Investing in the stock market can be an effective way to build wealth faster than the rate of inflation. In other words, you are increasing your wealth in terms of real dollars that will help you fund your retirement or help you meet other goals later in life. However, it is important to know what makes a stock worth buying or worth holding for the long-term.
Index Funds Are the Ideal Investment
If you want to buy stocks, an index fund is the best way to do so with maximum diversification and minimal risk. Index funds attempt to track the general direction of major indexes such as the Dow 30 or S&P 500 over the course of a year or several years. As the stock market tends to go up over long enough periods of time, you are almost assured to see your account increase in value.
In addition to index funds, you may also want to look for ETFs or other mutual funds that aim to match the performance of an entire index or sectors within the index. Funds may also be created that hold nothing but dividend stocks or large cap companies that have a track record of stable growth. If possible, try to look for funds that are passively managed as they cost less than those that are actively managed and may also have better rates of return.
You Either Buy and Flip or Buy and Hold
In general, you want to buy a stock and flip it as fast as possible or buy a stock and hold it forever. Those who like to flip stocks are known as swing traders who look for stocks that trade in predictable ranges. When the stock gets to the top of its range, a trader will sell it only to buy it again once its price goes back to the low end of its range.
The buy-and-hold strategy says that you buy a stock because you believe in its long-term prospects. For instance, you may buy shares in an established company because you know it will pay out larger dividends over time while also appreciating at a constant rate. You may also buy stock in a lesser known company with the hopes that it will breakout and appreciate rapidly over the next decade or so.
Don’t Buy or Sell Just Because the Broker Says So
Your stockbroker is there to facilitate any buy or sell orders that you may want to make. That person is also there to ensure that your funds remain available to you before you buy or after you sell. However, the biggest mistake that you could make is to buy or sell a stock just because your broker told you to.
This is because he or she gets a commission each time an order is placed that can be as high as $9.95 per trade. If you made even one trade a week, you could spend up to $40 without seeing any return on that investment. Besides, modern technology makes it easier than ever to scan charts or gain access to other information that can inform your trading decisions.
Don’t Let Your Emotions Get in the Way of Your Success
Another cardinal mistake to avoid is to buy or sell based on your emotions. There will be many days when the value of a stock goes up or down by several percentage points. It may be tempting to lock in profits when prices go up and cut your losses when stocks go down in value.
However, if you have a truly valuable stock from an established company that you feel good in, you should just put the mouse down and hold your position. It is critical to know that over the course of a year, five years or a decade, one good or bad day is basically a statistically insignificant fluke.
In some cases, a stock may decline for several weeks or months at a time before once again increasing in value. The smart investor may actually decide to buy more during these down times to reap even bigger benefits when the stock reverses course. It may also be a good idea to buy on the dips if you are getting a dividend as your total payment is dependent on how many shares are owned.
Buying stocks can be complex and confusing when you first start out. There are so many options available to you, and the thought of your account being wiped out in a downturn can cause novices to lose sleep at night. However, putting money in an index fund or another diversified fund can help you keep your capital safe while also giving you time to learn the nuances of what makes the market tick.