How to buy stocks
There are many sides to investing in stocks. I will like to start by saying that investing in stocks involves some elements of risk. This is not to scare anybody anyway. It is important you know this truth. Before you start pumping your money into the stock market, I like to hint that the need to learn how the market operates cannot be over-emphasised. As I usually advise anybody that wants to start a business about the need for proper and adequate planning, the same way I will advise anybody that likes to consider investing in stocks to do his homework properly. While it is acknowledged that you don’t need to know it all, you should not invest in shares blindly. These days, you don’t need to be a professional stockbroker to become an expert in stocks trading. The truth of the matter is that, some of the professional stockbrokers do learn about strategies being employed by successful investors who did not have any educational background in stocks trading. For instance, I don’t think there is any stockbroker who will not acknowledge Warren Buffet when talking about stock investing. Warren Buffet is one of the big time successful stocks investors not because he had large amount of money to invest. He became successful by giving himself time to understand the rule of the game. If you want to achieve success the same way, you may need to follow suit. Therefore, before you starting pumping your money into buying stocks no matter how appealing the deal may look, you need to first invest in yourself. In this article, I highlight some salient points you may need to consider before you start your journey into investing in shares.
The starting point is for you to sit down and understand the kind of person you are. In the world of stocks investing, we have three categories of investors namely; the risk takers, the risk averse and the in-between which is known as risk neutral. This aspect is very important in stock investing. Each stock in the market comes with its own risk but the level of risks involved may differ from one share to the other. The level of risk you are ready to take will determine the type of stocks you should buy. The basic principle guiding investment whether you are investing in stocks or in any other instrument is; the higher the risk, the higher the likely return on such investment. If you are risk averse, it means that you are not willing to take much risk. Being a risk averse does not mean you are not taking any risk at all. It simply means that you want to reduce your risk to the barest minimum. People in this category are more concerned about the security of their capital. They are contented with whatever little returns they have on their investment. Instead of investing in stocks, risk averse individuals may prefer investing in bonds or mutual funds. The returns on bonds may not be that high but it promises guaranteed returns while your capital is also secure. People who have attained a retirement age are usually risk averse. They can’t afford to gamble with their money. Therefore, they prefer to play it safe as they may not be able to go back to work if they lose their money.
The opposite of risk averse are the risk takers. If you have a gut for risks, there is likelihood that you may be attracted to investing in stocks. Being a risk taker does not mean you should invest with your eyes closed. Risk takers take calculated risks. However, no matter how calculated they may appear in risk taking, they still have the understanding that things can go in the opposite direction. It is a game of probability. But a wise investor will like to have odds to his favour. That is, the probability for success should be higher than the probability of recording failure or loss. Risk takers are usually aggressive stock investors. They are ready to risk their money as long as such stocks promise high rate of returns. Their focus is more on returns rather than the risks. Of course, if the old turns to their advantage, the returns on their investment is like hitting a jackpot. In addition to the two categories of investors described above, there are people who are neither risk takers nor risk averse. They are seemed not to be bothered about risk. Please, don’t confuse this with being a risk taker. Risk takers are known for investing in shares that people consider too risky. They do this with the aim of achieving high returns. It is a conscious decision on their part. On the other hand, risk neutral investors’ decision to invest in stocks is not motivated by any risk factor. Their own is that they invest in any stock they like whether risky or not. So, if you are a beginner learning how to buy stocks, your attitude to risk will play a very important role in the type of stocks you will buy and the likely return you will enjoy.
Determine your investment goal
To a novice, the motivation for investing in stocks is to make money. The best approach to any investment is to have a clear investment goal. Your investment goal will determine which stocks to invest in. Your investment goal can be either of the following:
- To save for retirement
- To save for home down payment
- To raise capital in order to start a business
- To save for children’s school fees
Those are examples of investment goal. The goals are specific and well defined as against saying that you want to make money. When you have a clear investment goal, it now becomes a driving force that will guide every investment decision that you will make. It will be like a road map telling you the type of stocks to buy. You also need to match your investment goal with your attitude to risk. For instance, a person that is investing in stocks for the purpose of securing his retirement income may not want to buy shares that are considered risky no matter the rate of returns the shares may offer. On the other hand, a young person that buys shares in order to save for his children’s future school expenses can afford to invest in such stocks. Therefore, if you are looking for stocks to buy, your investment goal will play an important role in determining whether a particular stock is good for you or not. In essence, what is considered as best stocks for somebody that is saving for the payment of his children’s school fees in the future may not be good stocks to buy for a person that is investing towards his retirement.
Understand different types of stocks
Stocks can be categorised in different ways. But I am going to focus on two categories here. First, stocks can be categorised based on the ownership rights. Second, you can look at stocks at the angle of risks and rewards. These two categories are inter-woven to some extent. In the first category, I shall talk about two types of stocks namely common stock and preferred stocks.
Common stocks are very popular. In fact, when somebody is saying that he wants to buy stocks, what easily comes to mind is common stock. Common stocks can also be called ordinary stocks. What is unique about common stocks? If you buy common stocks, you have voting rights in proportion to the number of stocks you hold in a particular company. That means that you are a part owner of the company and you can partake in certain vital decision making such as voting for the appointment of members of board of directors and the company’s external auditors. Also, when it comes to the declaration of dividends, you equally have a say. Common stocks enjoy higher returns on investment if the company performs very well. On the other side, common stocks carry the higher risks. If you buy common stocks, there is no guarantee that you will receive any dividends. To make it worse, if the company goes into bankruptcy, all classes of creditors and preferred shareholders will get paid first. If there is anything remaining, then you can then be paid in proportion to the number of common stocks you own. If you are willing to take the risk so that you can partake in the excess profits of the company, common stocks may be good option for your in this regard.
Preferred Stocks: Preferred shareholders also share some degree of ownership in a company but they don’t have the voting rights like common shareholders. However, preferred shareholders enjoy guaranteed fixed returns on their investment, the performance of the company notwithstanding. This can turn to be an advantage and a disadvantage at the same time. It means that if the company performs exceptionally, the preferred shareholders cannot partake in the sharing of the excess profits like common shareholders will do. That is why people usually refer to preferred stocks as hybrid stocks. Hybrid stocks in the sense that the stocks enjoy ownership of the company; this makes it to share in the attributes of common stocks. At the same time, the fact that the preferred shareholders enjoy fixed returns makes it to look as if they are bondholders. In case of bankruptcy, preferred shareholders will get paid after all the creditors have been paid. However, preferred shareholders are ranked higher than their common shareholders counterpart. For people that like to invest in shares but are not willing to carry much risks, preferred stocks may be good stocks to buy.
Apart from the ownership and risks involved in investing in stocks, stocks can be classified based on the types of returns they offer. Principally, stocks offer three types of returns namely income, growth and stability. The stocks of companies that usually pay dividends on a regular basis whether bi-annually or annually can be termed as income stocks. They provide a source of income for investors. These are good stocks to buy for retirees who may need income to support themselves since they are not actively engaged in any productive activity. Income stocks are also good stocks to buy for people looking for passive income to supplement his earnings.
There are also growth stocks. Growth stocks may not pay dividends at all or it may be that the dividends pay-out of the companies is damn low. The growth in this type of stocks may come in two forms such as script issue and capital appreciation. That is, in place of dividends, the company may offer script issues to its shareholders. In this case, the company will not pay physical cash to its shareholders. Instead, it will convert its reserves into shares and distribute them to the existing shareholders in proportion of the shares they already held. This is also called bonus issue because the shareholders are not paying any money for these new additional shares. For instance, a company may declare bonus share of one for five. This means that for every five shares you hold in the company, you will get additional one bonus share. For somebody having 5,000 shares, he will get additional 1,000 shares thereby making his shares to increase to 6,000 units.
The second way shareholders enjoy growth is by way of share appreciation. If you bought a growth stock say at $5 per share, it can grow to $15 within a period of time. By calculation, that is two hundred per cent growth. This type of stocks can be best stocks to buy for someone saving for school children fees or planning to save in order to start a business in a future time. Because of the lack of physical cash flow coming to shareholders, growth stocks may not be the best stocks to buy for retirees. Notwithstanding, if a retiree invests in growth stocks, he can decide to sell off part of his shares. This is like declaring and paying dividends from his investment as he desires per time. But one thing with growth stocks is that the growth may not be as predictable as that of dividends. Therefore, anyone planning to invest in such stocks should have a long range perspective. Nevertheless, with growth stocks, you don’t need to wait till the company declares dividends before you can enjoy cash flow. You can sell part of your shares at any time to cash in part of the profits which might have arisen either by way of bonus shares or capital appreciation.
The third return a stock can offer is stability. Blue chip stocks fall into this category. The motivation for investing in stocks like this is not because of any capital appreciation but the assurance that the invested capital is preserved. If you can’t afford to lose a penny from your capital or may be you know that any loss in the capital may disrupt your investment goal, it might be safe to keep this type of stocks. If you are looking for this class of stocks to buy, you can consider companies that have been around for decades and have passed the test of time. They are companies that you should be able to describe as strong and reliable. If there is likelihood that the stocks might outperform the interest in savings or fixed deposit account, it may make sense to investing in them. Otherwise it would be better to keep the money in fixed interest yielding investment such as Treasury Bills or Bonds. Besides the returns on investment, some people like the status of being called a shareholder of a company.
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Focus on High Volume Stocks
It doesn’t matter if you are buying blue chip stocks or penny stocks, it is important that you buy stocks that enjoy high volume of transactions every day. You may be wondering what blue chip stocks or penny stocks are. Let me quickly explain to you here. There are actually much to learn about stocks investing. As you keep learning, you will realise that there are other things you need to know. Blue chip stocks are the stocks of well established companies with good reputation and a very good track of records. They may not have room to grow exponentially anymore, but they are known for their consistency in the payment of dividends. So, you can refer to blue chip stocks as income stocks. They are good stocks to buy for people seeking safe stocks to invest in. On the other hand, penny stocks are stocks with relatively low prices. According to SEC, penny stocks are stocks that trade below $5. You can call them small-cap stocks. These are good stocks to buy for people seeking share appreciation. One of the attraction about penny stocks is that you can buy more stocks with little amount. In most cases, people buy penny stocks to invest into the future of the company.
With that said, you need to ensure that the stocks you are buying enjoy volume of partronage. One of the advantages of buying stocks is that you can sell them at any time. But this assumption will only hold water when the stocks are well traded in the stock exchange market. Without volume, you may find it difficult selling your stocks. So, before you buy stocks, you need to pay attention to the daily transactions on such stocks. Any stocks with low volume will not be good stocks to buy except you don’t have plan of selling it in the future.
Know your available time range
Your age or the number of years you still have to achieve your investment goal will also influence your investment decision. This factor will keep changing your approach to investing. For instance, your investment goal may be to save a minimum of $200,000 as a start-up capital for your business in a ten year time. Initially, you can be an aggressive investor ready to buy any stock that guarantees capital appreciation. But as you are approaching the date you set for you to start the business, your investment priority may change from investing in growth shares to investing in shares that guarantee stability. The more time horizon you have available to achieve your investment goals, the more risk you will be able to take. You age will also influence your attitude to risks. If you are a young individual earning a very good
Do your research
If you want to make appreciable returns from your investment in shares, you should not be a lazy or passive investor. Those people that usually make most returns investing in stocks are the active investors. What is the difference between active and passive investors? Active investors usually take time to research stock market before making investment decision. They don’t just buy any stocks that their stockbroker throws at them neither do they invest based on mere hearsay. They usually have a list of top stocks to buy. They study the companies and then wait patiently for the right time to invest in such stocks. They usually study the trend of the stock market to determine when to buy or sell a particular stock. Although they may not hold stocks for a long time, they only sell based on the facts they have gathered rather than the panics caused by uninformed investors. Passive investors on the other hands may not spend time to study the trend in the market. Passive investors will rather choose to invest for a long period instead of being an active trader in the market. They may have money but there is tendency that they don’t even have a clue about the stocks to invest in. I am not saying that you cannot make money investing in stocks as a passive investor. But because passive investors are not conversant with the happenings in the stock market, they usually lose most of their gains back to the market due to stock price fluctuation. If you ask an expert about how to invest in stocks profitably, he will probably advise you on the need to be an active investor. Let’s take a look at two investors below: Mr A and Mr B. bought 5,000 shares at $2 per share each. The cost to each of them was $10,000. At a time, the stock appreciated to $5 per share. At this point, Mr. A who was an active investor that usually monitored the market trend decided to sell his all his 5,000 shares at $5 each. He then realised $25,000. Though the price of the stock later increase to $5.25, within a short period of time, the price of the stock peaked and later came down to $2.50. Mr A later bought new 5,000 shares of the same company at $3 per share. This brought the cost of the shares to $15,000. At present, the share price is $3.50. Let’s assume that the two of them decide to sell all their shares at this point; below is the analysis of their profit:
|Proceeds from sales 5,000 shares @ $3.50||
|Cost of 5,000 shares||
|Profit from 1st sales ($25,000 – $10,000)||
Note: It is assumed that the transaction costs are all inclusive in the calculation. From the above analysis, you can see that both passive and active investors actually recorded gains. But the gain accrued to Mr A. can be described as super profit when compared to that of Mr. B. The difference was that, Mr. A was very active in the market and understood the market trend. This helped him to know when to sell his stocks and the time to buy again. This singular practice resulted in $10,000 gain difference between the two investors. However, I need to say that I am not recommending that you take the same approach. There is no guarantee that you will achieve the same result if you do the same thing. It is just a practical demonstration on how many investors lose money into the market by not monitoring their investment in order to take advantage of the fluctuation of the market trend.
Don’t focus on the price alone
When it comes to investing in stocks, there are many factors you need to consider before making a buying decision. Some people usually confuse penny stock to be cheap stock, Some penny stock can be very expensive if you take into consideration other fundamental issues. Also, the fact that a stock is low does not mean that it is actually cheap. For instance, if a stock that used to sell for $10 suddenly drops to $1, a novice investor may consider the share as a good stock to invest in because of the price. An avid investor will probably see it differently. When you see such a stock, the first question you may need to ask is, “what is responsible for the fall in the price?” If you take time to carry our some background checks about the company, you may realise that the factory of the company has just been raze down by fire. If that is the case, would you still consider such as good stock to invest in? Price is relative. Seemingly cheap stock can be the most expensive stock to buy while the seemingly expensive shares may be the cheapest stocks to buy at that particular time. Beside price, it is important that you consider other factors such as the performance of the company, its management, competition, market shares, introduction of new products, effects of new technology on its products, likely merger or takeover etc. One of the ways through which you can obtain vital information about a company is by studying its financial statements and directors reports.
What of Diversification?
Opinions differ when it comes to diversification of investment in stocks. It is generally believed that a good way to minimize risks involved in stock investing is to diversify. Diversification can mean investing in shares in different industry. It can also mean investing in shares in different companies within the same industry. But investing all your money in companies within the same industry is not a true diversification. For instance, if you invest all your money in companies within banking industry, a change in government policy may have adverse effects on your entire investment. The main objective of diversification is for you to spread your investment in such a way that any change of events or policy will not affect all the companies the same way at the same time. This in essence is to help you minimize the impact a loss may have on your entire portfolio. That is why some expert belief that you should not put all your eggs in one basket. If one stock is not performing, the other should be able to help you weather the storm. The second opinion on diversification is that, you can put all your eggs in one basket and ensure you watch over it. This saying may only apply to the risk takers type of investors. Before you put all your eggs in one basket, you must have carried out enough due diligence and you are convinced that the risk is worthwhile.If you are risk averse, it is better and safer to diversify.
Invest your Idle Funds
As a beginner who is just learning how to buy stocks, I advise that you start with your idle funds. Don’t invest the money you can’t afford to lose. The reason is that, at the very beginning, there is a tendency for you to make some mistakes. Each mistake you make is part of your learning process but it may cost you some bucks. Supposing you invest just $1,000 in stocks and it happens that you lose 20% of your investment. This loss in absolute figure will amount to $200 only. I think it will be easy for you to manage the loss and forge ahead. On the contrary, if you had invested $10,000 of your hard earned income and you lose 20%, the loss would have been a whopping $2,000. Can you bear such a loss considering your present position? As mentioned before, the earlier you admit that investing in stocks entails risk, the better. When you invest in stocks, there is always a probability of losing your money. Certain events can happen which may adversely affect the price of the stocks you invest in. For instance, if the financial performance of the company you invest in is below expectation, the market will react to this thereby leading to the fall of its share price. Also, a change in government policy may be unfavourable to the company. For instance, if government prohibit the importation of a particular item which is a vital raw material being used in the manufacturing of the company’s product, this can create crisis for the company. If not properly managed, it can even lead to the liquidation of such company. This will in turn lead to loss of investment to the company’s shareholders.
Don’t borrow to invest
At times, the performance in the stock market may be very attractive to the point that one can be tempted to borrow money to invest in shares. This is very dangerous for beginners. I remember how many people went deep into debts in 2007 when stock market suddenly crashed. Before then, stock market has been on the bullish trend. Prices were rising and everybody was taking position without even carrying out any due diligence. Almost all stocks were performing as the law of demand and supply set in. So people didn’t see any reason for either technical or fundamental analysis. People started borrowing in order to invest in stocks. If you were not investing in stocks then, it was like you were not smart enough. But the boom did not last forever. Suddenly the stock market peaked and the prices started tumbling. Still, people were holding to their stocks hoping that the trend will soon reverse itself. People were afraid of taking losses until most stock prices fell by more than fifty per cent. It was a great loss that even affected some of the stockbroking firms and other financial institutions. So, if you want to invest in stocks, it is safer to start with your own money. Personally, I still believe that investing in shares should not be that risky if only you learn how to buy stocks by taking one step at a time.
Invest for a medium or long term
If you want to invest in stock market, don’t expect a quick return. Investing in stocks should not be seen as a get rich quick scheme. That is not to say that one cannot make money by speculation. But speculation is not for beginners. Speculators are experts who have good understanding about the market trends. They know the stocks that have behaved and performed consistently in a particular manner over time. It may be difficult for beginners to speculate without getting their fingers burnt. Even, experienced speculators don’t get it right every time. So, the best approach for people who are relatively new in stock investing will be to invest for a medium or long term. The reason is that, no matter how quality the stock you are investing in may be, it will always experience fluctuation in prices. If you invest in stocks today and you suddenly realise that you need the money to pay a particular bill the following month, there is a tendency that you might sell the stock at a loss. So, you should not invest the money you know you will need in a very near future. Don’t carry the money you want to use to buy your car to the stock market except you are willing to wait as long as the performance of the market may dictate.
Additional tips on how to buy stocks
Before closing this article on how to invest in stocks, I feel that I need to give this additional tips here. I wish I knew these when I started investing in stocks newly. However, I have learnt my lesson. What the lessons I learnt? This is what I will cover in this section.
Avoid buying stocks on the way down in price
I read a book as part of my training on how to invest in stocks. The author emphasized on the need to always buy low and sell high; that most of the profits are made at the entry point. That is, if you are able to buy a stock when the price is low, that is when you can make most profit. Of course, the saying is true. But the question is that, “how do you low whether the price is already low enough for you to buy?” I was busy looking for stocks that their prices are trending downward. With my research, I finally settle for one that has reached its lowest price for the year. I considered this a good buy and quickly placed my order. Unfortunately, what I thought would be the lowest price of the share turned to be incorrect. After I bought the share, the price still went further down far below the price at which I bought my own. So, the point I am trying to make here is that, it is not advisable to buy stocks when prices are going downward. You may not know if the company is heading for its grave. Some stocks prices have gone down that way and never bounced back. In your attempt to buy at a low price, you should not make this mistake. Instead, wait until the price of the price start rising before you buy.
Don’t depend too much on your stockbroker
You should understand the main reason why you need a stockbroker. You need a stockbroker to help you buy and sell stocks on the exchange floor. Stockbrokers can execute buy and sell order in different ways. They can do it right from the comfort of their office or home through an online platform. They can also also go directly to the floor. There is nothing bad in seeking information and advice from your stockbroker. Of course, they are trained in that line. They also have fiduciary responsibility to represent the interest of their clients. But the truth is that some of them are so occupied with trading activities to the extent that they don’t have time to carry out any research. Instead of depending entirely on your stockbroker, I suggest that you do your own study and research. Thereafter, you can then seek for further information from your stockbroker to corroborate the one you have gathered. I have had instances where I would tell my stockbrokers something and he would later tell me at the end of the trading session that what I mentioned to him earlier was true. So if you are waiting for your stock broker to tell you the best stocks to buy, you may be missing some opportunities. In fact, this era of online brokerage attest to what I am saying. With online brokerage, you only need a platform where you can execute your own buy and sell order on your own. Once you choose an online brokerage firm, you can do your own research about the best stocks to buy, decide on the quantity and at what price to buy. You monitor the performance of the stock and execute the sell order when appropriate. With internet, you can do all these from the comfort of your home. However, if you are a beginner, you can start with demo account. Some online brokerage firms allow you to open a demo account where you can test drive your stock investing skill by using free money as if you are trading with your own money. Whatever gain or loss you make at this point does not count. It is just to provide a platform for you so that you can have a practical demonstration on how stock market operates. You can start trading in real term after you have built enough confidence.
Read Also: How to Choose a Right Stock Broker
Greed and fear are your two enemies when it comes to investing in stocks. Some people will not invest in stocks because of the fear that the market will crash or that they may lose their money. I don’t want to talk much on fear because those people that are plagued with such fear will not even bother to read this article. If you are reading this article, I want to believe that you are interested in stock investing. One of the ways one can easily lose money in stock market is when you are too greedy. Greediness will not allow someone to sell his shares when he has made appreciable gains on the stock. If you bought a stock and the price has gone up enough that you have made gain, there is nothing bad in selling the stocks and then look for another opportunity. If you have time to do research, you will always discover new opportunities in the market. If you hold to a stock for too long period, you may lose the money back to the market when the price reverses itself. Please, this does not contradict the point I mentioned that you should have a long term perspective when investing in stocks. Having a long time range will allow you to wait long enough till the price appreciates before considering selling the stocks. You will not be forced to sell at loss when you need the money.
Cut short your loss
In stock investing, it is not every time you will get it right. What should you do when you realise that you have made a wrong investment decision? What you need to do is to quickly sell the stocks instead of holding on to it. If you hold on to bad stocks, two things will happen. One, you will lose money. Second, you will not have money to invest in other good opportunities that may arise in the market. I will like to conclude here by saying that learning how to invest in stocks is a lifelong adventure. If you want to achieve higher rate of returns investing in stock market, you may need to be an active investor. This will require that you be at alert regarding the market news and change in market trends. Though investing in stocks has element of risks, it can become fun if you master the rule of the game. There are many books out there on how to invest in stock market. If you can lay your hand on few of them, you will get equipped. Your knowledge about how stock market operate will impact on how much money you will make.
Don’t make stocks investing a love affair
It is in marriage that couple usually promise themselves that whatever happens, I will be with you until death do us part. When it comes to investing in stocks, it is a different ball game. There is nothing like for better for worse. If you are ready to make money investing in stocks, you should not fall in love with any stock. You should be willing to sell a particular stock when there is need to do that. You either sell the stocks to take position after the share price has appreciated to a particular level. On the other hand, you can sell the stocks in order to minimize your loss. If you fall in love with a stock, you will either be missing opportunity to cash in your gains or you end up enter into loss that can erode your capital.
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Don’t fall victims of hypes
One of the factors that drive stocks prices is the information that is available in the market. Any time there is positive information about a particular company, its stock prices go up. Big time investors understand this and they can use it to drive up the stocks they own. They have money to spend on media. So if they plan to offload their stocks, they can decide to create some hypes around the stocks first. When this happens, you will see investors who are ignorant about this rushing in to cash the moment. When the price has gone up to a particular level, these investors with large amount of share will pull out. Thereafter, the price begins to tumble. I am not saying that you should not read news if you want to buy stocks. What I am saying is that you should not be carried away with any hypes about any stocks. You should try to identify the source of such information in order to determine its reliability. Also, there is nothing bad in seeking corroborating information elsewhere before making an investing decision. It is unfortunate that many people usually fall victims of hypes. Any time you come across something like best stocks to buy, hot stocks to buy or top stocks to buy, don’t rush into buying them without you doing your own homework. Of course, the stocks may be what they call them, it is always safer when you read between the line so that you truly understand why the stocks are top picks.
Take advantage of stock market crash
Stock market crash is not a new thing. It does happen once in a while. Any time the stock market experiences a crash, the prices of stocks usually fall below their market value. For existing shareholders, this may result in temporary loss in their wealth. In an attempt to cut losses, you find many investors offloading their stocks in order to cut their losses. This usually aggravates the market condition as you will now have many people wanting to sell their stocks with just few people willing to buy. In this situation, the law of demand and supply sets in. Stock prices will continue to fall very sharply. This is enough to set panic in the mind of prospective investors. But I want to say that stock market crash can be a good opportunity for investors. Smart investors know how to take advantage of the situation by entering the market when others are running away. If you are privileged to witness a stock market crash, it is a right time to prepare yourself and be watchful about when the stocks will rebound. However, you need to be careful and be sure that the market is set to rebound before you invest your hard earned income so that you don’t lose it to further drop in stock prices. Also, don’t forget that I suggested that you have a long term perspective if you want to buy stocks.
Benefits of Investing in Stocks
I don’t think it will be enough for me to just tell you how to invest in stocks. It will be nice to let you know some of the benefits you can enjoy when you invest in stocks. Some of the benefits of investing in shares are enumerated below:
- Liquidity: One of the reasons that make people to invest in stocks is the ability to dispose the stocks when there is need for that. If you invest in high volume stocks, you can be guaranteed that you will always have a ready market for your stocks.
- Ease of trading: With the aid of online trading platform, you can buy stocks from the comfort of your home without visiting the office of any stockbroking firm. Even if you like to buy stocks through a stock broker, you can even conclude all the transactions without going to his office. You just transfer the money to him through online banking while you instruct him about the stocks to buy if you already know what you want. But if you don’t know which stocks to buy, your stock broker might be in a better to advise you. As a professional, he will know the types of stocks that will meet your risk tolerance level and your investment objectives.
- Passive Income: If you are looking for passive income, investing in stocks may be appropriate for you. There are high dividend stocks that can provide you good returns far above what your banks will offer you on savings account. If you do your research very well before you buy the stocks, you can then go and sleep and expect your dividend at the end of the year of the company.
- Flexibility: There are different types of stocks in the market. Investing in stocks is so flexible that you can keep changing them as your risk profile continues to change. This means that you can start by investing in growth stocks and later shift to income stocks. You can begin investing in stocks at any level. As your income continue to grow, you can increase the level of your investment.
- Low transaction costs: The cost you need to pay if you want to buy stocks besides the cost of the stock itself is considerably low. With this, cost will not erode the gains you will make any time you sell the stocks.
- Capital growth: In most cases, stocks grow with economy. So, if there is inflation, the value of stocks tends to go up too. If you invest in penny stocks, the growth can be so exponential beyond what you can ever imagine.
- Divisibility: One of the advantages stocks investing has over real estate investing is that stocks are divisible. You can decide to sell a portion of your investment. If you own a house and you are in need of money, it is difficult to sell just a room while you keep the remaining part of the building. Even if you succeed in selling just a part of the building, you will be giving up your privacy.
- Privacy: There are many stocks investors who are silent millionaires. Stocks are paper assets. So, you can have a lot of money invested in stocks and your neighbour may not know about it. Except you want to make noise by yourself, stocks do not announce you to the public as in the case of real estate
- Tax advantage: The tax you pay on dividend is not as high as what is payable on employment income especially if your income fall within high tax bracket. You can also defer your tax for a long time. I think government do this intentionally to encourage investment.
Disadvantages of Investing in Stocks
For everything that has advantages, there is tendency for it to also have few disadvantages. Therefore, investing in stocks has its own disadvantages.
- Volatility: You can lose almost all your money due to the volatility of the stock prices. That is why you may be advised not to invest the money that you cannot afford to lose.
- Knowledge driven: If you want to make it big in stock market, you need to keep updating yourself. You need to know what is going on in the market and in the economy at large. Stock prices respond to information. If you are not abreast of the information, your stock price may fall drastically within few days.
- Fraudulent stock broker: You may fall victim of fraudulent stock broker if you don’t carry out your own background checks properly. There are many scammers advertising penny stocks to unsuspecting novice investors. Penny stocks can suffer “pump and dumb” syndrome. “Pump and dumb” syndrome is a situation whereby some people (usually institutional investors) just decide to create hypes around a particular stock so that people can start buying the stock. This will make the price of the stock to go up. Immediately the price gets to a certain level, they offload their stocks and all of a sudden, its price plummets.So, if you buy this type of stocks, you can easily lose your money.