Buying stocks is effortless and exhausting. While buying a stock is a relatively straightforward process, finding the right one is tricky. Most people fail to buy the right stocks, and consequently, fail to make any profit. But what are the right stocks? Is there a right way to buy stocks? What should you have in mind before buying stocks? Here’s everything you need to know before you invest.
To invest, or not to invest?
Firstly, financial experts suggest you invest only less than 10% of your portfolio in individual stocks. The rest of it must be a diversified blend of low-cost index mutual funds. Most importantly, you should invest only if you have the money to sustain for the next five years. That money shouldn’t be invested in stocks at all.
You should never be impulsive
If you see movement in stocks and plan to make a deal, you should make an informed decision, no matter where you are; not a decision made by intuition. Moreover, any decision you make should be looking forward to long-term gain, even if it means losing in the short term.
You should not forget that buying a share of a company’s stock grants you ownership in that business. If you watch business news channels, you would see enormous information that would confuse you. However, you can focus only on the necessary aspects. You should be mainly looking for:
- Company operations and management style.
- Company’s position in the industry.
- Company’s competitors.
- Company’s long-term prospects.
Finally, you should check what you already have and whether investing in that company would diversify your portfolio.
Maintaining a journal
Most investors make decisions on the spur of the moment so that they don’t miss out on a potential gain. However, almost every time, investors end up buying high and selling low. However, some investors don’t make this mistake. These investors would have the habit of maintaining a journal.
Many seasoned investors know if a stock deserves a place in their portfolio or not. In some cases, they would clear that certain stocks (once beneficial in the portfolio) would have to be removed during various circumstances. Thus, in a journal, you can write down these points to ask yourself:
- What is the primary reason for choosing a company?
- What do I see in the future after signing this deal?
- What criteria should be measured to understand a company’s progress?
You should not be observing only the stock price movements and short-term gains. You should be able to have a comprehensive idea about changes that might occur and affect the company’s prospects as well — for instance, if a company has a change in management style, it is likely to perform in a way you wouldn’t have anticipated.
Successful investors never buy stocks depending on the movement. They look forward to earning from capital appreciation, dividends, etc., after years or even decades. They also use some strategies that allow their investment to remain unaffected by volatility.
Dollar-cost averaging is a strategy in which investors would invest a fixed amount of money at regular intervals. Here’s the interesting part: the set amount purchases more shares if the stock price falls and fewer shares when it rises. Thus, it balances out the average price you have paid. You don’t even have to keep a schedule, as many online brokerage firms have the facility to set up an automated schedule.
Another strategy you can try is to buy in thirds: you can divide the amount you want to invest by three and, as its name suggests, choose three dates to purchase shares. These can be at regular intervals (for instance, monthly or quarterly). This could also be based on performance as you can see if your initial plan works out — if a company that was moving up goes down, you can change your mind during the second interval.
Suppose you are unsure which companies in a particular industry would be profitable in the long term. In that case, you could buy all of them — it would balance out even if a company fails. Moreover, you can learn which company is doing well in different scenarios.
Don’t be distracted by the noise
Having a periodic check on your stocks every quarter is appreciable. But if you constantly monitor stock movements, there are chances that you would get needless anxiety by shifting your focus from value to short-term price movements. If stocks encounter a steep price movement, you must ascertain what caused it.
- Is it because of an unrelated event?
- Has something changed in the company’s functionality?
You should worry only if something affects you in the long term.
In the financial markets, noise is a temporary price fluctuation. Many investors get troubled when they hear some noise. It is essential to know that noise does not affect how a company performs in the long term. Thus, your reaction to the noise is crucial. During trying times, you can pick up the investing journal that would remind you about the short-term inevitable ups and downs that come with investing in stocks.