Stocks have traditionally offered the greatest potential for growth among the investment options available for US residents and are arguably the best means for making money in the long term. Experts have even suggested that not investing in stocks is risky for young people due to the incredible potential for returns. There are often no hidden secrets to mastering the stock market — the common theme of identifying the right company at the right time and buying at a great price is straightforward on paper, but you will also need a robust plan and a cool temperament to achieve success.
Where to start
There is a widespread misconception that a huge sum of money is required to start an investment journey on the stock market. However, it is possible to get up and running with just $500 by opening an account with an online broker. ”Maximizing returns by minimizing costs” should be your mantra for your formative steps into stocks. There are fees of up to $10 for each of the stock trades that you make, so try to focus on one or two companies at monthly intervals to begin with. Once you have made some money, you can look to diversify your portfolio and make bigger moves.
Personal loans are also a viable source of capital for investment, but you will need to be smart with your stock choices to ensure that you get the most from this financial arrangement. First and foremost, you should compare personal loan rates and potential return on investment. For example, you ideally want an APR with less than half of the expected ROI. Mitigating the risks through due diligence is critical when attempting to turn debt into positive returns, so pay attention to the tiniest details.
When to buy
Finding and investing in the right stocks is what sets the most successful investors apart from the rest. There are times when certain stocks will offer a better chance of making money. You should determine a price target range using resources such as analyst reports and consensus averages, and be willing to make moves when stocks hit your buy price, when they are undervalued and if and when they go on sale. Valuation metrics and techniques such as price to cash flow, price to sales and the widely used price-to-earnings ratio are also incredibly useful, so always do your homework.
Explore business elements
Buying stocks isn’t hard, but selecting companies that will beat the market on a regular basis is. It is easy to get swept up by the mass of stock market figures and symbols, but as you’re effectively buying into a business, you should also consider aspects such as its long-term prospects, its place within the industry, its competitors and whether it adds value to your portfolio. Taking a step back to look at the bigger picture and keep your emotions in check will make you a shrewd investor capable of thinking clearly and exercising sound judgement.
Investors are often too focused on making a quick return instead of building a portfolio that will offer rewards via dividends and share price appreciation for years to come. To reduce your exposure to the volatile nature of the stock market, you can use a dollar-cost averaging strategy to invest a set amount at regular intervals, buy in thirds to avoid morale-crushing returns early on or buy a whole “basket” of low-priced stocks to identify trends to double down on in the future. Generally, you don’t want to invest more than ten percent of your holdings into individual stocks at any time.
Master the basics first
Renowned investor Warren Buffett famously said: “Risk comes from not knowing what you’re doing,” so take the time to get up to speed with financial metrics and definitions, popular methods for stock selection, the different stock market order types and the wide range of investment accounts. Success in stocks requires a solid foundation, so get everything in order before thinking big.