Getting in the stock market isn’t hard, but selecting winners is where the challenge comes in. If you’re diligent and willing to learn, you can increase your chances of success. Here are 5 stock investing tips that could help you.
Much of what makes a good investor goes against the most basic human instincts. Controlling your urges and impulses will allow you to make sound investing decisions. The primary impulses that lead to poor investment decisions are fear and greed.
No matter how sophisticated or advanced your investing strategy is, it is not useful if you allow your emotions to override your logic. Good investing temperament means admitting when you are wrong, cutting losses, allowing profits to grow, and carefully managing your risk.
On Wall Street, there is a saying: “Bulls make money, bears make money, and pigs get slaughtered.” In other words, people who let greed influence their investment decisions will take unsustainable risks, allow losses to grow, and take profits early.
Most importantly, a level head will give you the clarity of mind to carefully research, execute, and manage your investments.
There is much more to stock investing than what appears on the surface level. Many have a general idea of making a profit without much consideration for the details or available options. Knowing what you are looking for is essential.
For example, an investor searching for high monthly dividends will research the highest performing dividend stocks, their max drawdown rates, the fundamentals beneath the companies, and how they compare to other stocks in order to find the best dividend stocks to buy right now.
Additionally, an investor seeking opportunities for high performance may seek out managed products such as Exchange Traded Funds (ETFs) and Closed-end Funds (CEFs). Understanding the different types of products available will give you more choices and opportunities to make the most of your capital.
Many retail investors look for the easy way out without a focused goal. This means taking random tips, overlooking most of the market, taking bad risks, and being unaware of special investment products in the stock market.
With a patient investing mindset, you can develop carefully researched goals and extract the maximum possible value from the stock market.
Value investing is the bread and butter of making long-term gains in the stock market. It may not be as exciting as buying into popular trends, but anything worth doing requires hard work.
The basic principle of value investing is choosing undervalued stocks. You should determine what stocks are undervalued right now by researching their fundamentals. The fundamentals are the core indicators of a company’s health and future performance.
Stocks often overreact to news. Value investing means ignoring trends, researching financials, and finding quality long-term companies. Many famous investors like Warren Buffet have used this exact strategy to break world records in investing success.
Some metrics for gauging a company’s health include finding low price-to-book ratios, undervalued price-to-earnings ratios, and substantial free cash flows. These all indicate a stock that is undervalued and projected to grow in the long term.
These strategies allow you to calculate the “real price” of a stock, and if it is greater than the listed price, owning the stock will lead to profit. Of course, there is a margin of error to consider, but it can be negligible if the difference is substantial enough.
There is much more to value investing than can be written here. An excellent resource for understanding the art is the book The Intelligent Investor by Benjamin Graham. This book is highly praised by the most successful investors in the world.
It may go against natural impulses when seeking gains in the market, but it’s actually more important to consider what you can lose than what you can potentially gain. This principle is called risk management, and it’s what makes the difference between a successful and reckless investor.
Good risk management means knowing exactly how much you are willing to lose on your investments, including when to get out of the market. As a rule of thumb, you do not want to risk more than 1% or 2% on each investment.
One very effective tool for risk management is a stop loss. This is a tool offered by brokers that automatically closes your position when the price reaches a predetermined level of loss. Setting a stop loss at 1% or 2% will allow you to make several bad trades without making a huge dent in your portfolio. Additionally, it will enable you to create many opportunities from a single good trade.
Something you must understand is that you will make mistakes. Every investor makes bad decisions time and again, but good risk management means that you will still come out on top.
For example, a lousy investor will hold on to a losing stock and lose 10% or 20% of their portfolio in hopes of it turning around. A good investor will set their ego aside, take a 1% or 2% loss on the same stock, and easily make it up with a diversified portfolio.
Many retail investors are very hasty to enter the market and start making profits. Nothing stops anyone from opening a retail account and buying stocks without any prior consideration or knowledge.
If you take the time to educate yourself on different asset classes, you will have a distinct advantage and make greater profits by placing your money into superior assets.
For example, a hasty investor may simply pick a list of popular stocks off the bat, trying to beat the market without much preparation or foresight. This is risky as the investor has no knowledge of the company’s fundamentals or projected future growth.
On the other hand, an informed investor may take the time to research stock equity funds that are already beating the market by wide margins and paying out dividends in monthly income. This investor will make the most of sophisticated teams of professionals who are completely focused on managing capital in the stock market.
The more time you put into learning about the market, the different types of investment products, and the fundamentals of the companies that drive them, the greater your chances of success. A successful investor has confidence in the profitable allocation of their capital.