When you start investing in stocks, there is a lot you probably won’t initially be aware of. While the process of investing has a life long learning curve associated with it, there are a few things you should know from the very beginning.
Unfortunately, not everyone takes the time to learn these basics before they plunge in headlong. Often they spend a lot of time wondering why they fail. Hopefully this list will help to minimize your failures and maximize your successes.
Dividends are Your Friend
A lot of people who buy stocks never really think about the dividends some companies pay out. While you might be primarily interested in investing for capital gains, you might also want to buttress those gains with the payouts of a steady dividend or two. Oddly enough, stocks that pay dividends tend to do better from a price appreciation standpoint than their non-paying counterparts. If you reinvest your dividends, you can do even better.
Never Buy Based on Emotion
When you buy, and particularly when you sell, you need to do so based on reason and a plan. Even if you decide to day trade, don’t make a move just because “everyone else” is doing this or that. Make a move because it fits into what you want to do and because you’re reasonably certain it will make you a solid profit. Some actions involve taking risks, but other some other actions just involve being risky. The former is great, but the latter is foolish.
Think About Why You’re Buying Before You Do
Why do you want this stock? That’s a question a lot of people never think to ask. If you know why you have it, you won’t be in a rush to sell just because analysts say one thing, the market says something else and the company’s management says a third thing. When you act based on a solid reason, you tend to do a lot better than people who join the proverbial herd.
Look for Great Deals
Many of the greatest investors of all time have relied on what they call the margin of safety. This means that when you buy a stock, you want it to be far below what it’s actually worth intrinsically. Some people measure this based on cash flow, while others measure it based on book value. Still other people measure a good margin of safety based on the company’s earnings. It’s up to you how you judge a good deal, but it’s the best way to make a profit and protect yourself from serious losses.
Diversification Makes Life Easier
When you own a wide basket of different equities, you don’t have to worry as much when one of them has a bad year. Being well diversified is a great place to be when times are tough, and sooner or later they get that way.
There’s a lot to investing. Your studies should never really end. But the above are some great basic points to remember.
About the Author: Melodee Suddreth loves studying the world of stocks and bonds and pays close attention to professionals like Tim Sykes and others who have done well in the world of investments. She’s an undergrad student who plans to obtain her MBA and eventually become a professional finance analyst.
Credits: Image courtesy of T. Al Nakib.