For those new to investing, the stock market may seem a bit daunting. You're not alone. Lately, though, it seems that investing in individual stocks versus funds for example has been gaining in popularity. More and more people want to get in on it, and yet those same people are not always well-versed when it comes to picking stocks. So what are some of the "rules" for investing in a single stock and/or company? What tips should guide you to determine which are the best stocks to invest in? In this article, we look closer at what some of the experts suggest when deciding which stocks you should invest in.
Look at Dominant Companies
It is not difficult to tell which companies rank as giants in their industry. Names such as Facebook and Amazon for example keep popping up in numerous portfolios. This is because for many investors, putting their money into safe bets such as the Facebooks and Apples of the world just makes the most sense.
The reason these companies tend to dominate is that they are innovators. In other words, they lead the pack as far as developing those must-have products with every new year. This of course translates to the fact that these companies will likely stay on top and thus their stock will consequently soar. Certainly, as with any element of the stock market, there's no guarantee that such companies will continue to be at the top of the heap, but their track record and sales history do speak volumes.
Make Sure You Understand What the Company is All About
The stock market is filled with companies you can invest in—thousands of them! One thing that is important when choosing which to put your money in, is that you understand how the business works. What is the company about? And what types of products do they sell?
The value of a stock is innately connected to the success of the company and the popularity of the products they sell. If it is a common product, odds are most people understand and need it. And this means that they are buying it. Take a look at the things you use every day; are there products attached to companies who may be hot on the stock market?
Investing in companies you have zero understanding of is not necessarily the wisest move. For example, many are eager to invest in drug companies and yet they are unaware of the full scope of what that company sells. They could be working on an experimental drug and are thus not viable yet as a solid stock option. There are also other types of industries where if you aren't certain what the organization is about, you could be investing your money blindly. The more you know about a business, the better off you are when it comes to investments.
Spread Out Your Investments into Different Industries
While it is important to understand the industry/business that you are considering investing in, you also don't want to invest solely in one industry. Diversification is key when it comes to any investing approach. Spreading your money out into 2 or 3 different sectors/markets makes a lot of sense and is a strategy pursued by many seasoned investors. For instance, if you are an IT person and therefore understand that industry inside and out you may be tempted to stick with IT-based investments. But then what happens if there is a shaky moment in the IT world and that, consequently, is where all of your money is?
The more stocks you invest in, the more industries you might consider. So if you are thinking about putting money into 15 different stocks, perhaps look at 8 or 9 different industries to safeguard your money. The stock market can be unpredictable; there is risk involved. You want to try and mitigate that risk as much as possible.
Consider a Company's Track Record
Penny stocks and getting rich quickly that way are a dream. Once in a blue moon, it can happen, but the odds are unlikely. A company's history and track record do matter—most importantly, that they have a solid track record. Granted, this may prevent you from investing in new companies, but as a novice investor especially, ask yourself if you're ready to take such risks? The key with any investment is to make money, right? If a company is untested, what are the odds they are going to make you money anytime soon?
The better bets are businesses that have been around for at least a handful of years, those companies that have shown growth and realize steady revenue. Also, keep an eye on profitability. What has that company done as far as making a profit over the past 5 to seven years? Growth patterns are hugely important when it comes to identifying those stocks you want to invest in. You are looking for long-term opportunities and a solid promise of what is to come in terms of the companies you choose to invest your money into.
Understand that There Are No Guarantees
While you can listen to advise and follow certain steps when it comes to investing, understand going in that there are no guarantees in the stock market. The best company could have a rocky period and thus see their stock prices fall. Be prepared to this end. Know that risks are going in and you could lose money. Now, that said, you could also stand to make a decent amount of money if you are savvy about your investment strategy. Some people simply have a knack for picking those winning stocks and reaping the monetary benefits. With a little practice, you could be one of those investors.
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