Investing in the stock market is a risky business. However, there are many areas in which one can invest in and either reduce or increase one risk. Usually, the higher the risk, the higher the reward. The areas of investments are options, mutual funds, common stocks, preferred stocks, government bonds, etc. Government bonds and mutual funds are the list risks. However, the returns on these investment instruments are very low. Returns usually range from about 3% to 5%. The area in which I specialize in is common stock and the focus of this article is about investing in common stock. Investing in common stock has a higher risk than government bonds and mutual funds. However, if you do your homework properly and thoroughly you will reduce the risk significantly and the rewards are usually great.
Getting Prepared to Invest in the Stock Market
Before you can invest in the stock market, you will need to open an account with a reputable stock brokerage company. It is preferable to use a bank that has a brokerage division. The reason for this is for you to have easy access to your money. That means, you can transfer money from your brokerage account to your bank account instantly. Otherwise, money has to be mailed to you when you do a withdrawal from your brokerage account.
Next, you need to sign up to have online access to your account. After this is done, you will need to have real time access to the stock market. Most reputable brokerage companies will provide this service to you depends on your deposit. The more money you deposit, the more services you will get for free. Note – you do not need the 15 minutes delay real time stock prices. This is no good to you. You need real time stock prices. Once this is set-up, you are ready to rock and roll.
Common Stock Selection
The Next thing you need to do is to find the stocks that you want to invest in. This part is time-consuming. What I did for finding my stocks is as follow: at the end of every business day, I looked at the stock market of interest and look at all the best-performing stocks for the day. In doing so, you will get a stock code which is necessary for buying, selling, and researching stocks, etc.
The next thing you want to do is to research each stock that you are interested in. You want to look at financial statements and balance sheets for 5 years. Financial statements will tell you if the company is making money or losing money. Also, a financial statement shows you a company sales trend and expense trend. Therefore, you can determine if a company is growing or not. The balance sheet will tell you if the company has money and assets or if it is in debt. If a company’s liabilities is 25% of all its asset, that is a financially sound company. However, if a company’s liabilities is 75% of its assets, that company is in serious financial debt and will be a very risky investment. To be successful in the stock market, you will need to be knowledgeable about financial statements and balance sheets.
Next, you want to research what a company do as a business. Also, you want to know who are the stock’s holders of a company, who is the CEO(chief executive officer), who is on the board of directors, does the company pays dividend, etc. Also, you want to check all the news headlines about a company for about 5 years. After all this is done and you are satisfied with the company, you put this company in your portfolio. You do the same procedure for each company that you are interested in. Note – you have to diversify your portfolio. Invest in companies that are in different kind of businesses. For example, invest in companies that are in various business segments – mining, manufacturing, services, etc. Once you have a number of companies in your portfolio, you are ready to do business.