Buying stocks as an investment is a fantastic idea that can lead to life-changing wealth. However, it is not an easy process, and this is why it is essential that you have the right tools at your disposal to make an informed decision.
Knowing everything buying stocks entails can help you properly invest your hard-earned money without any remorse.
Once you purchase that stock, you automatically become a shareholder in that company. Hence, you need to ensure you properly analyze all aspects of stock buying so that you are happy with the results at the end of the day. So, are you planning on investing in stocks? Here are six things you should consider.
Determine the Time Horizon
Determining the time horizon plays a vital role in whether or not you purchase a specific stock or if you even buy stocks altogether. Your time horizon can be short, middle, or long-term, depending on your financial plans.
Short-Term Horizon
Short-term time horizon investments are investments that you do not plan on holding for long. These could be stocks you intend to buy and hold for under a year or a year at most. You could use the profits and principal from this investment to start a business.
If this is your time horizon, you should consider investing in blue-chip stocks. These are stocks that pay dividends. Companies that offer blue-chip stocks typically have stellar balance sheets, and you face fewer risks. That said, ensure the company you chose does, in fact, offer dividends. For example, amazon stocks do not offer dividends.
Medium-Term Horizon
Medium-term time horizon investments are investments you hold from anywhere between a year and ten years. For these kinds of investments, you should focus on emerging markets stock with moderate risks.
Long-Term Horizon
Long-term investments are investments you plan on holding for over ten years. These kinds of investments require a long time to recover if anything goes south; however, they offer the most significant returns and increase your odds of accumulating life-changing wealth.
Consider Whether You Are a Risk Taker or Not
No matter the investment you decide to make, you are bound to run into some risks in one form or the other. So, it is vital that you realize that investing in stocks means you could lose some, most, or all of your money.
Unlike other investments made with NCUA-Insured credit unions and FDIC-insured banks, stocks are not insured by the federal government. Therefore, there is a possibility of you losing your principal (the money you invested). This potential loss is valid even if you buy the stock through a bank.
Taking risks while buying stocks means you have a higher potential for a larger return on investments (ROI). Opting for stocks or bonds is the way to go if you plan on a long-term horizon. This is because they have more risks but even greater returns in the long run.
However, if you need a short-term horizon investment, you should consider investing in assets with lower risks, such as cash equivalents. The drawback to cash equivalents is inflation risk, and this means that inflation might occur, which could lead to the deterioration of returns. Ultimately, stable blue-chip stocks might be your best bet.
Save Some Money as Emergency Fund
Setting aside money for emergencies is a smart move to make before investing in stocks. This is because there are a number of unforeseen circumstances that could occur, for example, sudden unemployment. Many intelligent investors ensure to save up to six months' worth of their income before venturing into investments so that they are ready for anything.
Look Into Dividend History
Dividend stocks regularly offer investors a part of their profits or reserves, which could be monthly or yearly. Investors who want to receive this form of payment should opt for dividend stocks. As a soon-to-be investor, you should analyze the dividend history of all the companies you want to buy from so that you know which stocks to buy.
If you want high dividend payments from a company's stocks, you should look at their dividend over the years. This yield is typically expressed as a percentage, which you can calculate by dividing the yearly dividend per share by the current share price.
Do Research to Avoid Fraudsters
There are scam artists everywhere looking to make huge gains from unsuspecting individuals. These scammers watch the news and take advantage of widely publicized information. They use this information to attract unwitting victims with their so-called "opportunities.”
This is why the SEC advises that you always ask relevant questions and expect credible answers. You should also ensure to get answers from legitimate sources that have nothing to gain by giving you false information. You can do research online, ask professionals, or make inquiries from trusted family members and friends.
Diversify Your Investments
As I mentioned earlier, all investments come with risks, and the best way to reduce this risk is not to put all your eggs in one basket. Thus, it would be best if you diversified your investments. If you select suitable investments, you can limit your odds of making losses while maintaining the potential gain you would receive from sticking to one asset.
Regardless of the shares you invest in, whether individual or employer's stock, it is best not to invest in one. By doing so, you run the risk of losing a lot of money if the company goes bankrupt, and if it was an employer's stock, your job. So, endeavor to invest your money in several places.
Conclusion
Investing today for a better tomorrow is a wise decision. Several professionals, such as Warren Buffet, have succeeded by dedicating their lives to making the right choices when selecting investments.
You, too, can be successful in following in their footsteps. All you need to do is consider a few factors this article has disclosed. Hopefully, you can make the right decision and accumulate the wealth you desire.