Posted on 02 December 2013.
New investors have a lot of trouble navigating the stock market. These top 10 investing tips will get you asking the right questions when trying to make an investment decision.
It is impossible for anyone to predict the exact high or low a stock will hit. This is one of the age old dilemma’s in investing, and no one has ever been able to master selling at the top and buying at the bottom. Still, many investors (especially those just starting out) continue to chase this dream with little success. Instead, it is wise to stage the way you buy and sell stocks. If you are buying periodically as the price is dropping you are (almost always) guaranteed to have a lower average price per share then if you had bought shares all at once. The same goes for when you are trying to sell a stock instead of selling all your shares at once sell of a percentage of your shares as the price continues to rise. When you buy/sell in stages you get a chance for some of your shares to be bought or sold near the top or bottom. This can also be an important strategy for penny stock investors who invest in stocks with little volume. If you purchase shares all at once you might actually be impacting the bidding price with a large order.
There is a reason why you have heard the saying “don’t put all your eggs in one basket” since you were a little kid. What is the same for life is true for investing if you only have a few positions in businesses or industries that are similar you can get burned badly. Often times, while one industry is suffering another is thriving. For example, during the great recession stocks were hammered, but commodities such as gold were at historically high levels. It’s a good idea to have many investments among different industries and asset classes.
If you are having trouble finding a good investment to add to your portfolio it might be smart just to hold onto your cash. Cash is not a bad thing, and in fact you will need cash when that once in a lifetime opportunity comes along. Some investment accounts even offer a small percentage interest for holding cash in their account. You can also invest in high liquidity investments such as money markets so you can easily convert back to cash when you need too.
Often times new investors fear market corrections and recessions. Actually, for a new investor there couldn’t be a better opportunity to make money long term. During a market correction stocks will be extremely cheap compared to regular conditions. For instance during the last recession investors had opportunities to make triple digit returns (in a short period of time) on companies such as Apple, Google, Amazon, and much more. During a recessions you have an opportunity to make huge gains on relatively safe and solid businesses. The best way to buy during a market correction is using the tiered approach mentioned in Step 1. If you buy the stock in intervals as the price keeps decreasing you give yourself a great chance to get a lower average price per share then if you purchase it all at once. During a recession it can be very scary for a new investor to put their money into a stock. However, if you look towards great companies that have a good reputation (and the financials to withstand the storm) then you will have a huge opportunity to get the stock at a very cheap price.
Taxes are a fact of life, and unfortunately for an investor they can really eat into the profits you have made. Taxes will always be a something investors have to deal with. One thing you do not want to find yourself doing is making decisions purely for their tax implications. The first priority of your portfolio should be to grow and secure your money.
Are the operating officers selling all their shares, or are they leaving the company? This should raise some concern in your investment. When the people inside the company are losing their faith, then so should you. Executives don’t leave high paying jobs for no reason. If the top managers of the company are leaving or selling off their shares in the company you should reanalyze your position in the business and decide whether you are going to stick it out or look elsewhere for investments.
Often times great companies do not always prove to be great investments. The problem with the big brand names is that everyone knows about them, and they are usually priced accordingly. There is a difference between a good value and a good stock. A good stock can be a bad value if it is priced to high. Many successful investors look for companies who are worth much more then their market price. This is another reason why recessions can be such a great opportunity for new investors. During a recession stocks get battered to the point where they become a great value. During bull markets investors must work a bit harder to find stocks that have been damaged, but the companies have thriving. If you look hard enough you will be able to find these opportunities. One of my favorite stories is the case where McDonald’s had sold a chick nugget that was actually a chicken head. When news broke investors panicked and it drove the price down to roughly 10 dollars per share. For an intelligent investor this would have been an excellent opportunity to purchase a big brand at a very cheap price. A few months later McDonald’s was back to their original market price.
Note: If you have been reading my blogs in the past you know I use the word cheap and expensive an awful lot. When I am using these terms I am referring to the value of the investment not the price per share. For instance a stock trading at $0.01 can still be expensive and a stock trading at $500 can be cheap. An investor needs to decide if the money he is paying is what the company is actually worth.
Emotions and business do not mix. When you are emotional about a company it is not wise to invest in them. If you get too attached to your investments it can become difficult to sell them. (A little off topic) I am a huge Jets fan, but I will never gamble on the Jets. Because I like the Jets so much it is hard for me to decide if its a good bet or not, because I always think they will win. Due to my emotional ties to the team I have set a ground rule that I will never bet on them. The same is true for investors who have emotional ties to particular products or brands. If you let your emotions get in the way, it can be difficult to make the right decision, because you are inherently biased.
When you are making an investment decision you have to think about the future. As investors we use the past to see how the company has performed over time, and learn how it got to where it is today. However, as an investor the future is what matters. Its how the company performs after the day you bought the stock that matters most. When looking at an investment it’s imperative that you look to how the company is going to make higher profits then it already has.
Metrics help us compare stocks with industry peers. However, sometimes metrics can be misleading. There should never be one thing you use to make your investment decision. For instance in college I heard that anything with a P/E ratio above 15 or below 5 is a bad investment. These are hard numbers and investing is not a black and white game. If you stick to a rule of thumb you will probably miss out on the greatest of opportunities. When investing you should take all the information you have available to you and use it to make a smart decision on what will happen down the road.
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