You’re a new investor, and all you want to do is learn how to make a return on your money. Stocks are one of the best investment vehicles, and playing the stock market is the most common method of investing.
That savings account that you keep all of your hard-earned cash in is not providing you with the best return possible.
These seven stock buying secrets will help every investor find success.
1. The Index Beats Brokers
Warren Buffett, and every smart investor, recommends putting your money in an index fund. Index funds beat broker recommendations time and time again. And you won’t have to pay commission fees in the process.
2. Invest for the Long-term
Dreaming of day trading and making money is a fool’s game. You need to invest over the long-term to see true gains. If you’re just starting out, go into investing with the idea that the stocks you buy are meant for the long-term, not short-term.
3. Low Debt-to-Equity
The debt-to-equity ratio for the stock should be blow the 50% mark. When companies are too dependent on leverage, they will be fine on the books until the lender stops giving them money. When the debt to equity level is too high, you’re risking your money.
4. Long Corporate History is Ideal
Invest in companies with a long corporate history. When you look at some of the biggest companies in the world, you’ll find that they have been around for a long time. Wells Fargo Bank was established in 1852, and Coca Cola was also founded in the 1800s.
Companies with longer histories provide fewer surprises to investors.
Companies that have been around for decades or centuries are following a business model that works.
5. Seek Undervalued Businesses
Stocks that trade for less than their intrinsic value should be gobbled up by investors. Value investing is not a strict rule to follow, but when a stock is trading below its fair value, it’s often a good time to buy.
Companies that don’t have a low price for their stock and are trading above market value often go through a point of stagnation. If the stock takes years for its true value to reach its fair market value, you won’t be making much money in the process.
6. Diversify the Right Way
Warren Buffett is one of the richest men in the world, and the investor’s portfolio isn’t as diverse as you might think. In fact, Buffett is quoted as saying “Diversification is protection against ignorance. It makes little sense if you know what you’re doing.”
While we do recommend a diverse portfolio, keep these words of wisdom in mind. Buffett’s portfolio has five stocks that account for 67.5% of the portfolio.
Conviction and assurance that a company is a good pick is why Buffett chose to put most of his money in long-term stocks.
Many investors recommend a portfolio of 12 – 20 stocks.
7. Penny Stocks Are Risky
Penny stocks are romantic. Not only are these stocks cheap to buy, but you can experience massive gains overnight and make a massive return on your profit. The issue is that you can also lose all of your money overnight because penny stocks hold a high inherent risk.
Fewer regulations are put on penny stocks, and the filing requirements are lower, too.
A lack of transparency is never a smart choice for an investment. As an investor, it’s better to choose a higher-priced stock that has to meet strict regulatory guidelines and has a higher chance of being profitable.
Penny stocks can and do make investors money, but they’re a major risk when using money you can’t afford to lose.