How to Invest in Stocks

It’s no coincidence that most rich people invest in the stock market. Even though investing can be costly, investing in stocks is one of the best ways to create security, financial independence, and create your own wealth. Whether you’re starting to save or already have savings for later retirement, the money you’ve earned should be used as efficiently as it was when you were actively earning it. However, to be successful in this investment you need to understand how stock investing works. This article will guide you from the investment decision-making process to choosing the right path to becoming a successful investor. The article will also discuss investing in stocks specifically. To trade stocks, you need to refer to the article How to trade stocks. To invest through mutual funds, see how to decide whether to buy stocks or fund certificates.

Table of Contents

Setting Investment Goals and Expectations

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Make a list of the things you want. To set your goals, you will need an idea of what or what experiences you need in life to have the necessary amount of money. For example, after you retire, what do you want your life to be like? Do you love travel, nice new cars or great dinners. Or do you just have normal needs? Use this list to help you establish your goals in the next step. ^{[1] X Research Source}

Making a list also helps if you are saving for your child’s future. For example, do you want to send your children to private schools and universities? Want to buy a car for them? Or do you want to send your kids to public schools and use the extra money for other things? Having a clear intention of what is valuable to you will help you define goals for saving or investing.

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Set financial goals. To develop an investment plan, the first thing you need to understand is why you decided to invest? In other words, how much do you want to achieve financially, and how much do you need to invest to get there? Your goals therefore need to be as specific as possible so that you can have the best idea of what you will have to do to get there. ^{[2] X Research Source}

The most common financial goals include buying a home, paying for your children’s education, accumulating a hedge fund for the “windy days” and saving for later retirement. Instead of having a general goal like “owning a home,” you need to be more specific. “Had to save $63,000 to pay upfront for a $311,000 home.” (Most home loans require a down payment of 20% to 25% of the home’s value to attract the best interest rates.) ^{[3] X Research Sources}
Most investment advisors recommend saving at least 8 times your best salary for retirement. This allows you to receive a pension equal to 85% of your pre-retirement annual income. ^{[4] X Source of Research} For example, if you want to retire with a salary of $80,000, you’d have to work hard to get an early pre-retirement income of up to $64,000 per year.
Use a student calculator to figure out how much you need to save for your child’s college expenses, given the types of financial aid your child may be eligible for, as a parent. Your mom will also have to figure out how much her contribution will be based on your net income for those major expenses. It should be noted that those costs vary widely depending on the location and type of school (public, private, etc.) It’s also important to note that the costs of attending college include not only tuition, but also tuition. including expenses for accommodation, travel, books and other expenses. ^{[5] X Research Sources}^{[6] X Research Sources}
Take into account the time factor of your goal. This is especially true for long-term projects such as pension funds. Example: Nam started saving at the age of 20 using an individual retirement account (IRA) with an interest rate of 8% per annum. He started saving $3000 a year for the next 10 years, then stopped saving but used the money he got from this fund to invest in the market. By the time Nam retires at 65, he will have $642,000 in his hand! ^{[7] X Research Sources}
Many sites have “savings calculators” that can calculate you an investment that will grow over a period of time at a specific interest rate. While no professional financial advice is available, these tools can give you a good start. ^{[8] X Research Sources}
Once you’ve defined your goals, you can see how far you’re going to get, and calculate your target annual rate of return.

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Work out your tolerance for risk. Profits are often inherently risky. Risk tolerance consists of two factors: risk tolerance and willingness to take risks. ^{[9] X Research Sources} There are a few important questions you should ask yourself: ^{[10] X Research Sources}

What stage of life are you in? In other words, are you very far away or close to peaking your potential earnings?
Are you willing to take bigger risks for bigger returns?
What is your target investment period?
How much liquidity do you need (assets that can be easily converted to cash) for short-term goals and to maintain cash reserves? Don’t invest in stocks until you have at least six to twelve months of living money in your account as a backup in case you lose your job. If you have to sell shares after holding for less than a year to meet your liquidity needs, you are just speculating, not investing.
If the risk of a potential investment is higher than you can tolerate, it is clearly not a viable option. Give it up!
You should allocate investments based on age. For example, you might allocate more to stocks in your portfolio when you were younger. Likewise, the job will also determine the allocation rate. If you have a steady, high-paying job, like a bond: you have a steady, long-term income. Spend more money on stocks in your portfolio. Conversely, if your job is like a “stock” with a volatile income such as a salesperson or stockbroker, you should allocate less to stocks and more to bonds. While stocks can make your fortune grow faster, they carry more risk. As you age, you can gradually transition to more stable investments like bonds. ^{[11] X Research Source}

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Learn about the market. Spend a lot of time reading about the stock market and the economy. Listen to the analysis and forecasts of experts to develop a sense of the macro situation and identify potential stocks. Investment classics that will help you build a good foundation:

The Smart Investor and Stock Analyst by Benjamin Graham are excellent introductory books on investing.
Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith. This is a short and concise course on how to read financial statements.
Investment Expectations by Alfred Rappaport, Michael J. Mauboussin. This is an easy read, providing a fresh look at stock analysis and adding to the things that Graham’s books haven’t covered.
Common Stocks and Extraordinary Returns (and other articles) by Philip Fisher. Warren Buffett once said that he learned from Graham 85% and Fisher 15%, and this book helps us understand how Fisher influenced Warren’s investing style.
“Warren Buffet Articles” is a collection of letters Buffett writes annually to shareholders. Buffet has built a huge fortune through investing and has a lot of valuable advice for those who want to follow him. The articles are freely available online at: www.berkshirehathaway.com/letters/letters.html.
John Burr Williams’ Investment Theory of Value is one of the best books on stock valuation.
On Top of Wall Street and Beating Wall Street are two books by Peter Lynch – a brilliant financial manager. Both books are easy to read, packed with useful information, and very witty.
Charles Mackay’s Unusual Popular Illusions and Crowd Madness and William Lefevre’s Memoirs of a Genius Stock Exchange use real-life examples to describe the harmful effects of over-emotion and anxiety. greed in the stock market.
You can also sign up for basic or beginner courses on investing online. Occasionally, you can take courses from companies like Morningstar and TD Ameritrade for free. ^{[12] X Research Resources}^{[13] X Research Resources} Many universities, including Stanford, offer online investment courses. ^{[14] X Research Source}
Community Centers and Adult Education Centers also offer finance courses. Courses are usually free or low tuition and provide an overview of investing. Search online for these courses in your area.
Let’s practice “virtual trading”. Pretend you’re buying and selling real stocks, using each day’s closing price. You can practice on paper or through a free online account at some sites such as How the Market Works . Practice helps you practice your investment strategy and knowledge without losing real money if you lose. ^{[15] X Research Source}

Making Investments

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First, allocate your investment assets. In other words, you will have to decide how much money to allocate to investment channels.

Find out and decide how much you will invest in stocks, how much in bonds, how much in riskier options and how much you will hold as cash and cash equivalents. deposit, bills, etc.). ^{[24] X Trusted Source US Securities and Exchange Commission Go to source}
The goal here is to build a starting point based on market expectations and your risk tolerance. ^{[25] X Trusted Source US Securities and Exchange Commission Go to source}

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Choose your investments. Your “risk-and-reward” objective will eliminate unsuitable choices. As an investor, you can buy individual stocks like Apple or McDonalds. This is the simplest way to invest. The bottom-up approach is that you buy and sell stocks based on a calculation of future prices and dividends. Direct investing in stocks will avoid the management costs of investing in mutual funds, but in return you will need a lot of effort and research to have a properly diversified portfolio.

Choose stocks that meet your needs. If you are in the high income tax bracket; If you don’t need a lot of money in the short to medium term, and have a high risk tolerance, choose a growth stock: paying little or no dividends but with a higher-than-average growth rate.
Passive index funds typically charge lower fees than actively managed funds. ^{[26] X Research Sources} They have more guarantees because they simulate indicators. For example, an index fund might choose a benchmark like picking stocks in the S&P 500 index. The fund would buy most or all of the stocks to get the same (but not better) results. of the index. This is considered safe but not attractive. Active investors will not use this method. ^{[27] X Source of Research} However, index funds are a great “starter” for new investors. ^{[28] X Research Source} Buying and holding a “mindless”, low-cost index fund and using a cost averaging strategy has actually outperformed Active Mutual Funds over the long term. Choose the index fund with the lowest expense index and see its return. For investors with less than $100,000, index funds are a great fit over the long term. If you have more than $100,000, self-trading is better than mutual funds, as funds all charge fees based on asset size. Even a low-cost index fund charges 0.05% of expenses – which is quite a lot of money. Assuming an average rate of return of 10%, and 0.05% fees on the initial 1,000,000 investment that would be $236,385 in 30 years! (Compare this expense with a balance of $31,500,000 in 30 years.) Read Deciding whether to Trade Yourself or Invest in a Mutual Fund to understand which is right for you.
An Exchange Traded Fund (ETF) is an index fund and fund certificate that is traded like a stock. ETFs are typically unmanaged portfolios (stocks that are not traded continuously like Active Investment Funds) and are traded without commission. You can buy ETFs based on an index or an industry or a commodity like gold. ^{[29] X The ETF Research Source} is also a good choice for beginners.
You can also invest in actively managed funds. These funds raise capital from investors to invest in stocks and bonds. Individual investors buy shares of the fund’s portfolio. ^{[30] X Trusted Source Investor.gov Go to Source} Fund managers typically create portfolios based on a few criteria or goals, such as long-term growth. However, because funds are actively managed (meaning managers are constantly buying and selling to achieve a fund’s goals), fees are also higher. The cost of funds can reduce returns and slow down your plan. ^{[31] X Trusted Source US Securities and Exchange Commission Go to source}
A few companies offer specialized portfolios for retirement investors. These are “asset allocation” or “age target” funds that will automatically adjust your holdings based on age.For example, your portfolio is heavily focused on stocks when young and will move. gradually into fixed-income securities as you get older, in other words, they adjust your portfolio for you as you get older ^{[32] X Source} Note that these funds often charge high fees than conventional index funds and ETFs because of this exceptional service provided.
It is very important to consider costs when investing. Fees can reduce profitability and profits. Find out the costs you pay when buying, holding, or selling stocks. Common trading costs include: commissions, bid-ask spreads, expected-match spreads, SEC fees 31 ^{[33] X Trusted Source US Securities and Exchange Commission Go to source} , and tax on gains from selling securities. For a fund, expenses may include management fees, selling fees, purchase fees, exchange fees, account fees, 12b-1 fees, and operating expenses. ^{[34] X Trusted Source US Securities and Exchange Commission Go to source}

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Decide on the intrinsic value and fair price of each stock. Intrinsic value is the price of the stock determined based on the value of the business, it is different from the current price. The fair price is calculated as a ratio to the intrinsic price, based on the margin of safety (MOS). The MOS can vary from 20% to 60% depending on the uncertainty when you estimate the intrinsic value. There are a variety of stock valuation methods outlined below:

Discounted dividend cash flow method: The value of a stock is the present value of all future dividends discounted to the present. So the price of a stock = dividends per share divided by the difference of the discount rate and the dividend growth rate. ^{[35] X Research Source} For example, suppose Company A pays a dividend of $1 per share and is expected to grow 7% per year. If your cost of capital (discount rate) is 12%, Company A Stock would be worth 1/(.12-.07) = $20.
Discounted Cash Flow (DCF) Model: The value of a stock is the present value of all future cash flows discounted to the present per share. Therefore, DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n, where CFn = cash flow for period n , r = discount rate. A typical DCF model calculates the annual growth rate of cash flows (as operating cash flows minus capital expenditures) over a 10-year period at a rapid growth rate and a long-term growth rate to calculate the ending value of the forecast period, then add them together to get the stock’s DCF value. For example, if company A has a current FCF of $2/share, the expected FCF growth rate is 7% over the next 10 years and 4% unchanged thereafter, using a discount rate of 12%. , the stock has a growth value of $15.69 and a closing value of $16.46 and the stock is worth $32.15 in total.
Comparative method: This method values a stock based on the price of each stock relative to its earnings (P/E), book value (P/B), sales (P/S), or cash flow (P/CF). It compares a stock’s current price indexes with some suitable benchmark and past average price indexes to determine a sellable price.

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Buy shares. When you find the right stock, it’s time to buy it. Open an account at a securities company that meets your requirements and place an order.

You can choose a cheap broker who will only place orders to buy and sell stocks. Or you can choose a package brokerage service, which is more expensive, but will provide and advise you with a lot of useful information. ^{[36] X Research Resources} Check for yourself by going to companies’ websites and reading reviews and recommendations online to find the best broker. You should learn first about commissions and other costs. Some brokers offer free trades if your portfolio reaches their specified minimum balance (e.g. Merrill Edge Preferred Rewards), or if you invest in a group of stocks in which they are listed. will pay transaction costs (eg loyal3).
Some companies offer direct stock sales, allowing you to buy without a broker. If you are planning to buy and hold or cost average, this may be the best option. But first, search online or contact the company whose stock you want to buy to see if they have such an offer. ^{[37] X Research Resources} Pay attention to the fee schedule and choose a program that charges the least or is free.

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Build a diversified portfolio of 5 to 20 stocks. Diversify across industries, sectors, countries, sizes and investment styles (“growth” or “value”).

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Hold for the long term, five to ten years or so. Avoid the impulse to sell when the market goes down for a day, month, or year. Over the long term, stocks typically go up. On the other hand, avoid taking profits (selling) when the stock has gained 50% or more. As long as the business fundamentals are good, hold (unless you desperately need the money). You should only sell when the stock has appreciated more than it is worth (see Step 3 of this section), or if the fundamentals of the business have changed a lot since you bought it and the company has may not be as profitable as before.

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Invest regularly and systematically. Cost averaging is a way to buy low and sell high, this is a simple and effective strategy. Set aside a little of your salary each month to buy stocks.

Remember that the bear market is a great buying opportunity. If the market drops at least 20%, put more money into stocks. If the market drops 50%, spend all your spare money and sell bonds to buy stocks. This may sound crazy, but the market always bounced back, even during the Great Depression of 1929-1932. The most successful investors often waited to buy “down” stocks.

Monitor and Maintain Portfolio

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Let’s set standards. Set standards to measure and evaluate the performance of stocks when compared to your expectations. Establish standards such as how much growth stocks need to grow in order for you to continue to maintain them. ^{[38] X Research Source}

Usually, the standards are based on market indexes. These indicators help you to know if your investment is doing the market or better. ^{[39] X Research Sources}
This may seem a bit paradoxical, but understand that a stock that is going up is not necessarily a good one, especially when other similar stocks are up even more. Conversely, falling stocks are not necessarily bad (when similar stocks fall even more).

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Compare actual investment performance with your expectations. You must compare the results of the stocks in each period with your expectations to see whether to sell or hold. The comparison should also apply to other asset allocation decisions.

If the investments do not meet expectations then you should sell to make new investments. Withhold, however, if you have reason to believe that your expectations will come true.
Please wait patiently. One year or three years is a very short period of time for a long-term investment. The stock market is always emotional and volatile in the short term, but in the long term it is a very accurate stock valuation tool.

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Be cautious and update expectations. After you buy a stock, you must periodically check the health of your stock. ^{[40] X Research Source}

Circumstances and attitudes may change. This is part of the investment. You must evaluate the new information and make changes according to the instructions in the steps above.
Evaluate whether your market predictions are correct. If not, why? Use the reviews below to check your expectations and portfolio.
Is your portfolio swinging within the risk range you’ve set? Stocks can do well, but they’re more volatile and riskier than you might expect. If you can’t stand these risks, it’s time to change those investments.
Did you achieve your goal? Your investments operate within an acceptable risk range but appreciate too slowly to hit the target. If so, consider new investments.

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Prevent yourself from being drawn into frequent trading. After all, you are an investor, not a speculator. In addition, every time you make a profit you are taxed on the profit earned. Besides, each transaction you are charged a brokerage fee.

Stay away from insider news or “sold out” waves. Do your own research on stocks and ignore insider news. Warren Buffet says he puts all of his code recommendations in the trash. These sellers, he said, get paid to say good things about the stock so that the company can raise capital or make money.
Don’t pay too much attention to public information about the stock market. Focus on your long-term investment goals (at least 20 years), and don’t be distracted by short-term market price movements.

Advice

Buy company stock with no or little competition. Aviation, retail, and auto manufacturing are often considered bad long-term investments because they are in highly competitive industries. This is reflected in the low profit margin in the revenue statement. In general, avoid seasonal or trending industries like retail and regulated industries like utilities and airlines unless these companies have sustained revenue and growth. Only a handful of companies achieve that!
Look for opportunities to buy good stocks at low prices. This is the motto of value investing.
The goal of a financial advisor or broker is to keep you as a client so they can make money from you. They recommend diversifying your portfolio simulating the Dow or S&P 500. That way, they’ll always have a reasonable explanation when your portfolio declines in value. In fact, mid-level consultants/brokers have little knowledge of the inner workings of the business. Warren Buffett once famously said, “Risk is for those who don’t know what they’re doing.”
Keep yourself objective and don’t let your emotions decide for you. Believe in yourself and in the process you have set out, and you will be on the right track to becoming a successful investor.
Information is considered the lifeblood of successful investing in the equity and fixed-income markets. The trick here is to stay disciplined when it comes to conducting research and measuring performance by monitoring and adjusting.
Big branded companies can be a good choice. Coca-Cpa, Johnson & Johnson, Procter & Gamble, 3M and Exxon are examples of that.
Don’t look at your portfolio’s value more than once per month. If you follow the sentiments of Wall Street, you will sell out of these great long-term investments. Before buying, ask yourself “If it goes down, will I want to sell or buy more?” Don’t buy if the answer is want to sell.
Remember that you are not trading stocks that will go down or go up, you are buying to own a business. The company’s performance and profitability and the price you’ll pay are the only two factors that influence your decision.
Wall Street focuses on the short term. It is difficult to predict future earnings, especially the distant future. Most analysts forecast revenue for ten years and use a discounted cash flow model to calculate a stock target price. So you can beat the market by holding only one stock for many years.
Understand why blue chips are good investments: their quality is based on historical revenue and steady, continuous growth. Being able to spot these companies before the crowd discovers them will give you great rewards. Learn how to be a ‘root’ investor.
Invest in companies that act in the interests of shareholders. Many companies prefer to spend money on buying new planes for the CEO rather than paying dividends to shareholders. The hallmarks of shareholder-driven companies can be: executive compensation based on long-terms, prudent capital investments, regular dividend payouts, EPS and the book value of each share increases steadily.
Consider opening a Roth IRA or 401k account. You will save a lot of tax money in the long run.
Before buying stocks, try “virtual trading” for a while. Virtual trading programs simulate trading in the markets. Keep an eye on stocks, keep a record of your buying and selling history seriously. Check to see if your investment decisions are working. Once your trading method works and you master the market functions, move on to real trading. ^{[41] X Research Source}

Warning

With money, people often lie to save face. When someone gives you hot advice, remember it’s just an opinion. Consider the credibility of those recommendations.
Don’t try to predict the market to calculate when a stock will reverse. No one (except liars) can predict the market.
Don’t day-trade or day-trade or trade just for short-term profits. Remember, the more you trade, the more fees you lose and the less profit you earn. At the same time, short-term gains are taxed more heavily than long-term (long-term is more than a year). The reason not to surf short-term is that success in investing requires a lot of skill, knowledge, nerves of steel, not luck. It’s not for the inexperienced!
Only invest money that you are willing to risk. Stocks can plummet in the short term, and even a seemingly smart investment can turn out badly.
Do not trade on margin. Stocks can be very volatile and no one knows what the price will be like, using financial leverage can thus wipe out your account. You don’t want to buy on margin and then watch the stock price drop 50%, the account evaporate and then watch the stock bounce back. Buying on margin is never an investment, it’s speculation.
Don’t use technical analysis which is a tool for traders, not investors. Its designation as an investment instrument is controversial.
Don’t buy stocks blindly. In other words, don’t buy low-margin and cheap-looking stocks. Most cheap stocks have their reasons. Just because a stock was once trading at over $100 and is now $1 doesn’t mean you should buy. All stocks can go to zero and in fact there have been many such cases.
Focus on stocks and stay away from options or derivatives, which are instruments for speculation, not investment. You can make money with stocks. As for options and derivatives, it is easier to lose money.
Do not immediately trust the advice of anyone, especially someone who can make money from your trading. These people can be brokers, consultants or analysts.
Avoid “trend investing,” the habit of buying profitable hot stocks that has been effective lately. However, this is speculation, not investment, and it does not bring sustainable results. Ask the people who have applied it to technology stocks – once the “hottest” stock in the late 1990s.
Do not engage in insider trading (inside trading). If you trade stocks using inside information prior to publication, you could face prosecution. The money you make won’t make up for the legal trouble you’ll get into. ^{[42] X Trusted Source US Securities and Exchange Commission Go to source}

Steps

Setting Investment Goals and Expectations

Making Investments

Monitor and Maintain Portfolio

Advice

Warning

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