If you have ever thought about investing your money so that you can make some extra cash other than your regular salary or wages, the chances are that you have heard about investing in the stock market. If not, at least you have heard of people like Warren Buffett, who is one of the wealthiest men currently alive courtesy of his life-long love affair with the stock market.
Yes, some people have become millionaires and even billionaires, thanks to stocks. So now, you are probably wondering how you can also get to such levels but worry not because we have a guide through which you will get a good idea of how to navigate the stock market.
What are stocks?
A stock refers to the shares of a company, and a share is a unit of ownership of that particular company. A publicly listed company sells its shares to the public as a means of raising revenue and you get to be one of the owners of the company. Shareholders can, therefore, decide which direction the firm should go to. Also worth noting is that stocks gain or lose value due to several factors that might be internal or external. Factors that influence the positive growth or success of the company also contribute to its profitability and, thus, a positive stock price performance. The reverse also applies.
Why you should buy stock
People purchase stocks for the following two major reasons. The first is so that they can make dividends, which refers to the share of the company profits that they are entitled to, based on the amount of stock they own in a company. The second reason is so that they can take advantage of the price movements, so here the basic principle of commerce applies. Buy low and sell high.
You can invest in the stock of one company, or you can create a portfolio of carefully selected stocks that you can invest in to increase your earning potential. A diversified stock portfolio is also a good idea because it dilutes the risk. Speaking of risk, you need to perform a careful analysis of the market and the individual stocks before you invest. You should look at the performance of each company over time, such as its performance in the last five years, its current performance, and steps they are implementing for growth in the future. It will help you get a better idea of which stock will likely remain profitable in the future.
Open a brokerage account
You will need a brokerage account if you want to venture into stock trading, but first, you will have to select a good broker. An excellent online brokerage is perhaps your best bet at achieving success in stock trading since they can access the market from wherever they are as long as they have internet and a computer. Consider the brokerages that are available before making the final decision to identify the one that is ideal for you based on costs such as account fees and trading commissions.
Fund your account and pick your stocks
Come up with a capital figure that you want to invest in the stock market. You can start with a relatively small but still significant amount that you can use to trade until you get the hang of the market, especially if you choose to become a retail stock trader (buy the stock when prices are low and sell high). Once you develop your strategy and are confident in it, you can perhaps think of investing a more considerable sum. As you will notice, you will need to invest a sizable amount of cash if you want to see good returns.
If you prefer long-run investments so you can enjoy dividends when the company or companies you have invested in making a profit, then consider investing a larger sum. Note however, that you can build your stock portfolio over time.
Just as crucial in your trading journey is the ability to select the company to invest in. Just because the stock has been doing well over the past few years does not mean that it will continue to be a strong performer, and only because a stock is not valued highly does not mean that it is not a good investment. Doing some due diligence is essential, that is why we emphasize that you look at the company’s financials to get a better picture of how things are going and whether it has the potential to deliver good returns in the future.
Keep in mind that purchasing a stock when its price is low or undervalued is always a great move. Just make sure that it can deliver because undervalued does not necessarily mean good investment. Another tip to look out for is the company’s debt ratio, which will show you whether most of the company’s profits are going into debt repayment.
A diversified portfolio
As noted earlier, you should consider diversifying your portfolio as a way of reducing your risk exposure in the stock market. Invest in multiple stocks to achieve this, and the good thing about investing in the stock market is that you can always drop a stock if you are convinced that a stock you have invested in is not headed in the right direction. Also, consider investing in index funds like the S&P 500 as a way of diversifying your portfolio. An index fund is an exchange-traded fund that tracks specific underlying stocks. It is a great low-risk investment option if you want to take advantage of long-term growth in the stock market.
If you feel like investing in the stock market is intimidating to you, consider opening a Robo-advisor account so that you are advised on how and where to invest. You can also consider having a fund manager that will invest on your behalf, but you will have to pay them some commission. Note that the stock market still has some level of risk, and one can lose their money.