Figuring out what kind of stock to invest in can be overwhelming, especially if it’s your first time. However, looking into buying stocks and investments isn’t as difficult as it seems. All you need is the right information and an open mind. Soon enough, you’ll be well-versed in the ins and outs of the investing world that you wouldn’t need to pay a financial advisor to help you pick stocks.
When starting to build a portfolio, most investors think that they should start with a company’s stock. But most financial advisors say beginners should avoid individual stocks. Buying individual stocks can be a lot riskier than a low-cost mutual fund that tracks a large group of stocks. And, the advantage of owning only a few shares is that you can better track sudden changes in the value of your investments.
A good rule of thumb when investing for the first time is to add individual stocks only when you already have a diversified portfolio of mutual funds and ETFs. Creating a good base of low-risk securities ensures the health of your investment portfolio, which is something that you will need in the long run.
A great mindset to keep when buying stocks is that you become a part owner of that company. So, the value of your investments depends on the health of the business, short-term market movements notwithstanding.
Now that you’re armed with the basic information let’s explore other tips that will make buying stocks for the first time a little less intimidating.
When preparing for a big purchase—like a house or a car—you spend time researching. You peruse different sources to ensure that you don’t miss out on any crucial information that will affect the value of a purchase. Buying stocks requires the same amount of resourcefulness and patience. After all, you will own pieces of the companies in which you choose to invest, so it’s always best to spend wisely.
There is a lot of excellent and free financial advice online, so why not make the most of it? Bookmark websites like the Motley Fool, Yahoo Finance, and CNN Money, among others. Aside from news sites, you can also check out the companies’ public reports, such as financial statements or annual reports. Businesses that issue stock are required to release these reports quarterly or annually. Visit the company’s website and check out their ‘Investor Relations’ page.
Once you get ahold of a couple of financial statements, it might seem incomprehensible to you at first but remind yourself to be patient. You may need to enlist the help of a financial advisor, whom you need to pay for their time. The price for a short primer course to introduce you to the investing world is worth it when you can finally understand what the company reports contain. And, with a bit of practice, you can easily find what you’re looking for—the overall health of a company, which is evident in their consistent performance throughout the years. While a quarter’s good performance may seem good enough for you to invest in an individual company, it’s always best to err on the side of caution and trust what the numbers look like over the years.
Buying Stocks – Buy what you know
As a beginner investor, you will most likely gravitate towards the brands that you already love. Trust your instinct because there is a good reason for it. Buying what you know, whether it’s a company or in an industry that you’re familiar with, gives you a familiarity, which can act as a proper context for the numbers in the annual report.
Price and valuation
It is a common misconception that cheap is good. When it comes to stocks, that’s not always the case. Sometimes a share is reasonable because the business isn’t growing. And sometimes a stock is expensive because its earnings are poised to proliferate in the next few years.
Also, familiarize yourself with the price-to-earnings ratio (P/E). A reasonable P/E means paying a low price for each dollar the company earns. There are a lot of free P/E calculators online that you can use. You can also calculate it yourself by dividing a company’s share price by its net income. Keep in mind that a P/E below 15 is considered cheap, while a P/E above 20 is expensive.
Avoid the hype
The new and unfamiliar often presents a lot of possibilities. However, history is filled with events that prove that it’s smart not to trust the hype. You may be familiar with the dot-com bubble during the late 1990s. Investors flocked to buy stocks of internet-based companies without understanding how those companies planned to earn money. The result: panic selling, companies folded up, and hundreds of thousands of investments evaporated.