How to invest in stocks: A Beginners Guide

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Introduction

How you ever thought about investing in stocks but don’t know where to start?  Then this simple, easy to understand investing guide is just for you and it covers the type of investing you should consider according to your risk tolerance levels, time horizon, level of knowledge as well as the costs involved among  DJ other factors.  One thing to note is that historically, stocks as an asset class have traditionally outperformed other assets such as bonds, cash and commodities over the long term so by choosing to invest in this asset class, you are historically on the way to a winning path.

Are you a risk taker or risk averse?

Whether you are comfortable with large fluctuations over a few weeks or not determines what type of equity products you should consider.  If you are someone who is not comfortable taking risks for example but wish still consider investing in stocks, then you may wish to invest in mutual funds or broad index funds rather than individual stocks.  This is because these products are well diversified and contain a wide variety of stocks in different sectors.  Investing in such products also has the added benefit of less time required on individual research as this is either already done by the investment manager or it just follows the market.

Time horizon

Time is another important factor to consider when investing in stocks.  Ideally, the longer the time period you have for investing, the better the returns.  Don’t worry about the day to day fluctuations in the market, and use any dips in the market as an opportunity to buy more stocks.  As a general rule of thumb, you should allocate more of your investment portfolio  into stocks early and as you approach retirement, re allocate to less riskier assets such as bonds to preserve your retirement fund.

Knowledge

As Warren Buffet once famously quoted, never invest in anything that you don’t understand.  If you don’t have the time to research equity investments, then your best bet would be to invest in index funds that track a particular market such as the S&PP 500 for example which composes of an index of 500 companies in the US and is considered a bellweather of the US economy.  However, if you have the dedicated time, you can also consider individual stock investing.  IN this case, you need to make a judgement on the management, earnings and future prospects on the companies that you choose to invest in.  However, before going down this route, you need to consider the fact that individual stock picking is a skill that requires extensive research and time to develop.

Diversification

Don’t put all your eggs in one basket if you decide to invest in individual stocks!   Yes, the potential returns could be very high but so are the downside risks.  As a general rule of thumb, I like to allocate a maximum of 10% in any individual stock and a maximum of  20% in a particular sector in my investment portfolio.  Moreover, make sure that you are diversified in different asset classes too such as bonds, real estate and cash for example as this lessens the risk of losing it all at any one time.

Costs of investing and finding the right  broker

Investing carries many costs that you need to be made aware of, namely trading costs as well as management and brokerage fees.   Just bear this in mind as these fees could seriously eat into your returns over the long term!

Summary

To sum up, you need to spend some time thinking about how you want to invest with stocks according to your risk tolerance, time you wish to spend on research, making sure you are well diversified as well as considering the costs of investing.

 

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