The intention behind every stock investment, other than short, is to make a profit if the stock price goes up. But a lot of the markets go down instead and cause people to lose their hard-earned money. Luckily, investing isn’t like gambling. As in, it’s not random. Anyone with sufficient knowledge of the market and affecting factors can make a fairly accurate guess about the direction of the market. Here are a few things that you should understand before jumping into the world of investing.
Investing always holds some amount of risk with it. Even if you go out looking for the best stocks to buy, you’ll still not be one harden percent safe. The risk factor of investing is always present and affects everyone, from the billion-dollar hedge funds to small retail investors.
The safest investing method, according to the past 50 years of research, is buying stable stocks and holding them as they rise slowly but surely. This will give you the best chance of not only getting your money back but also making a decent profit given enough time. On the other hand, the riskiest method is predicting which stocks are going to increase their value rapidly and investing everything in that stock. While extremely risky, this method also contributes to most profits in a short amount of time.
Another thing to keep in mind is your time. Risky short-term investments need a lot more time and research to be successful. You need to be constantly on your toes and constantly looking into matters. After all, the only way to avoid huge losses in short-term investments is to sell as quickly as you can if a dip starts. If you aren’t giving enough time to the stock, and it falls when you weren’t checking, then you’ll have to endure a huge loss.
Income and dividends:
You can think of dividends as a company paying the share to their stockholders. Stocks that offer decent dividends are usually the most stable. But this stability goes in both directions. They will most likely not fall immediately and won’t reach the moon either. Investing in such a stock gives you a steady stream of income that is fairly stable. You can also reinvest your earnings back into more stocks if you don’t need them right now. If risking your money isn’t something that you are comfortable with, then investing in a high-dividend stock is the best option for you.
Buying stocks, especially for a beginner, can be tricky. They don’t know what to look for, so they invest in a stock that everyone else is investing in. This is not a good strategy. You need to have a clear understanding of how the stock market works, how to look for patterns, and how to do your research for long-term success.
This is not to say that following trends is bad; it isn’t. But blindly boarding every hype train is bad and will result in you losing your hard-earned money. You need to understand the difference between trends that have some actual merit behind them and trends that are just bubbles waiting to burst at any time. It can’t be said enough, doing proper research is the best way to succeed in the stock market.
Another thing to understand about following trends is to know when to let go. You should know when a hyped stock is about to reach its peak or is already at its peak. A lot of people lose money every day because they participate too late, and the party’s over by then. This is highly important if you’re leaning towards trading stocks instead of simply investing and holding. Even as simple as learning simple strategies and knowing how to spot patterns like the double bottom can help you earn money instead of losing your investment.
Price to earnings ratio:
In the simplest words, price to earnings ratio is the amount of money you’d have to spend to make a unit of profit. For example, one company is known for giving a dollar of profit per share, but each share is twenty dollars. On the other hand, it is a company that provides much less profit per share, but the share is also extremely cheap, especially compared to the first company. So, how do you determine the better investment in a situation like this? The answer is simple, price to earnings ratio.
The relative value of a company’s stock is also dependent on the speed of its growth. A fast-growing company will usually provide a better price-to-earnings ratio than a slow-growing one. This is also determined by comparing the company to its direct competitors and rivals.