Every investor is looking for an edge to outperform the stock market and make enough money to retire. But ETFs and mutual funds have led to a lot of “lazy” investors that will invest blindly and make a good return, too.
There is nothing wrong with an ETF or mutual fund, but it’s not as active as some other options that are available.
Advice from the best traders in the world, insiders that have made millions, is rather simplistic, but also highly accurate. We interviewed Ben Myers, a hedge fund manager and trainer, to find out what investors need to pay attention to in today’s markets.
1. Buy Low, Sell High
The first rule of trading is to buy low and sell high. A simple yet vital rule of trading. Smart investors shop for “discounts” on stocks. This is why recessions and market crashes allow investors to put their money on solid companies and reap the benefits as markets recover.
2. Research Filings
Going along with the first tip, filings allow investors to get a clearer picture of a stock and its value. Research is what separates an unsuccessful trader from a successful trader. Regular public filings are required by the SEC, which details everything from:
- Risk factors
- Potential conflicts
Annual 10-K filings provide the most information about a company. Acquisitions, changes in management, and a plethora of essential information is provided in a 10-K.
3. Every Stock is a Risk
Investors have to be prepared for losses. Historical data provides some form of reassurance in the resilience of a company, but there will always be an inherent risk when investing no matter how sure of a “bet” a company may be.
All an investor has to do is look toward oil prices that many of the world’s analysts were “sure” would never budge below the $100 a barrel threshold.
Expert investors may use downturns as a way to purchase a stock with long-term value that is on the downtrend, but for the most part, every stock and company has a risk attached to it.
4. Dividend Stocks Provide Loss Cushions and Provide Immediate Returns
New traders assume that a stock must be sold to make a return on investment. Dividend-yielding stocks provide quarterly dividends that pay investors a percentage every quarter for the shares that they own.
Apple (AAPL) is a dividend-yielding stock that dispersed $2.03 a share in 2015 to investors.
What dividends do is allow investors to reinvest the dividends to make more money and provide a cushion against losses.
As an example, Apple’s stock fell $5.12 in 2015, but investors were given a $2.03 dividend. The dividend resulted in losses of just $3.09 on the year per share, which is much better than a $5.12 loss.
Dividend-yielding stocks aren’t perfect, and there is always the risk of a dividend cut, but they should be part of every investor’s portfolio.
5. Stock Prices Aren’t Expensive or Cheap
Every investor needs to go into investing with some upfront capital. It can be tempting to look at stocks worth $5 because they’re “cheap.” Investors may even be deterred from investing in a $100 stock because it’s simply too “expensive.”
The cheap stock may have poor financials and negative growth.
And the expensive stock may be bleeding money and be a “hot” stock that seemingly doesn’t turn a profit.
Looking for “cheap” stock is too subjective to be the only metric to consider.
6. Taxes on Stocks Are Different
You’ve made the plunge, invested in a hot stock that has rallied over the last 10 months, and now you want to sell. If you do, you may be hit with capital gains taxes, which may be 25% – 39.6% of the return from your investment.
Stocks that are held for less than a year will be hit with a short-term capital gain.
Ultimately, these capital gains are taxed as normal income and cut into your profit margins greatly.
Playing it smart, always invest for the long-term. If you own a stock for over a 12-month period, the tax on your gains will be as low as 15% for most tax brackets. This means you’ll be able to keep 10% to 24.9% more of your money – a big difference.
Uncle Sam wants his money, but if you hold onto the stock for the long-term, he will demand just a little less.
Investments are for the long-term. Yes, some people make money on penny stocks – even millions – but for a smart investor, it’s better to invest for the long-term. When investing long-term, you’ll be able to withstand volatile markets, receive higher returns and pay less taxes as a result.