Financial uncertainty plagues the lives of individuals and small business owners alike. Having some cash on the side and wanting them to produce more in the long term is usually a great idea. Nevertheless, choosing between a bank deposit and stock investments may be a hard option for those knowing close to nothing about stocks. Today, we will offer a detailed guide on how to invest in stocks and the fundamentals you have to cover before expecting to get rich while following trends in commodities.
1. Decide on Your Investment Style
If you already know about stocks and you survey some promising companies (usually, big names in the technology sector attract new investors the most), you can take a DIY approach. Typically, you need a brokering company to offer its assistance.
The best stockbrokers should offer you a reasonable minimum for your account, reliable and proficient trading tools, and, most importantly, no hidden fees and taxes, and excellent customer service.
In case you are the type of investor knowing about stocks but having no idea how to proceed further, you may want to pick a managed account – hire a broker to do the work for you. Such services require minimum efforts from your part, but they do not come cheap. Reflect on your goals and make the best decision depending on the time, energy, money, and skills you are willing to give to this investment venture.
2. Understand the Differences between Stocks
A sensitive area where investors need help is differentiating between multiple types of stock-based investments.
Buying Individual Stocks
One of the first rules when you learn how to invest in stocks is to decide what you want: short-term trades that may boost your finances in 2-3 months, or long-term stock investments in companies active in what we call “forever businesses” that you hold on to for decades. A more conservative investor will choose to buy stocks on the long term from companies that are more likely to hold their ground for years to come despite market turmoil (think Amazon, since we already mentioned tech companies).
When you buy individual stocks, it means that you purchase a single share or a few shares of a specific company, one that you trust and believe will grow over the years or the next few months. Of course, seasoned investors buy shares of multiple companies, diversifying their portfolio, but you need quite the capital (shares range from a few bucks to thousands of dollars).
Investing in Mutual Funds or Index Funds
Mutual funds allow you to buy small pieces of many different stocks in a single trade. Index funds and ETFs track specific companies or entire industries. For instance, NASDAQ, while covering plenty of sectors, is one of the best trackers of tech companies. The DAX 30 in Germany tracks the 30 most valuable companies in the country (and worldwide, since they are all global brands).
Trading indices require knowledge and experience, but your chosen brokering company can teach you how to employ the best strategies. Nevertheless, making a direct investment in a mutual fund comes with inherent diversification – meaning fewer risks for you. Mutual funds are the haven for those thinking about retiring – while they do not make people fabulously wealthy overnight, they offer slow and steady gains in the long run.
3. Research the Company Thoroughly
Sure, you heard Amazon, Alphabet, and Netflix are good investments, but why are they so? Before you begin buying individual stocks in a particular company, you should engage in thorough research months before you make the actual investment. You can use a stock price prediction tool to guide you in choosing a company to invest in. Here are some things you need to consider:
- The company’s income statement, balance sheet, and cash flow statement; if you do not have direct access to such documents, your broker will fill in the gaps with information.
- The latest company annual report and the letter from the Chairman. This document gives you a solid knowledge of the company and offers you insights on the trends and strategies the company will follow next. Some of the best written such letters are those of Warren Buffet. His shareholders know what to expect and what to do.
- Check out the company’s press in the last six months. When it comes to shares, bad publicity is awful news for investors. On the contrary, extended media coverage of the upcoming revolutionary company’s product can lead to unprecedented spikes in share price.
- Statistics on share prices, market ups and downs, stock dips and meteoric rises, resilience on both bull and bear markets, and so on for the past 5 to 10 years. Such information is almost impossible to digest, but most companies offer such data in palatable formats. Your broker will be of massive help at this stage.
4. Understand your Budget
Opening an investment account is usually a straightforward deal. Budgeting that account, nonetheless, is something you need to consider thoroughly. As we said before, shares can cost a few dollars up to a few thousand dollars (or EUR if you focus on European companies or indices).
- ETFs are the best choice if you want to invest in mutual funds, but you do not have a robust budget.
- Talk to your broker about trading on CDFs and learn more about indexes – while you need to master some special scalping or day-trading skills, such approaches may prove more profitable than buying stocks and forgetting you have them for 40 years.
Some investors are comfortable with significant degrees of risk, while others prefer a “quieter” way to make money in the long run, taking the safer, more conservative path. If the kids’ college fund or your retirement plan are your main goals, mutual funds are usually a good way to go about stocks. If you aim for profits by taking advantage of the market itself or the price differences between stocks, you should have a long discussion with a broker about trading.