One of the simplest ways to earn a steady income is by learning how to invest in stocks. However, investing in stocks is very risky as you can lose everything you have invested just as easily as you have earned it. As such, knowing how to invest in stocks is very important.
Although you have the option to contact an investment broker or even an investment company to make all the investments for you, you should still know how the process works. Below is a step by step guide on how to invest in stocks the proper way.
Step #1: Save
Perhaps the most obvious step, before investing in any stocks, you first need to have money to invest. At this point, it is important to note that when you decide to invest in stocks, make sure that you have steady job and savings for at least 6 to 8 months (should you lose your investments or job).
Remember that it is not a good idea to spend any profit that you earn through your investments straight away. Save a little and reinvest. When you have an ample amount of profit, then start spending, should you wish to of course.
Step #2: Read
Another crucial step before investing money into stocks is to read up on stocks. You must understand what stocks are, how they work, how to assess and evaluate stocks and etc. An individual can get information on stocks by simply browsing the internet or by reading a book on stocks and investments.
Step #3: Think
Thinking and using your brain and intuition is a very big part of investing in stocks. You must have a solid reason to invest in a particular stock.
The best way, according to Warren Buffet (guru on investments), to know if a stock is worth investing in is to fill up an entire sheet of paper with a number of reasons why you should invest. If the sheet is blank in the end, then the stock is not worth investing in.
Step #4: Practice
In order to get a handle on stock investments, practice with paper for a while instead of real money. Keep a track of all stock trades you have made on paper and write down each and every detail about the stock and the trade. For example, you should write down how many shares you purchased or sold, the profit or loss incurred, any taxes, date of trade and etc.
A word of advice, always try and note down the reasons as to why you have sold or purchased a particular stock. This will help you in the long run and build up your investment abilities.
Step #5: Find a Discount Stock Broker and Open up a Brokerage Account.
Once you are satisfied and comfortable with the stock trading skills that you have, you should step into the real world of investments and contact a discount stock broker to open up a brokerage account for you and to help you with your stock investments. To be honest, there is no way to tell if a particular stock broker is the best or not because this question will always remain a guess to some point.
The best shot an individual has is to do their homework and read up on the broker, what type of services they offer, what tools do they use to find investments and etc. This way, you can gain some peace of mind that the broker is real.
Also ensure that you look at how much the broker charges. Typically, discount brokers usually charge around $10 for each trade. If you end up paying more than that, then it’s not worth it.
Step #6: Create a Portfolio
The next step is to start investing yourself. In the beginning, you must build up an investment portfolio. It is a good idea to invest in blue chip companies. Essentially, blue chip companies are those that are very large (usually market leaders) and are known for their quality, ability to create profit (in an economic recession or boom) and safety in investments.
Step #7: Hold the Stock for a Long Term
It is very easy to get carried away and start selling shares the moment the market hits a rough patch. However, try and avoid this temptation because this is how stocks work. They are always in a constant state of flux meaning that they are always increasing and decreasing, it just depends on the market conditions.
Only sell the stocks if the market conditions have changed very drastically for that company i.e. the company is filing for bankruptcy.
Similarly, do not take the profit out of the stocks that have increased in value. Instead let them grow in value even more and take profit later on when it becomes a substantial amount.
Step #8: Don’t Follow Stock Tips
It is of the utmost importance to realize that an investor should not listen to stock tips, even if they are coming from an inside source.
Why you may ask? Well, insiders and stock advisers are paid to shout nice things about the company’s stock they are trying to promote in an attempt to increase the company capital. Instead, conduct your own through investigation and follow what your research and guts tell you.
Always think long term and don’t listen to stock tips, regardless of where they might originate from.
Step #9: Invest On a Regular Basis
When investing in stocks, it is always important to keep investing on a regular basis. With that being said, set aside a certain amount of cash each month so that you can purchase stocks. Always remember to purchase stocks when the stock market drops by at least 20%, not when it appreciates.
Always try to remember that you must enhance your knowledge about investments and how to invest in stocks. Never just stop at one concept because the stock market is always rapidly evolving and as a stock investor, you must too change and evolve with the market.