If you have read this article “What is Investing?” then the basics of investing in stocks is next article. Now that you know a few quick investing tips, it’s time to learn how to do it right.
Putting Money Into Stocks
The easiest ways to invest in stocks is use an online platform. This is also one of the cheapest ways. It doesn’t take long to sign up. A few basic things, like your address and phone number, are all you need. Automated investing has low fees and a portfolio that you can choose.
The risk vs. reward trade-off
Any other Investments don’t have as much risk as stocks But stocks have also better returns. New traders take more risks in order to get the more return but he/she need to understand first how stock market works.
Diversification While Picking Stocks
Did you think that picking one stock would be the best way to benefit from this? You’d be wrong! When Warren Buffett talks to people, he always tells them not to try to pick individual stocks. Instead, diversify your portfolio so you can benefit from the growth of the whole market. The Omaha oracle said this once:
There is no way for a non-professional to pick winners. Instead, the goal should be to own a wide range of businesses that are likely to do well together, not just one or two. because you’re not likely to win when you pick stocks.
Isn’t it possible that when you buy a stock at a certain price, someone else might be very smart and have access to the same information as you? We both think it’s going to go up. Are you sure you’re smarter than he/she is? Stock picking is very hard, and people who do it should be prepared to lose a lot of their money.
If what we told you about diversification has made sense to you, you might want to invest in real estate, bonds, and a lot of stocks. Here, you can spread your risk.
For Example :
Let’s say you decide to buy Netflix stock because you think it will give you the best long-term return. I think it might, too. But what if Amazon comes up with a way to eat Netflix’s lunch, and it does it? Suppose people change their minds about what they like and start watching YouTube videos of cats that are very funny instead of expensive TV shows. The stock would be wiped out, and so would your money. This is what would happen:
This is why you should diversify your investment not only by purchasing a large number of stocks, but also by purchasing a variety of stock types (along with bonds, real estate, and other assets).
So even if one sector goes down hard, your whole portfolio won’t be wiped out. In 2000, many tech stock prices fell. If you had put all of your money into tech companies, you would have lost a lot of money.
Buying Stocks Through ETFs
The best way to diversify a portfolio is to invest in mutual funds or ETFs that act as “wrappers” for a lot of different stocks or bonds. Many of these will resemble well-known indices such as the S&P 500.You can find a lot of investment providers that let you invest your money in ETFs that track the market.
An “MER” is the percentage of the fund that the mutual fund company charges each year to pay for things like managers, support staff, advertising, rent, and just about everything else you can think of.
People in the U.S. aren’t very likely to have a MER of 1%. In Canada, it’s more likely that it will be closer to 2%. It doesn’t matter if the fund value rises 15% or falls 5% over the course of a year. That percentage will always be cut right off from top to bottom.
Real Estate investing
A whole genre of TV shows makes it look like buying and flipping real estate is like alchemy today. A lot of people think that they can turn drywall and vinyl siding into gold, but they can’t. People who buy property in the hope of making money quickly should be aware of the risks.
Real estate is a business that comes with a lot of big, costly problems that could ruin people who aren’t very smart. Any back of the envelope calculation of the return on an investment must take into account costs like property taxes, insurance, and maintenance, as well as the value of the property.
In addition to stocks and bonds, people who want more diversification can invest in real estate without having to own a house or apartment. There are companies called real estate investment trusts, or REITs, that sell shares in their real estate investments to people who want to buy them. It’s important for REIT investors to spread their risk across dozens or even hundreds of REITs, and they can do that through REIT ETFs, of which there are literally hundreds to choose from. As a bonus, REITs also have tax investments that neither owning a home nor investing in stocks or bonds has.
Hope these Basics Of Investing rules will help to start your investment career.