Beginning in the stock market is a learning experience. Losing money is almost a certainty. But with experience, you’ll be able to lower your risk when trading, and round out a portfolio that has a low risk and will provide appropriate returns year after year.
Don’t expect blockbuster investments without luck.
Eight investment tips that are working in this market that will allow you to realize long-term gains and returns on your investments are:
1. Consider Exchange-Traded Funds (ETFS)
Picking individual stocks to make money in the market isn’t a necessity. Fortunes have been made through ETFs, which automatically diversify a portfolio. Depending on the ETF, there may be a mix of one type of stock, such as energy stocks, or the stocks in the ETF may be spread across hundreds of companies.
Stocks are owned in proportions with an ETF, allowing you to spread your money out in a smart manner despite having little upfront capital.
2. Avoid Paying High Fees
High fees can turn a good investment into a bad one. Paying too much commission or fees for a trade immediately lowers your potential returns from the start. Invest in no-load funds and aim for low fee investments that can save you thousands of dollars or more in fees over the lifetime of your investment.
3. Stay With Safe Stocks
High-risk stocks can provide massive returns, but these stocks can also lead to losing out on all of your upfront capital. The goal for all new investors should be to stay with “safe” stocks. I’m not under the delusion that any stock is 100% free of risk – all investments have an inherent risk factor.
Safe stocks can be a staple stock, such as Johnson & Johnson (NYSE:JNJ).
The company has over 130 years in business, has increased their dividends for 53 years straight, and provides everything from cancer drugs to bandages and hundreds of other products. While returns may be modest and slow, Johnson & Johnson is one of many stocks with a low risk.
4. Avoid Hot Stocks
Hot stocks are often risky. People flock to the latest technology stock only to find out it’s not going to be the next Google and doesn’t have a plan for the future, and is only able to make a splash with one product.
These hot stocks may even be sound companies, but when they become over-inflated in price, returns can be slow and prices are unjustified.
5. Don’t Overly Commit to a Stock
You like a stock so much that you’re now overly committed. And the thought of you selling the stock makes you cringe. This isn’t a good thing. Stocks need to be viewed as an investment only, and when the investment’s potential fizzles, it’s time to reevaluate the stock from an objective viewpoint.
Overcommitting may result in you holding onto the stock well past the point of a loss.
Stock prices can be volatile, and there are times when you need to ride out a stock slump, but also remain cautious of a stock that isn’t budging and has started to decline for years with poor financials to backup the slide.
6. Diversify Your Portfolio
Long-term investors, such as Warren Buffett, know the market so well that they can risk investments on a single stock or a group of stocks, and don’t give a second thought to stock diversification.
Don’t make the mistake of thinking you’re the next Buffett: you don’t have the experience and money to make the same trades.
Diversifying allows you to lower the risk of a loss. Imagine a portfolio of:
- 35% in Company A
- 25% in Company B
- 25% in Company C
- 15% in Company D
Let’s assume that Company A was supposed to be a blockbuster and ended the year 10% lower. If Company B provided 4% returns and Company D provided 2% returns, your losses would be negated.
But an investor that bet the entire bank of Company A would of walked away down on the year.
7. Avoid Leverage
Taking out money to make an investment isn’t a smart choice for a new investor. You’re at a much higher risk of losing the money, and you’ll need to make an investment that not only pays back the lender, but covers interest and provides you with an ample return.
In short, it’s best to avoid leverage or taking out money to make an investment.
Again this correlates with a new investor that is at a much higher risk to lose money than, say, Warren Buffett, who may be able to invest a million dollars, pay back his lender, and walk away with a substantial amount of money in the process.
8. Research the Stock First
People spend time reading reviews for flat screen televisions, yet they neglect to research a company they’re about to invest $1,000 in. Learn everything you can about a company prior to making an investment.
Learn about their:
- Earnings reports
- Product lineup
- Growth potential
If a company’s earnings per share (EPS) have been on the decline, this is a red flag. Management may not be controlling costs, or the company may be losing money with lower profit margins due to a changing economic landscape.
Keep a close eye on a company’s EPS and note any downward trends, as this is a good indicator of a stock’s risk rising.