Investing in stocks is much easier said than done. You can see that a stock has performed well in the past, but anticipating its future performance can be deceptively tough. The good news is that you can maximize returns and minimize risks by doing thorough research and taking some measures.
Let’s break down four things you should consider when investing in stocks to improve your chances of success.
- Alignment with Long-term Investment Goals
The first step is to evaluate your investment goals and determine how they align with your stock investment choices.
Here’s what you need to do:
- Define Investment Goals: Set clear, measurable, achievable, relevant, and time-bound (SMART) investment goals. Instead of saying, “I am investing in stocks to save for retirement,” say, “I want to save $75,000 by the time I’m 60.”
- Assess Risk Tolerance: Every investor has a risk tolerance. Consider whether the stock aligns with your risk tolerance level. Growth stocks or start-ups can offer high returns, but they typically have high volatility. Whereas investing and trading stocks from established or dividend-paying companies will offer moderate returns with low volatility.
- Monitor and Adjust: Review your portfolio’s performance and make adjustments. Evaluate how the stock aligns with your portfolio’s allocation strategy.
- Consider Investment Horizon
Investment horizon refers to the length of time an investor plans to hold an investment. It can influence the nature and length of your investment strategy. Time horizons are typically characterized as:
- Short-Term (under 1 year) – Focus on earning profit through market fluctuations and strategies like day trading
- Medium-Term (1-5 years) – Focus on achieving goals, such as down payment for a house or saving for a child’s tuition fee
- Long-Term (5+ years) – Focus on building wealth for long-term goals, such as retirement
Someone nearing retirement may benefit from a short-term time horizon, combined with stock trading in steady, dividend-paying companies. Whereas, a young investor with a longer horizon might opt for growth stocks.
- Account Costs and Fees
Stock investment and trading come with various fees and costs. For example, up-front costs might include brokerage commissions and other account setup fees. Traditional brokers often charge $5-10 per transaction; however, a newer stock trading platform might offer free services with $0 commissions.
Investors also have to keep up with ongoing costs, such as management fees and tool costs. Having a clear understanding of your stock trading expenses can help you manage expectations.
- Insurance and Protection
Preparing for worst-case scenarios is a critical aspect of ensuring success in stock trading. Before investing, determine the maximum potential loss and how it will affect your portfolio.
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To mitigate risks, consider insurance and protection strategies, which can include:
- Buy non-correlating assets
- Buying put options
- Diversify your portfolio
- Using tools like stop-loss orders
- Investing in dividend-paying stocks
Moreover, make sure the brokerage firm you’re working with complies with standard regulations and offers protections, such as shareholder rights.
After consolidating all of the strategies mentioned above, you can make informed decisions and ensure financial success.
