There is no magical formula for winning every time you invest in the stock market, but still, you can significantly increase your chances by applying these five golden rules:
1. Invest in Dominant Companies
Picking the right stocks is important. If you have been in the stock market for quite some time, sure you have noticed that some particular companies keep coming up in various portfolios. Companies like Apple, Amazon, Facebook, and McDonald’s are among the most successful businesses worldwide, and they keep coming again and again. Why? Because these blue chips dominate their respective industries and domains. If a company is successful and always trying to expand its business, it will more likely stay successful in the future as well. That makes the job of any investor much easier.
Furthermore, these dominant companies not only have a solid track record of long periods but also have a remarkable ability to produce new services and products which are well-appreciated by the customers. The customers’ satisfaction makes them want to buy more of a company’s service or product; and that what makes the company even more successful and profitable.
Besides, most of the blue chips have been in the industry for long periods, and they know very well how to turn losing into winning. However, there is no such thing as a 100% guarantee in the stock market. For every time you invest in the stock market, there is a risk tolerance you should consider. But still, you should always keep a close eye on the dominant companies of any field.
2. Get Informed Before Investing
Information is essential for a good investment. Before investing your money, find out about the different options available to you and how they fit with the objectives you are trying to achieve and the risk you are willing to take.
There are various well-known companies which sell everyday services and products. There is a solid relationship between the success of a service or a product and stock performance. Moreover, a common product is accepted and well understood by the consuming public. If you are familiar with the company’s product and understand it very well, then you should have a solid knowledge of the company’s functioning. That’s why you should invest in companies you know very well. Just make sure to stay away from companies you have little or no knowledge. Don’t get involved in businesses you don’t know about, even if they show high potentials.
So, having enough knowledge about the company or companies you are about to invest in is crucial. You can find all sorts of data about any company on the internet. Take your time and search thoroughly before making your move. Besides, it is highly recommended to monitor financial and stock market news via the financial press or stock market websites. The more you know, the more you feel confident about stock investment, which will help you generate high profits in the future.
3. Don’t Overload in Many Sectors
As mentioned above, you should be well-informed about the companies of your interest before investing in the stock market. It is true that you want to keep a lower risk of losing and prefer to invest in companies in your domain and understand the most. But still, make sure to diversify your portfolio and not overload it with stocks in a small number of fields and industries.
For instance, if you have a strong knowledge of IT, you will more likely overload your portfolio with technology stocks. However, no matter how well you know any particular industry, it is always susceptible to the ups and downs of the stock market. Besides, it is true that technology is top niche today, does that necessarily mean that it will remain on top forever?
So, now let’s say that you are planning to invest in 10 different stock, the wisest move to do is to diversify your portfolio across 6-7 various industries. On the other hand, the worst thing to do is to have half or even more of the total stocks in a single sector. It might be the right choice when that particular industry is booming at the moment, but it can turn out to be the worst decision of your life when that sector drastically goes down.
You should keep in mind that, for various reasons, it is unpredictable when a particular industry can go into a bear market.
The key to increasing your success chances is to diversify your portfolio with different industries and sectors; no matter whether you are in individual stocks or funds.
4. Look for Companies with a Solid Track Record
Has the company shown solid and stable growth in the past? It is even riskier if it is a new business with no history. Make sure to consult the financial reports and the prospectuses to find out if the company is making gains or losses and growing. The share price of a company that has raised well over many years is more likely to increase steadily in the future.
That is why you should opt for companies with a solid track record of increasing profits and revenues. It is preferable to look for established companies which have been on the business for several years (the more, the better). On the other hand, any relatively new and unproven company will more likely lead to a negative outcome.
Additionally, you might not find much information about a company’s history if it is private. Private companies are not required to provide information about their business activities. Contact the company and ask for any information you need.
5. Dividends DO
Dividends are part of a company’s net profits that are distributed to investors. They serve as a return on the capital invested in the company. These dividends are a common interest for income investors. Also, they offer some protection measures in the downturns of the market.
Moreover, a company that regularly pays dividends to its investors is a sign of success and good profitability. It can continue performing operations, and at the same time, can return a part of the profits to its investors.
To have a better idea about which dividends you should consider, check Kiplinger’s where you can find an annual list of dividend aristocrats (or more commonly known as dividend growth stocks). These latter are companies in Standard & Poor’s (S&P) 500 which have generated higher payouts every year during at least 25 consecutive years. You will certainly find that many of the listed companies are popular and meet other standards listed above.
Risk and Precautions
Risks are associated with all investment forms. Before investing in the stock market, it is advisable to be well informed and familiar with the functioning of financial services. In general, a high-return investment involves higher risks. Some investments may result in a total loss of invested money, or even worse, for the riskiest ones, a more significant loss than the investment itself. Alternatively, if you think that you are not fit for choosing your own stocks, you can rely on a robo-advisor to do the right job for you. But still, make sure to do some researches before getting into the action as there are various products on the internet.