investment capital while offering you some protection.
For example, you could opt to invest in a goliath company such Walmart – which as of this writing is trending up steadily and has a market cap of over $278 billion – while also placing some
investment capital in a relatively small company such as the Redfin corporation.
The perk of investing in a smallish or Micro Cap company is that the price per share will often be quite low.
As an example, Redfin currently has a market cap of about $1 billion, with shares currently available for about $15 per share. This makes the company affordable for a lot of investors to buy into.
An investor could pick up quite a few shares of a smaller up-and-comer such as Redfin in comparison to a huge company such as Walmart, which as of this writing is worth almost $100 per share.
Continuing with this example, an investor would also be diversifying markets. Investing in Redfin is investing in not only the company itself, but also the real estate market as a whole.
Meanwhile, investing in Walmart would not only be an investment in the biggest company in retail,
but also investing in Walmart’s burgeoning online business and any other markets that the company eventually penetrates or wades into.
In short, investing in stocks usually works best if the investor selects a number of different markets, market caps, and stock prices.
Even within the stock market itself, this is a terrific way to diversify your investment assets and protect yourself financially while also optimizing growth opportunities.
Investing in Stocks Can Be Lucrative (and Safe)
Investing in stocks does not have to be scary or stressful. By doing your homework and investing in stable stocks, in most cases, you can generate a solid profit for yourself or your family and see a good return on your initial investment.