Here are some top factors to consider when building your portfolio.
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January 4, 2021 4 min read
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Trading on the stock market is something that many of us would like to try. Yet, there’s an air of mystery and intrigue about it, as if there’s some dark art involved. The truth is that while there is a lot to consider if you want to succeed in investing in stocks, there are some simple rules to study that even the major players follow. Even if a diversified portfolio is recommended for minimizing risks, particularly if you’re starting off with stocks, the best way to secure benefits is to look for quality rather than quantity.
Good stock investments are based on timing and stock selection. In this article, we focus on the latter, although it is important to mention that long-terms investments on average are more profitable compared to short ones. Expert investors such as Warren Buffet advise to keep stocks for a minimum of five years, and if you don’t have any immediate need for cash, possibly never sell them. Never be impacted by what the market is offering, and never let your emotions decide your trading moves.
The following are a few things to consider.
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Company stability and earnings growth
Investigate the company you are considering thoroughly. This means checking out how they have performed over the previous few years, what growth they have achieved and whether the company is stable in its growth. A company with a competitive advantage should always be at the top of your list. This may be due to its unique product line or brand loyalty, being an established name or having pricing strategies that appeal. Check at least the last 10 years of a company’s earnings. If it hasn’t had stable growth or is new to the market — such as IPOs — give a second thought about buying its stocks.
Stick with what you know
Do you have a particular knowledge of a certain industry that gives you an authoritative understanding of the market? If so, you need to check out that area for potential investment. Peter Lynch‘s most famous quote, “Invest in what you know,” defines how to do a first screening of the stocks you should focus on. Of course, that doesn’t mean to buy stocks of all the companies you know, but simply to start digging and researching on the companies’ stocks you know something about rather than others.
What you know about the industry should give you an advantage in one or two vital factors, especially what the value of the market is and how stable it is likely to be in the long-term. Invest in what you understand, gather market research and check out the market for value in advance.
Explore who is involved in the company
Who is the CEO of the company you want to invest in, and what is their track record? What about the team beneath them? Do they have the proper credentials to assure you they will do a good job? It’s never been easier to find out about people and their backgrounds, so it’s worth looking closely at the management structure of a business before you choose to invest. Also, check that the company’s debt is at the standard level for its industry. This will have a great effect on the performance of stocks in the long-term.
Avoid ‘interesting’ risks
The idea of investing in stocks is to make money, and the best way to do so is to minimize your risks. It may appeal to you to invest in the exciting new tech company that promises great innovations, but it’s a massive risk in a fast-changing market. Don’t invest because you like the sound of a project; do your research and invest with your head. Also, make sure that the stocks you’re interested in buying are those suggested by top-performing analysts, and they are on the top of their best stocks rankings.
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These are just a few of the tips that might whelp you find the right stocks, so look long-term, stick with what you know and investigate each of the above facts thoroughly.