Here’s a bitter truth: Becoming a successful investor is deceptively tough. Many retail investors lose money simply because they don’t have enough knowledge of the stocks they’re investing in.
Buying stocks in the world’s popular stock exchange markets, like the New York Stock Exchange (NYSE) and NASDAQ, is a popular way to invest and earn returns. That said, you need to consider some important factors to make informed decisions.
Here’s a brief breakdown:
Know Your Investment Goals
First things first, consider your investment goals. What do you want to achieve with your money? Are you investing to fulfill some short-term goals, such as building an emergency fund, going on a vacation, or funding a child’s education? Or do you have long-term goals in mind, such as a down payment on a house or retirement planning? Your investment goals can determine the type of stocks that are most suitable.
Next, consider the time horizon or how long you plan to keep the money invested. If you need the money soon, opt for more stable and small-cap stocks. But as a long-term investor, you can often afford to take on more risk.
Research the Company
Once you know your investment goals, evaluate the specific company you’re investing in. Find out the following things:
- How the company generates revenue. Research their business activities and look out for information specifically tailored to investors.
- Scrutinize the company’s financials. This includes sales, earnings, financial projections, debts, and cash flow.
- Consider the leadership.
- Check the company’s industry position and reputation.
Pro tip: Buy stocks in a company where revenues and profits are consistently rising. This signals genuine growth and not a streak of good luck.
Evaluate the Stock Price
Next, check the stock price and evaluate the valuation to determine how much the stock is actually worth. One of the best ways to evaluate valuation is the Price-to-Earnings (P/E) ratio. It compares the company’s current stock price to its earnings per share (profit). A high P/E might mean the stock is expensive, but investors can expect strong future growth.
Also, consider when is the best time to buy stocks. For instance, experts believe that the best time of the day is in the morning, immediately after the market opens. Big price fluctuations happen during this time, so you can take advantage.
Look Into Dividend Payments
If you don’t have the time to watch stock prices all day, invest in companies that pay dividends. With dividends, you get paid regardless of the stock price. They are distributions made by a company to its shareholders as a reward for its profits.
Dividends can ensure a small yet consistent passive income.
Assess Risks
Every stock investment carries some sort of risk. Start by considering your risk tolerance — how much ups and downs you’re comfortable with.
Next, consider market risk or how sensitive an investment is to market fluctuations. For instance, stocks with a high beta tend to experience larger price swings. They bring big rewards, but also greater risk.
You should also consider how inflation, interest rates, and geopolitical events impact the price of a stock. Lastly, invest with a reliable platform like SoFi to minimize risks.
