Investing in the stock market is a time-proven method of growing wealth, especially over long periods of time. Of course, not every stock goes up and the common investment warning is: past performance does not guarantee future results. Markets go up and they go down. Sometimes they go down fast during market crashes. However, generally speaking, stock markets have gone up over the long term.
There are countless investment firms, advisories, strategies and investing ideas out there. With tens of thousands of stocks available, how should you begin to think about picking stocks? Here are some tips to get started on a good path.
Some self-reflection is a good idea
Knowing yourself is critical to crafting a solid investment strategy and plan. Why are you investing in the stock market? What are your goals and objectives? Are you looking for passive income or capital growth? What is your time horizon? Are you trying to earn more on your money than a bank savings account in the short term to make a large purchase like a home? Or are you planning to put money away regularly over your career to save for retirement? What is your risk tolerance? Are you okay with some volatility in your portfolio, or are you looking for more stability? Are you investing capital you don’t want to lose, or are you okay with some risk for short-term speculation?
Thinking through questions like these is really the first step on the path to a successful investment plan. Different answers can lead to drastically different investment decisions.
Do your homework
There’s an adage out there that you can’t be successful in any business that you don’t know well. Take the time to do your research on markets, sectors, and individual companies. Read news, articles, and company filings. If you’re targeting a specific sector, you may want to research multiple companies in that sector. Look into the company’s financial statements. Do they have a large cash balance or a lot of debt? Who are the leaders and managers of the company and what is their track record for success?
Smart stock market investors don’t randomly select stocks to buy. It’s critical to know why you are buying a specific stock.
Consider index funds in your portfolio
Trying to pick individual stocks out of thousands can be a daunting task. Where do you even begin? These funds have been introduced with portfolios designed to match a particular financial market index, such as the Standard & Poor’s 500 Index (S&P 500). The idea is that instead of buying individual stocks, you can buy the entire market. You can have exposure to gains from the entire market without the risk of an individual company’s stock losing significant value. The idea is a passive investment strategy that seeks to match the risk and return of an entire market, with the assumption that the market as a whole will outperform any individual company over time. These funds typically have lower expenses and fees than actively managed funds, which is another advantage. There are several of these to choose from, depending on your personal preferences.
Self-reflection and research are important steps to developing a stock market investment plan. Once you have a plan, it’s also important to stick with it, unless the circumstances under which you made the plan change. As I said before, markets go up and down, and if your plan is solid, you don’t want to make hasty decisions if there is a short-term negative impact to your portfolio. Stay the course. Continue to educate yourself and research your stocks and the larger market. A long term view is typically the most successful in the stock market. It takes lots of time. Hang in there.