What You Need to Know Before You Buy Stocks

What You Need to Know Before You Buy Stocks

What You Need to Know Before You Buy Stocks

Saving your money is great, leaving it untouched in the bank will accumulate some interest, but investing it is even better. You can invest in anything from real estate to precious metals, and they’re all just different ways to hold your capital. Stocks are just one way to diversify your portfolio, a higher risk, but a higher reward way to invest your money. A savings account offers security, for your money and your peace of mind. But, if you want to see your money really grow over time, taking a few risks and investing in stocks is the key to your success. In fact, investing in stocks has proven to be more successful than bonds, Treasury bills, gold, or cash over the long term. So, here’s the deal with stocks and what you need to think about before buying them:

Think long-term

Stocks are best if you can have them long-term, as opposed to trying to make a quick buck by day trading. Over a decade, the stock market grows, on average, about 7% a year – a lot more than the 1% interest rate from the bank!

Follow the 100 rule

To determine the amount of money you want to invest in stocks, use a simple formula. Subtract your age from 100, and that’s the percentage of your resources that you’ll want to put into stocks. Let’s say you’re 25 and looking to invest; you should be putting about 75% of your money into stocks. If you’re 75, though, you should only be investing about 25%. These numbers reflect the idea that a long-term stock investment is a lower overall risk. Of course, this percentage fluctuates based on your comfort with risks, but it’s good to have a general idea of what you should put in.

Spread across sectors

Don’t just invest in startups! You need to keep your stocks diversified, too. If government policies, trends, or foreign currencies change, they can affect how stocks perform. If you only invest in oil companies, and the government passes a law supporting sustainable energy, then all of your stocks have plummeted. An easy way to do this is through a mutual fund, which allows you to have smaller investments in lots of companies, as opposed to one or two larger investments.

Understand what you’re investing in

Keep it simple and only invest in companies that you actually understand. You should be able to answer questions about why you’re investing in about one to two sentences. In addition, make sure you do your research about the company; their earnings and sales should be higher than the previous year, and their debts lower, or the same as, the year before.

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