Click here to get this post in PDF
Are you thinking about investing in stocks? If so, you will be happy to know that it can be one of the best ways to build and grow your wealth. There is no doubt that stocks can be an important and valuable part of your overall investment portfolio.
This is because owning stocks in various companies will help you build your savings while protecting your hard-earned money from both taxes and inflation.
While many stocks can be a little volatile in the short run, note that in the long term, they tend to offer much higher returns compared to other assets, like government bonds. So, it is essential to know and understand that there are some specific risks, such as commodity price risk, when you invest in the stock market.
This is why like any investment, it makes sense to understand the risk/return relationship as well as your own risk tolerance.
What are Stocks?
We can define stocks, or shares as they are usually called, as investments representing ownership in a company. You may know that companies often issue stocks to raise funds so that they can develop and grow, such as by purchasing equipment.
Did you know that the price or value of a stock, such as IQE share price, can rise or decline depending on a company’s performance?
It is worth noting that when you purchase a stock, you basically become a part-owner of the underlying firm or company and are, hence, entitled to a share of the company’s profits.
Note that stocks are often traded on stock exchanges like the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and the NASDAQ. So, a stock exchange is a market where buyers and sellers of stocks can connect with each other.
Learn Stock Market Basics to Get Started
A stock is a small percentage of ownership in a company. You should know that there are two kinds of stocks. These are called common stocks and preferred stocks. In most cases, common stocks are what you are probably thinking about when considering investing in the stock market.
On the other hand, preferred stocks or shares get priority when it comes to dividend payouts; however, keep in mind that they do not have voting rights in meetings, unlike most shareholders of common stocks.
Usually, the main reason for investing in stocks is to earn money or investment income in the future. And this is also called a “rate of return.”
Determine Your Stock Investment Budget
Remember that your budget is a crucial factor that determines your investing style. It is advisable to develop an emergency savings fund before you begin investing. The value of your savings fund should be worth about three to five months’ worth of your household expenses.
After that, you may allocate the remaining funds for stock investing. And when it comes to a personal budget, note that essentials, such as housing and food costs come first. Any money left over after these necessary costs and expenses can be used as stock investment funds.
For example, keep in mind that a long-term goal, such as saving for retirement or your kid’s college education, doesn’t require a large budget, especially in the beginning.
Actually, investing small amounts over time is usually the best way to save for a college education or retirement. This is known as dollar-cost averaging. It will help smooth out the total costs of your stock investments over time.
Understand Your Investing Style
Before you can start investing your funds in the stock market, you have to decide which kind of stock investor you are. This is because knowing this will help you figure out what types of investments, such as mutual funds, are best for you and what type of services you should use. You have to think about a few things when it comes to deciding on your specific investing style.
For example, it is worth noting that some investors would like to take an active part in managing their money’s growth. On the flipside, others want to “set it and forget it.”
If you like researching companies as well as following the stock market daily, you have a hands-on approach to stock investing. If so, you are probably a DIY investor.
In contrast, if you find investing challenging and stressful, you may want to consider passive investing, like investing funds with a Robo advisor.
Using a Financial Advisor or Broker
Also, you can decide between choosing various stocks and other assets, such as government bonds, on your own, or you may employ a financial advisor in order to help you determine the most suitable investment strategy to meet your needs.
With so many brokers out there, it can be difficult to know which one to choose. Broker reviews such as Motley Fool review can help as they look at all aspects of the service offered, such as commissions, customer service, security, accounts, platforms, etc. For example, the Qtrade review summary shows that they are consistently at the top of many brokerage reviews.
Such results can give you peace of mind when choosing your broker or financial advisor.
Developing an Effective Stock Investment strategy
Did you know that there are several different approaches to investing in stocks? However, some of the primary investment strategies that stock market investors commonly pursue include the following.
Note that this strategy entails investing in companies that are currently trading at a considerable discount on their true stock or intrinsic value. And the idea is that if a specific stock is trading below its intrinsic or true value, it is undervalued and, hence, might be worth buying. Learn more about this strategy through this piece on value vs momentum investing published by Kailash Concepts.
This strategy is different from value investing and involves investing in companies that are likely to grow at a fast pace. While growth stocks tend to offer high potential returns, they can also be volatile, meaning that they can be riskier.
Finally, this investing strategy entails investing in companies that are highly profitable and have financial strength.
Manage the Risks of Stock Market Investments
As a stock investor, you must weigh the potential risk of loss of your principal against the risks of not meeting your investment goals. You can manage risks by:
Diversifying Among Multiple Stocks
Did you know that investing your funds in only one or two stocks is usually much riskier than purchasing stocks of 12 or 20 companies? If you invest in a range of assets, you can reduce the risk of one investment’s financial performance, severely hurting the financial return of your total investment.
By holding stocks of multiple companies in several industries, such as oil and gas, you lower your exposure to a considerable loss because of a price decline in only one stock.
Appropriate Asset Allocation
Note that asset allocation refers to the way you spread your investment portfolio among various types of investments, like stocks, bonds, and various money market investments. For example, an aggressive investor with a long-term horizon may choose to keep a significant percentage of their portfolio in stocks. In contrast, an investor looking to minimize risk could have a smaller fraction.
As you can see, investing in stocks is an important and valuable way for people to build and grow personal wealth. However, it is crucial for beginner or new investors to start investing in stocks by using the guide above.
You may also like: Best Ways to Invest in Commercial Real Estate Investing Companies
Image source: Dreamstime.com