There are a lot of different factors to consider before attempting to invest in the equity market yourself. This article is going to offer 11 tips that will help you succeed with your personal investment journey.
Understand the Risks
The most important equity market investment tip to remember is that you should always understand the risks. There is no such thing as a guarantee of return when investing in things like stocks, bonds, and mutual funds. If you have limited capital, consider investing in options like CD’s that are backed by an entity like the FDIC.
Avoid Peer Pressure
Another equity market investment tip to consider is that you should always avoid peer pressure. One of the most basic mistakes that new investors make is that they succumb to the herd instinct. This means that they make decisions based on popular opinion and the advice of friends and family. You should always base your investments on sound research from verified sources.
Invest in Companies You Know
For beginner investors, one of the best things you can do is start by investing in companies that you know and love. Some prime examples of well-known companies include McDonald’s, Coca-Cola, Hewlett Packard, and Apple. You can do a quick check to see what their base price is to determine if you can make the initial investment. The point is that these companies have been around for quite some time and have a proven track record.
Don’t Try to Time the Market
Trying to time the market is another big mistake that new users make when starting their equity market investment journey. The idea behind timing the market is based on making purchasing and selling decisions based on market predictions. These predictions are often based off of limited information and basic values like consumer sentiment that can alter quickly.
Consider Automatic Contributions
One of the best ways to grow your equity market holdings long-term is to set up automatic contributions to your investment account. The best way to set these up is with each paycheck that you receive. Once a month or two have passed, you can use these funds to purchase additional holdings of your favorite stocks.
Always Keep Your Cool
Strong emotions can cripple sound investment decisions. This is why it is so important to always keep your cool and make sure you are calm and composed before making and buying or selling decisions. A great method to try is to take a quick walk around the block or watch a few short video clips to take your mind off of whatever is bothering you. When your emotions are in-check, sit down and review your financial details before making a decision.
Understanding Diversification
Diversification is one of the most important things to understand early on when considering trying equity market investments for yourself. It is basically a risk management strategy designed to reduce the risks associated with your investment portfolio by ensuring you invest in multiple business sectors. The reason this strategy works is that it helps shield your portfolio from volatile changes that occur in a specific business sector by spreading risks. Prime examples of business sectors that fluctuate wildly include energy and healthcare.
The Magic of Reinvestment
Reinvestment is a type of strategy that involves using funds received from payments like dividends to purchase additional shares. It is a great way to grow your investment holdings without requiring any extra capital from your pocket. Several larger companies have a program known as DRIP which stands for dividend reinvestment plan. These plans automatically reinvest your dividend payments into the parent stock and are a great way to save on commissions.
Tracking Commissions
One of the biggest expenses associated with investing is commissions. Brokers charge these fees each time you buy or sell a stock. The exact fee will differ from broker to broker and will is also affected by the time of investment you are working with. Fortunately, there are several ways to help reduce commissions.
For mutual funds, look for options called no-load funds. These funds do not have any commissions associated with purchasing them and it’s a great way to maximize your investment capital when you are first starting out.
For regular stocks, the best strategy is to stop excessive trading whenever possible. Instead of purchasing a few stocks each week, consider doing bulk orders once a month. Most online brokers charge a fee for each individual order regardless of the amount of shares you are purchasing.
Understand Metrics
There is a wide range of reports available that come standard with most online broker platforms. The first figure you should familiarize yourself with is price-to-earnings ratio. This metric is calculating by dividing the price of a stock and the annualized earnings per share. The resulting number gives a rough approximation of how a company is currently valued. The lower the number, the more likely the investment is an attractive option.
The second metric that is worth learning about is P/CF ratio. This stands for price-to-cash-flow ratio. The P/CF ratio is a computation that measures a stock’s performance by comparing the current price to the current cash flow per share. This metric is particularly useful when evaluating companies that may not appear currently profitable. Lower ratios are better and may signify a potentially undervalued stock.
Long-Term Investment Tax Benefits
Long-term investments are defined as investments that have been held for a year or longer. The primary benefit of holding investments for this period or longer is that they are subject to reduced capital gains tax rates. Short-term gains are taxed at your current income tax rate for the year. With long-term investments, the rate can be zero, 15 percent, or 20 percent. The rate is determined by your current income tax bracket that you fall under with higher earners paying higher tax rates.
Keep these tips in mind when you are considering investing in the equity market. With just a little bit of patience and research, you can help ensure that you are making the best investment decisions possible for you and your family.
