Stock investing can be a great way to generate strong returns and achieve one's investment objectives. However, it can also be a way for an investor to lose all their money. With all the resources out there, it can prove helpful to have good, basic information on the subject. This article will lay out some straightforward points that anyone can follow.
Assess Your Investment Objectives
What are you goals? What are you looking to achieve by investing in stocks? If you are considering investing in these securities, those questions are a great place to start. It may be that you are planning for retirement and want to slowly accumulate wealth over time. Or you may have a completely different objective, such as wanting to produce some high returns through day trading.
There is a saying that people should start with the end in mind. Once you determine your destination, you can determine the best way to get there. If you are looking to build up wealth over a period of decades for an event like retirement, your approach may be completely different from someone who wants to generate compelling returns through short-term trading.
Consider Your Risk Profile
Another key variable to consider is your risk profile, which can be simply defined as how much risk an investor is willing to take on. Everyone has unique circumstances, so individual investors have varying aversion to risk.
Defined broadly, investors can have conserative (low risk) profiles, medium risk profiles and more aggressive profiles (high risk). Another way of thinking about this is that risk aversion takes place along a continuum. A person may be highly risk averse, or alternatively, they may be willing to take on significant risk.
Risk is inherent to investment, and investors should keep this in mind before they put their money into anything. However, when people who are just starting out in investing talk about this concept, they are frequently referring to downside risk, which is the risk that the value of their principal will decline significantly.
With these considerations in mind, there are a few questions you can ask to get a better sense of your risk profile. What is your age? What are your investment goals? When do you need the money that you invest?
One major consideration is investment horizon, which is how long you will invest your money into a portfolio before getting it back. It is important to find an investment horizon (also known as time horizon) that fits your objectives.
If you are looking to save for retirement or accumulate funds for your child's college tuition, that could take decades. In this case, you would have a long-term investment horizon. One major benefit of this type of time horizon is that an investor has more room to take risks. If they purchase a portfolio of stocks, for example, and that portfolio falls significantly in value because the economy goes into a downturn, they can wait out the turmoil until the market recovers.
On the other hand, if you are looking at a period of three years or less, you have a short-term investment horizon. Investors who are looking to trade stocks (as in buy and hold them for relatively short periods of time before selling) may find this type of time period particularly advantageous.
Determine Your Strategy
Every investor has unique circumstances. Some may want to figure out every security they wish to put in their portfolio on their own. Those who are looking to collaborate with others may explore or take part in investment clubs, which can be a good way to meet with other like-minded individuals. These clubs can be a great way for investors to share information and learn from each other, but keep in mind that joining one of these organisations may require you to contribute money so it can be combined with the financial resources of others.
If you are looking to do things on your own, you may decide to pick out individual stocks yourself. However, keep in mind that taking this approach can be rather time-consuming because it requires researching the market, as well as individual stocks. Having the ability to analyse financial statements and past performance will certainly prove helpful.
However, if you want to take a less active approach, you can hire someone to manage your assets for you. One option you have is a so-called robo-advisor, which uses software applications to help investors develop their portfolio. If you are looking to start investing without significant capital outlay, this may be a good option as robo-advisors do not require large sums of money.
Opening An Investment Account
If you want to trade stocks on your own, one crucial step is opening an investment account. For example, you could open a brokerage account, which will give you the ability to buy and sell stocks and other equities that grant access to the stock market. While there are a lot of options in terms of where you can open these accounts, you should review the different brokerages, namely their costs and benefits.
In addition to opening an individual brokerage account, you can also set up an individual retirement account (IRA). This will provide you with tax advantages, but you will need to follow specific guidelines to avoid incurring tax penalties. Keep in mind that you may already have a retirement plan through your employer, but this avenue may give you a limited number of securities you can invest in.
Earmark Funds To Invest
Before you make any effort to gain exposure to the stock market, you must determine how much money you will put toward this endeavour. Also, you need to determine what fraction should be allocated toward individual stocks and funds granting exposure to stocks.
If you want to purchase shares of individual stocks, for example, you may be able to do so with a very small initial amount of capital. Exchange-traded funds (ETFs) can also grant easy access to the stock market, as some can be purchased for relatively inexpensive amounts.
As for how much of your portfolio should go into stocks, stock funds and other assets like bond funds, everyone has unique circumstances. If you are simply looking to day trade, you could put the entirety of your portfolio into these equity securities. However, if you are looking to build a nest egg for retirement, you may want to put the bulk of your resources into funds that will grant you broad diversification.
If you are looking to gain further clarification of this subject, you may benefit from speaking with an experienced professional like a financial advisor.
Stocks Vs Other Equity Securities
You can invest in individual stocks to potentially generate compelling returns, but there are other ways to easily access the stock market, such as mutual funds. By investing in a mutual fund, you can gain exposure to the stocks of several companies at once, and by purchasing several of these at once, you can quickly establish a well-diversified portfolio.
ETFs are another option, and they also grant quick exposure to the stock market. An ETF is basically a basket of securities. Instead of buying shares of a major company, for example, an investor could purchase an ETF that grants exposure to the entire S&P 500 Index, which would give them a quick way to invest in 500 blue-chip companies.
For many investors, building up a portfolio of mutual funds or ETFs is advantageous, as it can help them quickly achieve diversification. However, individual stock picking can potentially generate some very strong returns. If you select shares of specific companies, they are more likely to skyrocket in value than funds that provide broader exposure. However, they are also more likely to suffer sharp losses.
If you are looking to participate in trading individual stocks, there are many different strategies at your disposal. Momentum trading, swing trading and range trading are a few of the options you can explore. These different approaches all come with their own unique benefits and drawbacks.
Performing your due diligence is crucial, but you can't start this process until you take the plunge and start investing. Keep in mind that your investment strategy doesn't have to be particularly sophisticated to work.
Warren Buffett, one of the world's richest investors, has repeatedly advocated relatively simple investment strategies. He says that people should buy what they know and look to purchase shares of companies that will have value for the long haul.
Investors should keep in mind that while trading stocks can provide impressive returns, you can also lose all the money you put in. Stocks have historically generated stronger returns than other asset classes. However, stocks have also suffered intense volatility and dropped sharply during downturns in the market.
If you do decide to pick individual stocks, be sure to do your own research.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…