How to Invest in Stocks
So, you want to invest in stocks? The first rule is to invest in what you know, but it’s actually not that simple. It’s not enough to simply understand the underlying business…you have to understand what makes a good investment, well, a good investment. There exist different schools of thought here, and investing is part art and part science. You can predict and hypothesize as much as you desire, but no one really knows exactly what’s going to transpire. Some different styles of investing include:
A swing trading position is held longer than a day trading position, but shorter than a buy and hold investment strategy that can be held for months or years. Typically, a tradable asset would be held for days at a time in order to profit from price changes or 'swings.’ Profits can be attained by either buying an asset or by short selling.
Learn more about Swing Trading
A value investor believes that the market overreacts to both good and bad news. He/she would look for stocks that they believe the market has undervalued; thereby profiting by buying when the price is deflated.
Learn more about Value Investing
Growth investors invest in companies that show above-average growth. Growth investing focuses on capital appreciation. Growth investing kind of contrasts with value investing.
Learn more about Growth Investing
Great chess players don't sit at a board and just…play.
Masters of the game have a very concrete plan of how they intend to play. They decision-making that can adapt to whatever their opponents throw at them. Investing is no different: you need a plan to guide your investment decisions!
Deciding What to Invest In
You know you are ready and willing to invest. Now it’s time to decide in what. Make sure to:
Find the exchange-traded fund which track the performance of the industry and check out their holdings.
Select your stocks based on specific criteria (sector, industry etc.) Use a screener to further sort companies by dividend yield, market cap and other super useful metrics.
Keep up-to-date. Read stock analysis articles. Read financial news releases. Stay critical.
Types of Investments
Bonds, or fixed-income securities, are debt investments in which an investor loans money to an entity, with interest. The borrower borrows the funds for either a fixed or variable period of time.
Mutual funds are operated by money managers and should match the investor’s objective. They are made up of a bunch of funds collected from many investors and the purpose is to invest in securities like stocks, bonds, etc.
Small-cap investors are the risk takers. These small companies have huge potential for growth. However – because they are often under-recognized, more research is necessary. This requires the investor to have more time available to properly crunch numbers.
Large-cap investors are more conservative – these guys like to play it safe. With their steady dividend payouts, these big-cap blue chip companies are as stable as they come
Penny stocks are super high risk because of their lack of liquidity. Beginners are often lured in to these stocks because of their crazy low share price. This allows investors to hold thousands of shares for a relatively small amount of invested capital. With a scale like that, the gain of just a few cents per share can translate into major returns.
How to Buy Stock
Here are the necessary steps to buy stock:
Learn the basics
Figure out your investment goals
Determine your risk tolerance
Find your investing style & strategy
Learn the costs
Find a broker/adviser
Keep your emotions separate
Review and adjust your portfolio
Finding Good Stocks to Buy
Within each stock sector, the ultimate goal is to find the stocks that are showing the greatest price appreciation. In the same way that one would pay attention to sectors, multiple timeframes should also be examined to make sure the stock in question is moving well over time. There are two main things to keep an eye on when selecting stocks:
It isn’t smart to invest in a stock that has very little volume. What if quick liquidation is required? Selling it at a fair price will be extremely difficult if not impossible. Unless you are a seasoned trader, invest in stocks that trade at least a couple hundred thousand shares per day. Save yourself the headache.
Trade in stocks that are at least $5. Don’t shy away from a stock just because of its high price. Don’t buy a stock just because of its low price.
Want to invest like The Greats? Take a look at the strategies these big guys used to earn their names:
Warren Buffet is considered a value investor. Essentially, he selects stocks that are priced at a significant discount to what he believes is their intrinsic value. When Buffett buys stocks, he buys them for keeps. This requires a lot of discipline: it’s hard to resist buying or selling when the market seems perfectly ripe to act.
Buffet views the stock market as temperamental. He doesn’t panic when stocks plummet, or celebrate when they skyrocket. Instead, the Oracle of Omaha maintains the “keep calm and carry on” mantra, only buying stocks he intends to hold indefinitely, if not forever.
is also a value
Lynch’s bottom-up approach involves focusing on an individual
company, rather than the entire industry or the market as a whole.
The idea here is that what really matters is the quality and growth
potential of a specific company, regardless of whether the industry
is under-performing or even in a tailspin.
Here are 3 additional Lynch stresses when looking at a company from the bottom up:
Good research pays off
Shut out market noise
Invest for the long term
Philip Fisher was a growth investor. He consistently invested in well-managed, high-quality growth companies. He would hold on to these for the long term. His famous "fifteen points to look for in a common stock" were divided up into two categories: management's qualities and the characteristics of the business itself.
When Fisher found an investment he liked, he wasn’t afraid to take an outsized position of the stock within his portfolio. In fact, Fisher sometimes downplayed the value of diversification. He often found himself scouring the tech sector because the pace of c hange there creates an environment that is ripe for disruptive innovations.
Best Stocks to Buy in 2015