What You Need to Know to Invest in the Stock Market
Updated: Mar 25, 2022
The important thing is not how much money you make but how much you save, how hard it works for you, and how long it stays with you. So, stock investing is one of the most effective ways to build long-term wealth when done right. And while it is not risk-free like any other investment, investing in the stock market offers a 7% return on average every year after inflation.
Believe it or not but investing has never been easier for beginners than it right now. Not long ago, you had to rely on stockbrokers who cost you an arm and a leg even when they didn’t have your best interest in their mind. However, things in the stock investing world are much different now. Today, you can start investing with just a few dollars by using plenty of investing information that you can find online.
So if you have made up your mind to try your luck in stock investing, know that the first step is to do your homework. Remember that your primary goal should be to find good value, especially for long-term investments. But before you buy stocks of a company, make sure you have done thorough research. Analyze a stock’s fundamentals to determine its viability and then see if you have room for it in your diversified portfolio.
Read on to learn more on how to invest in stock market for beginners to make sure you are doing it the right way!
What Are Stocks?
Stocks are the primary instruments for equity investments that offer part ownership in a company. Corporations typically issue stock to finance their business in two variations; common or preferred stocks.
Common stock offers the stockholder a proportionate share in both the profit or loss of a business. On the other hand, preferred stock offers a predetermined dividend payment.
4 Things to Know to Start Investing in the Stock Market
A lot of people think of stock investing as a get-rich-quick scheme. But the truth is that real money in investing can be made not by buying and selling, instead of from owning and holding stocks, receiving interest and dividends, and from their long-term increase in value.
If you are a newbie in stock investing, knowing the following things can help you build your first diversified portfolio.
Know Your Financial Goals
In any kind of investing, your financial goals determine the right investing strategies for your needs. So before you start buying stocks, you need to know why you are investing.
For instance, someone who wants to save money for a short-term goal, like a dream vacation, may go for a more conservative portfolio. They can focus on less risky companies or even prefer to invest in bonds. In contrast to this, someone who plans to grow a nest egg over the long-term, like for retirement, may invest in stocks that are high risk – high return.
Know-How Much You Can Invest
It is important to understand that stock investing is not for making money that you might need in three to five years. The stock prices indeed rise in the longer run, contributing to a lot of risk and uncertainty in the short term. In fact, in the first year of the pandemic, the stock market plunged by over 40%, only to rebound to an extreme high in a few months.
So to invest successfully in stocks, make sure you have sorted your emergency fund, financing your short-term goals, and how much amount you can afford to invest in the long-term.
Know the Trends in a Company’s Earning Growth
Before you buy stocks of a company, it is a good idea to review the trends in a company’s earnings growth. Find out if the earnings generally increase as it can be a good indicator of a well-performing business. All you are looking for is small, a regular improvement over a long period.
That said, earnings growth as an indicator alone is not enough. In order to determine if the company is doing great, you have to understand how it works and how valuable its future cash flows are. And this can be done by evaluating its products or services, target market, and cost structure.
Know the Debt-to-Equity Ratio Against Industry Norms
All companies carry debt, and this includes even big companies like Apple and Google. And for an investor, the debt-to-equity ratio is one way to determine the company’s financial well-being. What you have to do is divide the total liabilities on the balance sheet by the total amount of shareholder equity and then compare it against the industry norm. Thus, any company with high levels of debt against equity wouldn’t be good for investment.
The ultimate secret to being successful in stock investing is to buy stocks of companies that offer them at reasonable prices. Then hold on to them for as long as the business is doing great or at least until you need that money. Doing so will not make you immune to volatility, but over time your stock investment will produce excellent returns.
The truth is that learning how to invest in the stock market for beginners might take a little time. But once you get the hang of it, you will be well on your way to build long-term wealth. Until then, all you have to do is learn from various investment websites, get professional advice, and have a diversified portfolio to hedge against risk.
Additionally, if you have a hard time keeping track of your investing patterns, you can download the Doctor Money app to do it for you. With the right tools and knowledge, you have nothing to fear as the only risk left untackled now is not taking one!