The stock market may look a bit scary because you may fear losing your money. Investment risk can be lowered by knowledge. A beginning investor has to read a lot about finance, accounting, financial statements, the stock market and the companies traded there.
How to choose the correct stocks for you?
It is always a good idea to look for companies that provide products or services you like or you think are good or popular. Just think about Apple, they produce popular products, investors who purchased their stocks at the right time could make a lot of money. Other companies with strong brand names as Coca-Cola, Procter & Gamble, 3M, and GE are a good choice. Companies with virtual monopolies like Microsoft are good investments if you can buy them at a good price. Identify areas in which you have useful knowledge already or choose an area and slowly become an expert.
Investors need to do plenty of research. You need to look at the firm's financial statements. It is certainly not easy to analyze financial data, but you should learn the basics of it to be able to judge the probability of growth of a company and to identify criteria that may indicate potential for future price appreciation. Also, visit the Investor Relations section of the company's website. Don't forget to check dividends paid by the firm. Dividends make up most of an investors earnings over the long term.
The analysis considers the fundamental profit-producing factors of the company. A stock that is cheap can either be undervalued, or it can be worthless. Follow the price movements of the stock for a couple weeks before investing in it. Once you selected a stock, technical analysis tools help to time your entries and exits. Focus on long-term buying of a stock rather than the short gain.
You need money to invest. Nobody should start investing without six to twelve months of living expenses in a savings account for emergencies. It is advisable to start building cash in a money-market fund, gradually build a portfolio of mutual funds, and then start investing in individual stocks. If you have more than $100,000 to invest, individual stocks are preferable to mutual funds, because fees charged by funds are proportional to the size of the investment.
Investors need to decide how much money they are willing to risk. Only invest in stocks money you can afford to lose. First imagine you were to lose all the money you invested, and find out how much would you put in. The stock market crashes regularly. We have recently seen several of these crashes. Stocks may drop over the short term, but over the long term they usually outperform all other types of investment.
No doubt, there always will be price fluctuations. If you plan to buy 100 shares in a firm, do not buy it all at once. Buy it in increments. The price of the stock you bought might fell significantly. If you still believe in it, enter order to buy more shares. Warren Buffet, the most famous investor of our time, selects the companies that he likes and buys their shares during crashes.
Start buying stocks slowly with small amounts building a conservative portfolio of companies with proven records of profitability before investing into speculative stocks. Buying blue chip stocks is a good idea. These are stocks of market leading companies known for quality and ability to generate profit. Although, they are usually fully priced and difficult to buy at a bargain price.
A profitable company had at least some earning in each of the past ten years, and pays some dividend each year. EPS growth describes well the quality of a stock, it should be at least 30% over the past 10 years. Invest in companies that are shareholder-oriented. A return on equity greater than 15% and a dividend of at least 2% are evidences of this.
Hold your shares for the long term, at least 5-10 years. As long as the fundamentals are sound, do not sell. Sell them if their price appreciates too much above its value.
Read as many books and financial magazines as possible. Here are some of the best books for serious investors:
- One Up on Wall Street by Peter Lynch
- The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith
- Common Stocks and Uncommon Profits by Philip Fisher
- The Secret Code of the Superior Investor by James K. Glassman
- The Essays of Warren Buffet