Some people think stock investing is gambling. It can be, but it doesn’t have to be. Stock investing won’t be gambling if it’s a sure win. There is a range of concepts you can apply to increase your odds of winning.
Here are some useful tips that can make stock investing a lucrative endeavour for you.
Don’t Lose Money
This is easier said than done. To avoid losing money when you invest in stocks, first familiarize yourself with the topics around what makes a good business, fundamental analysis, and valuing a company.
I find learning about technical analysis helps. But identifying great businesses and trying not to overpay for them comes first.
Many investors share their investing strategies or why they buy or sell a stock through blogs or forums.
For instance, my friend recently invited me to join a Facebook (NASDAQ:FB) group, which had a focus on dividend investing. Of course, if you have more time on your hands, pick up a bunch of books about specific investing topics from the library or Amazon (NASDAQ:AMZN).
A good book for new investors is The Single Best Investment by Lowell Miller with a focus on Creating Wealth with Dividend Growth.
You can follow the people or groups that share stock investing ideas or strategies that interest you and learn over time.
Soon, you’ll be itching to apply your knowledge. If you want a sure-fire way to not lose money, experiment with a virtual account. I bank with Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
It offers a virtual trading account in which I can buy or sell stocks on the Canadian and U.S. exchanges like in a real account, but it’s for practice only. It starts you off with $100,000-200,000 of virtual money.
Key Takeaway: Preserve your capital. You need money to invest to make you more money.
Business Valuation Changes
In the previous section, I mentioned about valuing a company. If you’ve done some reading on stock investing already, you’ve probably heard that you don’t want to overpay for even the best of companies, including Johnson & Johnson (NYSE:JNJ), one of only two AAA-rated companies.
The most common valuation metric of a stock is the price-to-earnings ratio (P/E).
As of writing, Facebook trades at $162 per share and in 2018 it reported earnings per share of $7.57. So, its P/E based on trailing-12-month earnings is 21.4. However, its P/E was close to 60 when it first started trading. Facebook’s 2019 earnings are estimated to remain stable compared to 2018’s. That’s why the stock is trading at a lower P/E. Longer term, Facebook is currently estimated to increase its earnings per share by more than 15% per year.
There are other things that can affect a business’ valuation, such as the debt levels of a company. If company A and company B are the same except that A has more debt than B, A will have a lower price tag than B.
Key Takeaway: Business valuations change as the underlying businesses change. Typically, lower anticipated earnings growth (or worse, negative earnings growth or a net loss) will cause stocks’ valuations to drop like a rock.
Stick with what you know. If you’re trained in a specific profession, you’ll know that area better than others. You may also be very observant and spot trends around you.
For example, there’s a growing trend of micropayments and Paypal (NASDAQ:PYPL) is an obvious beneficiary. (Unfortunately, the stock has been pricey for quite some time. That’s why it makes sense to build positions over time even though it costs more to execute multiple trades. If you like a great growth company today, consider taking a small position in it and adding more to the position over time.)
Know your temperament and your risk tolerance. You may or may not be comfortable with what your friends invest in. In fact, if you’re new to stock investing, you may not know what you’re not comfortable investing in until you start investing and start making some trades.
Key Takeaway: If you’re in the wrong stocks, you can find yourself selling when the stock falls and you lose confidence in it. So, invest in enduring, profitable businesses that you understand and are comfortable investing in.
Stick with What Works for You
As you read and apply the art and science of stock investing, keep track of each trade and your results. What makes you lose money? What makes you money? Simply continue doing what works for you.
The following is something that I learned from another blogger a long time ago. It essentially tracks your trades, your cost basis, and capital gains or losses. I track how much dividends I generate separately on a monthly and annual basis.
Value and dividend investing combined together is a tried-and-true way to increase your odds of winning in the stock investing gaming. More recently, I’ve dabbled my toes in growth investing (e.g. Amazon, Shopify (TSX:SHOP)(NYSE:SHOP)) and find it to be intriguing.
- Stick with what makes you money, and avoid what makes you lose money. Remember that no strategy works all the time and that stocks can occasionally underperform.
- Stocks can be overvalued, undervalued, or fairly valued at times. You’ve gotta be patient if you want to double your money (or triple, quadruple,…) in great businesses. The right growth stocks can double your money quicker, but they can be scary to hold on to in a deep market correction.
Invest for a Long Time
The longer your investment horizon, the greater the probability your stock will come back — given you bought enduring, sound businesses to begin with and you bought them at good valuations.
If I didn’t own any of the stocks that I mentioned today, I’d consider nibbling Bank of Nova Scotia, Facebook, and Amazon, as I see them trading at reasonable valuations. If the market heads higher, the more growth-oriented stock can continue to outperform.
Key Takeaway: The longer your invest for, the greater your chance of making money — given you buy great businesses.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: At the time of writing, the author owns FB, AMZN, BNS, JNJ, and SHOP.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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