Are you considering purchasing stocks? If so, here are six great tips to do so to ensure you get it right.
Tip 1: Make An Assessment Of Your Financial Situation
Before investing any money, be sure to have the funds available for making the commitment. One good rule of thumb to follow is to have no or little debt (especially any credit card debt) in addition to six months of living expenses placed in an emergency savings account (if you happen to have a family then it should be more). If you have this kind of solid financial foundation, then you can be in the position to start investing in stocks.
Tip 2: Think about it in terms of return vs. risk
It is simple. If you would like higher returns, then you need to purchase stocks carrying more risk. If you aren’t interested in taking on risky stocks, you’ll need to settle for ones that offer lower returns. A majority of investments fall somewhere in the middle range of being risk-ready and very risk-averse. That is why it is very important to…
Tip 3: Diversify
Companies vary in terms of kinds of growth patterns (ex. value and growth), volatility, sector, and size. The smartest investors do not purchase all of one kind of stock – instead, they make sure to have diversified portfolios by placing money in various mutual funds and stocks, along with various kinds of funds that have different volatility. If all of your money was put into technology stocks during the 1990s, you would have lost everything in 2000 when the dot-com bubble burst. However, after a dip you could have got some great bargains after – these were the best cheap stocks to buy.
Tip 4: Do not get too emotional
Remember that investing is a type of long-term commitment, and it is usually intended to boost your retirement funds – and not to buy big ticket items. Investors who trade frequently based on fluctuations in the market make it more difficult on themselves. Market behavior in the short term, is frequently based on alternating emotions of enthusiasm (everybody loves the new product) and fear (the scandal that is looming is going to be really bad for business). Over the long run, the company’s bottom line earnings is what will determine the value of a stock, and companies that have a solid foundation are able to withstand lots of flack.
Tip 5: Assess the volatility of a stock
In order to anticipate the volatility of a company (and avoid having emotional reactions if the stock value suddenly drops), check its 12-month rolling standard deviation for the last 10 years. Simply put, check the average performance of the stock of that time frame. A normal standard deviation is around 17%, and that means it is normally for stocks to decrease or increase in value by around 17%.
Tip 6: Buy low and sell high
This might seem like obvious advice – purchase stocks when they have a lower price, and sell them when they have a higher price – but it can be hard to walk away from the blackjack table in Vegas when you are in the middle of a winning streak. In order to protect your overall stock portfolio against above-average risk, sell the stocks that have performed well and place the gains into underperforming stocks. It appears counterintuitive maybe, but that is the essence of getting a portfolio rebalanced. So if the standard deviation of a stock is 15%, and in a short period of time it drops by more than 15%, then it might be a good time to purchase more of this stock and rebalance – since you know it is likely that it will increase in price again.