7 Amazing Tips That Will Help You Pick The Right Stock
Investing in stock is a fast way to grow your money. But when it’s time for investment, everyone stumbles at the question: “Am I going to lose my money?” It can be stressful to a beginner. But that also does not mean an experienced person is free from this worry.
The market is a tricky place. Even industry veterans struggle to predict trends. But that does not mean people need to stop investing in stocks. In fact, it’s a great time to invest.
First, let’s discuss why you need to invest.
The Importance of Investing in Stock
Investing in stocks can financially benefit you. It’s an opportunity to grow your money for a better future. You can get returns from bank savings, but the returns on investment are much higher. This is one of the reasons people invest.
Moreover, it’s an effective way to have a passive income. There are companies that share their profits with investors. The profit share can be monthly or quarterly, depending on the company. It can be more than enough to create your early retirement plan.
But is investing just for creating an early retirement plan? No. Investing in stock can help protect your money from inflation. The annual inflation rate has been around three percent for the last century. You can combat that inflation by investing in stocks.
Where to Start
You should always start slow. Check on Marc Chaikin’s Power Gauge Report to see which stocks have higher potential. Begin your investment with a small amount to play it safe.
There are newsletters and annual reports that you can use as a reference. These will guide you if you are a beginner.
Furthermore, consult with an investment advisor before making the big roll. That way, you can have a clear vision of what you are getting into.
If you are enticed by the idea of investing, let’s see some amazing tips for stock investment.
1. Fair Price
It’s always a good decision to check the price before investing your money. You should evaluate prices to determine a stock’s value. For example, the sales ratio of a company indicates its profitability and predictability. However, it can only be used as a guide. You should always keep your future prospects in mind.
Always look into the profit-sharing ratio if the monthly and passive return is your goal. However, don’t fall for the profit-sharing trap. Always check on the payout ratio as well. It’s a good investment if the company’s earnings are trending upwards.
Additionally, companies that are undervalued can be a good place for investment. A stable company can have a lower earning ratio. The possibility of getting a steady return is high. But not all stocks are overvalued; the price can be higher because of future expectations.
2. Determining the Goals
You need to determine your investment goals. Not all investors roll their money in stocks for the same reasons. There are people who are more interested in creating a financial profile, there are people who are interested in preserving their money for a retirement plan, and there are also people who are interested in earning a passive income.
The profit share can be a lucrative offer for all investors. Take some time to set your goals. There are no specific rules for which type of investor you should want to be.
Look for companies that share their profit with their investors if you want monthly passive income.
Try for the newer companies if growth is your goal. Newer companies can have good revenue, but be careful because they can be duds as well.
You should go for stable company stocks if money preservation is your goal. These companies are predictable and produce a stable return.
3. Safety Margin
Check on safety margins if you are investing in security stocks. Companies that have higher safety margins indicate that they are less likely to go down. An incorrect evaluation can cause a huge loss for you.
For example, a company has projected sixty million dollars in revenue, but they need fifty million dollars to break even. Therefore, the safety margin is ten million dollars. Divide the safety margin by the projected revenue. The safety margin should be seventeen percent.
But not everyone goes for a wider safety margin. You can invest in a smaller range if you are looking for stable earnings. Eight to ten percent should do the trick for you.
However, it’s a good choice to invest in stocks with a fifteen to thirty percent safety margin. Growth stocks can be a risky investment and you need to ensure you are protected from loss.
4. Competitive Advantage
Write down a list of companies that you want to invest in. Research the companies from that list and narrow it down. The companies that have competitive advantages should be your target.
Why should you look for companies with a competitive advantage? Their stocks can go higher and be labeled as stock market gainers. It’s a good way to grow your money for both the short term and the long term. Moreover, their trends are easier to predict.
But how do you know if the company has a competitive advantage? A good company will always try to offer something different. It can be price, quality, or service. Even uniqueness is a competitive advantage for the company. This is known as a “moat”.
You will see big investors betting on newer companies for this exact reason. Even companies with a moderate level of competitive advantage are good for investment.
5. Understanding the Company
You need to understand the company you are investing in. You are setting yourself up for failure if you don’t understand the actual business.
Investing in a stock makes you a partial owner of that company. You may even have to bear debt if you’re not careful enough. Hiring a good analyst won’t be any help either, because there’s no way to tell if the company is doing a good or bad job.
You must understand the business. A great example can be your daily device. You use your personal computer regularly. The motherboard has been serving you for years without any hitch. You can invest in that motherboard company because you have trust in them.
Look closely and you will find many companies that can be a good choice for investment.
A good way to understand which company is best suited for your investment is to check trend history. Collect at least ten years of trends if you are looking into big company stocks. It’s going to be a good investment if stocks are trending with moderate growth.
Even stocks that are not trending upwards can be a good investment. You need to look into the growth history and competitive advantage of the company.
Trend history is important for beginners. You are more likely to face a big loss if you fail to understand trend history.
7. Planning Horizon
You need to plan for how long you are going to hold stocks before you invest. It is one of the crucial things and plays a large role in the decisions you make. For instance, you should never invest in a moderately risky stock if you are looking for a short-term investment.
Any stocks that you are planning to hold for less than one year are a short-term horizon. These are known as “blue Stock”. Blue stocks offer higher profit margins. The risks are low because of the stability.
Moderately risky stocks are good for mid-term investment. You hold this type of stock for one to ten years. It’s important to evaluate the basic history of a company before investing. It helps with future projections.
But it’s best to invest in big companies if you are looking for a long-term horizon. Hold them for more than ten years and you can get a good return.
It’s important to know the risks as well as what you can gain. Stocks are extremely unpredictable regardless of how stable the companies are. The market declines by ten percent from its peak every eleven months, twenty percent every four years and thirty percent once a decade.
Do not invest in stocks if you need to break your savings fund. There are people who have lost everything without emergency funds to support themselves. However, you can invest if you have disposable cash or are planning for retirement. You still need to know the essentials before investing.
Investing in stocks can be beneficial, but risky. Learning some essentials before making an investment can give you an upper hand. You want to grow your money and that should be the only reason for the investment. There’s no place for an emotional investment in the stock market. Numbers are the bulls here. Best of luck!