Tips You Need to Know Before Investing in Stocks

Tips You Need to Know Before Investing in Stocks
Source: Digitalstocksummit.com

When people are looking to make some extra cash, one of the options that commonly comes to mind is investing money in the stock market. Not many people take the plunge into the world of stocks. However, there are a few who’re not afraid of numbers and risk; and see the real opportunity that comes from investing in the right place. This helps you have your money grow on its own with minimal intervention on your part. If you’re looking to start investing in stocks but don’t really know which stocks to pick, keep reading to find these handy tips and only invest in stocks that are worth it. 

1. Decide Which Type of Investor You’ll be 

Before you can learn how to invest and think of picking the most attractive or best functioning stocks to start working the market, you must first think well and decide which type of investor you’ll really be. 

According to the interests, there are three main types of investors: 

  • Income-Oriented Investor: They buy and hold stocks in solid and slow-growing companies that pay good dividends regularly. 
  • Wealth Preservation Investors: They are only investing in low-risk, stable blue-chip corporations and never look for Initial Public Offerings.
  • Capital-Growth Investor: They grow their capital, and they do so by chasing early-growing companies and taking bigger risks. 

2. Use a Screener to Filter Stocks by Specific Criteria 

For those who are beginners wanting to know how to invest, you might know that there are thousands of stocks available in the market and you don’t even know where to begin. Good news is you can easily download or use an online screener in order to filter all stocks available based on specific characteristics. Some of the fields used to screen the stocks in these screeners are the sector and the industry. For those who have a better clue of what they’re looking for, you can also filter the stocks by criteria such as the market cap, the dividend yield and other common investment metrics such as the price-to-book ratio, the free cash flow and the PEG (price-to-growth) ratio. 

3. Learn the Price to Earnings Ratio

The Price/Earnings ratio is a common stock valuation metric that lets people know how well a stock’s price is doing compared to the company’s earnings. If you’re trying to pick the right stocks for investing money, then taking the P/E Ratio into account is crucial to tell if a stock is overvalued or undervalued. This metric lets you know more about the stock’s market value; and to find this metric all you have to do is divide the company’s share price by the earnings per share. 

Related: 9 Tips for Investing Money Wisely

4. Check out the Trends

Whether you see them at first sight or not, all stocks and companies have trends in growth, and you must be able to read them and interpret them correctly before you pick the right one. If you see that, in time, a company’s earnings generally increase, that might be a good indicator that the company’s going to keep growing. It doesn’t matter if it’s only a small improvement on a regular basis, if you see earnings growth and value come up then buying would be the right call when you are investing in stocks. 

5. Evaluate High Dividend Stocks 

Dividends are a payments a company makes to their shareholders. This payment can be in additional shares of the company or, in most cases, as direct cash to their investors. When a company pays dividends, it is usually a way for the company to reward or entice shareholders for owning their stocks. Picking high dividend stocks might be a good way to go, but be careful because it could also mean that a company’s business is high risk or their stock price can fluctuate wildly. 

6. Pick the Best Timing 

It’s important to investigate what is the best timing for investing money in certain stocks. For certain businesses or industries, there are best and worst times to purchase stocks, as a general rule. For example, if you were to invest in airline stocks, it’s best to buy before the summer travel season when the travel business improves and airline stocks go up. As another example, Amazon stock typically increases right around their Amazon Prime Day, or before the holiday shopping season begins.

Related: 8 Easy Ways to Start Investing with Little Money

7. Don’t Forget about the Debt-to-Equity Ratio

Everybody knows that all public companies carry debt, even stable and world-known corporations. Investors can use this debt as an indicator of a company’s financial status. If a company has an astonishingly high level of debts compared to their equity, you should be careful and stay away from their stocks. To find the Debt-to-Equity ratio, you should divide the total liabilities in a company’s balance sheet by the total amount of shareholder equity. Aside from checking a specific company’s ratio, you should also investigate what the normal range for the industry is, so you’ll identify if the ratio is standard, higher or lower.  

8. Check the Long-term Strength and Stability 

One of the few things we all know for sure about the stock market is that it’s a pretty volatile environment that can change 180º overnight. At some point and for various reasons, every company is going to lose value in the market, but what you should really be alert to is the long-term stability when assessing how to invest your money.  To measure the strength and stability of a company, track down their trend lines and make sure they go up smoothly and only have drops during times when all companies seem to have struggles. Some of the main elements to be on the lookout for are growing revenues, maintaining low debt levels, industry positioning and being a true leader in their industry. 

And these are just some of the many, highly important elements and tips on how to invest in the right stocks. Remember that all variables change and you’ll never know for sure which is the ideal moment to start investing in stocks. So, aside from doing your research, you need just a pinch of adventure to take the leap and start buying stocks. 

Related: The Right Mindset for How to Invest

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