Do you want to learn how to invest your money in stocks? Here are six things you should know before investing in stocks.
1. Identify Investment Goals
Before you invest your money in stocks, you should know your investment goals and your risk appetite. Some people invest in stocks as a long term investment, expecting long term capital gains and dividend income, while some people invest in stocks to make short term capital gains.
2. Choose a Stock Broker
You should register with a stock broker to carry out any financial market transaction. A stock broker is a licensed and regulated firm that facilitates buying and selling stocks on behalf of investors. There are more than 3,600 registered brokers in the USA, There are two broad categories of stock brokers.
a. Discount Brokers
Discount brokers are the cheapest out of two types of brokers, they provide a digital platform to buy and sell stocks, bonds, or other financial products. They provide no advisory or research services to the investors. If you wish to start with very small capital, discount brokers will be ideal for you, because other brokers are more expensive.
b. Full-Service Brokers
Unlike discount brokers, full-service brokers provide advisory and research services. If you are planning to start investing in stocks with a substantial amount of money. You can use a full-service broker to get their expertise knowledge.
4. How to Pick a Stock to Invest
To decide which stock to invest, you should consider these factors.
a. Value of the Stock
You must be able to sell for more in the future than it’s selling for now. Finding under priced stocks is very important. But it is not as easy as it sounds. It is not something like you go to a department store and find some clothes marked with discounts. You should assess the intrinsic value of a stock using various valuation models, unfortunately, these valuation models involve complex calculations.
b. How Long You Want to Hold the Stock
Lots of cases prove that holding on to a stock for a long time will reward you huge returns. Warren Buffet is one of the most successful investors who invest in stock for the long term. His company Berkshire Hathaway first invested in Coca Cola Stocks in 1988 by acquiring $ 1.023 billion worth of stocks. In 1994 he increased Berkshire stake in Coca Cola up to 200 million shares bringing his total cost up to $ 1.299 billion. Today Berkshire owns 400 million shares due to the share split took place in 2012 and it worth nearly $ 17.3 billion at the current stock price of $43.26.
Berkshire has earned an unrealized capital gain of $ 16 billion from investment in Coca Cola stocks. The gains are even higher when factoring in dividends.
If you don’t want to hold stocks for the long term you could hold stocks for a short term or even day trade. The short term investors or day traders focus on capital gain. Mostly, discount brokers facilitate day trading platforms. In my view, day trading is much riskier than long term investments and at the same time, it can give you higher returns within a short period.
Diversification is a technique for reducing risk in your investments. You would have heard the saying, “Don’t put all the eggs in one basket.” you can apply this technique by investing in stocks of different industries. When the tourism industry is not doing well, the health care industry will be doing well.
6. Determine the Type of Order.
Following are some common order types available.
a. Market Order
A market order is an order to buy or sell a security immediately at or near the current bid this type of order does not guarantee the execution price.
b. Limit Order
A limit order is an order to buy or sell a security at a specific price or lower. For example, if an investor wants to buy stock less than $ 20, the order will be executed at or lower $20.
c. Stop Order
A stop order is an order to buy or sell a stock once the price of the stock reaches the specified price.
Investing in stocks gives a higher return on average compared to most of the other investments. Therefore you should remember that it always involves higher risk.