Investing in stocks is a great way to earn money alongside your career or an existing job. Although you won’t always see the benefits right away, investing can provide long-term financial comfort and security. Many of those that invest in stocks use it to help them retire, or to simply have money later in life to enjoy. If you’re thinking of investing in stocks, it may be overwhelming. There is a ton of information you need to make informed decisions. Here we will let you in on everything you need to know, plus will cover the benefits of investing in stocks.
There is truly a lot to learn. But the benefits of investing can surely pay off if you manage it properly and are aware of the risks. You should know that investing does not guarantee any return in the future. Plus, past stock performance is not indicative of future results. That being said, below is a guide to investing in stocks, how to do it, and what the benefits of investing can mean for you and your future.
Wide Range of Investing Options
There are many different types of stocks you can invest your money in. You really have the opportunity to choose companies that you have a personal interest in, or you think will pay off the best in the future.
You can choose to invest in large, well-established companies (known as blue chip companies). Or, you can choose to invest in smaller and newer businesses. These may offer a higher return, however can also have more risk. If you do your research and manage to be lucky enough to invest in a small company that becomes successful, you can see huge returns.
Before buying anything, it’s worth taking the time to consider what stocks are best to add to your portfolio. Most stocks fall into one of two categories.
Common stock is the most popular form of stock. When you invest in common stock, you get a share in the company. You also may have the opportunity to earn dividends. Are you wondering what are dividends? These are simply a portion of company profits that are paid out to common shareholders.
That being said, not all companies pay out dividends. If you like the idea of receiving a mostly guaranteed income on your investments, be sure to invest in companies that pay dividends. Most well established companies pay dividends – even Apple pays dividends which is something they started recently.
Many technology and newer companies do not pay dividends. Instead, they take this money and reinvest it into the company to grow. So, if you hold investments in a company that does not pay dividends, instead of seeing a return on your investment through dividends, you should see a return known as capital appreciation. This is just when the stock appreciates – or the price increases.
Another benefit of common stock is that in most cases you are able to vote on different things. Each common stock you hold signifies partial ownership of that company. Therefore, you have the right to vote on things such as board members, executive compensation, and much more.
The other main form of stock is preferred stock. With this kind of stock, there are as the name suggest preferred shareholders who receive fixed dividends before common shareholders.
On the one hand, preferred stock can be safer as the value is less likely to fluctuate dramatically. That being said, preferred stock does not usually appreciate the way common shares do. If you’re thinking of investing in preferred stock, you may value the reliability of the regular, fixed dividends over the opportunity to earn more further down the line. Plus, with preferred stock, you do not get any voting rights.
Deciding What to Invest In
The most important part of investing is researching the stocks you want to invest in. Investing your money into stocks that don’t have strong future growth prospects can be a waste of money. Alternatively, investing in the right stocks could set you up for a comfortable future.
When investing, consider micro and macro economics factors. Could there be anything in the near future that could cause the value of certain stocks to fall? Take a look at the recent COVID pandemic. When the news broke, entertainment and leisure based companies dropped dramatically. These include the likes of cruise ship companies, movie theater companies, and many more. However, the price of work from home stocks like Zoom and Peloton, and large online retalers soared.
Investing is a game of balance in many ways. You need to balance diversifying your portfolio with avoiding investing in stock you don’t have good knowledge of. These could pose a threat to your investments in the future.
When deciding on stocks to buy, start off by thinking about which ones personally interest you. Do you like ‘green’ companies like Tesla or Rivian? Or maybe companies with strong economic, social, and governance (ESG) ratings.
From here, you can research stocks in that sphere and their value and risk. When starting out consider sticking with safer, more reliable and established stocks. Once you’ve got more experience and confidence, you can start taking on more risk for higher returns.
If you don’t want to pick your own stocks, you can invest in other financial instruments. Be sure to check out mutual funds and exchange traded funds (ETFs) before you start picking stocks.
Importance of Diversifying Your Portfolio
When investing, it’s important to remember that it is usually safer to invest in multiple stocks instead of just one. The reason for doing this is that by investing your money in more than place, if the value of one stock falls, you have others to fall back on. If you invest all your money into one single stock, and that stock’s price falls, you could lose a lot of money.
If you’d only invested a smaller amount of your money and the stock value decreases, you won’t have lost as much. You could also see an increase in another type of stock you’ve invested in at the same time. Essentially, a diverse stock portfolio is a form of safeguarding your money.
Long Term Benefits of Investing in Stocks
It’s common for a lot of companies to experience losses now and then. If you invest in stocks for a short period of time, the chance of you losing money may be higher. Holding shares in a company for a longer period of time is usually safer. Even if the company experiences losses, they could recover and pay off for you in the future.
Although it may be difficult, try not to act rashly when you see a company you have shares in starting to fall in value. That being said, also have a clear exit plan when investing. Also note that making short-term investments in numerous stocks is incredibly time-consuming. This requires constant attention and monitoring.
Any money made might not be worth how demanding keeping up with monitoring short-term stocks is. It can also take your attention away from other priorities.
Investing in stocks in the long-term allows you to get on with other things in your life. Overall, it is usually worth holding stocks for longer periods of time. This way you can avoid short term market fluctuations and volatility. Plus, if you are only investing in the short term, you will most likely have to pay a higher tax rate due to short term capital gains.
Why Do Stock Prices Fluctuate?
Stock prices can fluctuate for many reasons. If a company or their product rises or decreases in demand, their stock value may fluctuate. The greater the gap between supply and demand, the more the price of a stock will go up or down.
The price of stocks could also change due to economic and societal reasons, such as the recent COVID-19 pandemic. This is just a basic outline of the reasons for stock prices fluctuating. There are a ton of other reasons that could affect your chosen stocks. Executive leadership changes, a data breach, supply chain issues, regulation changes, are some other reasons. All this being said, it is important to do your research and due diligence into individual stocks before investing. It is also a good idea to keep up to date on government policies, tax law changes, monetary and fiscal policies, and much, much more.
See – investing in stocks can really be a full time job. However, there are many benefits of investing in stocks.
How to Invest in Stocks
Now that you are aware of the benefits of investing in stocks, and the risks, it is time to discuss how to actually invest! There are a number of different ways you can choose to invest in stocks. Although you can do it all yourself and invest manually, this is time-consuming and complicated, especially if you want to build up a large portfolio of investments. Remember, you must have a clear strategy, research, and be constantly educating yourself to make good investment decisions.
You can open an online brokerage account to begin investing. Downloading apps allow you to keep track of your account on the go at any time. Many online accounts will also feature useful advice for how to invest in stocks when you first start off.
Investing the Right Amount of Money
It’s essential to keep a strategic, level head when investing in stocks. It’s easy to get carried away and begin investing too much money. This can lead to poor personal financial decisions.
On the flip side, you could also be too cautious and not invest enough money to see any decent benefit further down the line.
The bottom line is that you’re investing your hard-earned money, sometimes money you’ve saved for a while to build up, and it’s understandable to be worried about investing it in the wrong stocks. Very often, there is no minimum required amount to begin investing with a brokerage. So ultimately it’s down to you how much money you put into your chosen stocks.
If you are just starting off, it may be a good idea to initially invest a small amount. As you start to learn, maybe make a monthly deposit into your investment account.
Understanding the Risk
Irrelevant of which kinds of stock you choose to invest in, there will always be the presence of risk. There is no guarantee that you will make money in stocks. You have to decide whether it is worth it for you personally.
As you invest, you will find it becomes more natural to decide what stocks to invest in. You will also learn more about how much risk to take as you gain more experience and build up a portfolio. Be sure to take time to consider how much risk you’re willing to have in your investments.
If you do decide to invest, you shouldn’t invest all of your savings into stocks. You should always have an emergency fund set aside should you ever need it. Investing in stocks isn’t the same as saving. Whilst savings don’t really increase over time unless you add to them, they also won’t go anywhere unless you choose to spend them.
Investments may grow over time. You should not, however, consider them a safety net.
Benefits of Investing in Stocks – Summary
There are many different things to consider when investing in stocks. Investment professionals with years of experience even make mistakes. If you decide to invest in stocks, be sure to conduct thorough research. Also, be patient and keeping a level head.
As long you take the time to carefully consider the stocks you want to include in your portfolio, and balance the risk, investing in stocks can be a very wise financial move for your future.
For more articles like this, check out the investing section of the site.