4 Things You Should Have in Mind Before Buying Stocks

When people think about putting money into an investment, they think that they will buy something and just forget about it for a few months or years, and when they open their account after that time, the value will have magically risen. While this might be true for some people, people that invest their money in options that really require no monitoring or adjusting, it isn’t true for everyone. More importantly, even those options that are a set-it and forget-it style of investment are not necessarily the best way to multiply your wealth. If you look at the investment in ten years and realize that it has not even grown above the rate of inflation of the last decade, you have essentially shrunken your wealth and lost money. 

Stocks can be a fantastic way for you to earn through trading and silent investing. Moreover, you can make money through the dividends while you hold the stock and also as the stock price rises. The real question is how you can maximize your earning potential regardless of which method you choose. To some extent, it does depend on your style, but there are a few things you should also know about the nature of the stock that you are investing in to ensure you are able to get the highest return on your money.

1.  Knowledge Of The Asset

The way the shares of a company perform is a reflection of the operations of that business itself as well as the industry within which that organization exists. For instance, if you are investing in oil and gas, regardless of the company that you invest in, if the overall trend for fossil fuel is falling for any given reason, it is unlikely that this will be a profitable investment. To counter this problem many investors choose to invest in blue-chip stocks as they are more resilient to market changes. However, even with these huge companies, the effects of the market itself can only be mitigated for so long. Similarly, if a company is manufacturing its products or selling its services in a way that is not sustainable in the long run, it doesn’t matter how high the demand is, the overall profitability of that company will be limited. For instance, if you are investing in a company that has questionable production processes, you can be certain that not only will the long term growth of that company be limited but the consumers will become less inclined to buy their products due to their poor reputation, and sooner or later that stock will start losing profitability.

2.  P/E Ratios

When investing in a stock, you are looking at two main things; the price of the stock itself and the profit it will be able to yield. For instance, you have a stock that is worth $100 and can pay you a dividend of $5, which means that it will have a 5% return. On the other hand, you have a stock that is worth $1000 but can pay you $120, which means that it has a 12% return. According to the advice found on youngandthrifty.ca, you should look for stocks that have the highest price-to-earnings ratio (P/E Ratio). Essentially you are looking for the stock which can give you the highest amount of return. Even if the price of the stock is high, if the percentage return is good, it will be more profitable than investing in a higher number of small stocks that have a lower yield. You can easily calculate the P/E Ratio by comparing the current market price to the average price of the stock over the previous four quarters. In this way, you can see how much value your investment will give you for each dollar that you invest.

3.  Dividend

Unless you are trading, the main thing you will be looking for as an investor in the stocks you buy is the dividend return. Some companies pay dividend returns quarterly, some every six months, while most pay it annually. It’s also important to note that there are different kinds of dividends. If you are looking to multiply your wealth by growing the number of shares you have in a company and don’t really need the dividend payout, you can invest in stock dividends or dividend reinvesting programs. If you are looking for the highest payout in the form of dividends, you want to look for options that will give you frequent payouts and payouts that are in proportion to the company’s earnings. Some companies also offer preferred dividends that are based on preferred stocks. The advantages and disadvantages of these are that you get a fixed dividend payout regardless of how much or how little the company makes.

4.  Charting

One of the most important and over-marketed aspects of stock trading is charting. Essentially this is just about graphically depicting the financial performance of a stock over a certain period of time. You can get live charts, 2-minute charts, five-minute charts, and even 10-year long charts. These charts tell you how the stock is performing over that time period. Based on this information you can make all kinds of analyses, predictions, and decisions. Generally, all technical and fundamental analyses that you come across for a certain stock will be based on some kind of chart. It can get complicated if you want to study charts. The most basic rule is to stick to options that show an upward trend and stay far away from those that show a downward trend.

The main thing that makes the difference between a successful trader and a not-so-successful trader is the amount of research they are willing to put into their decision. The best investors in the world spend the bulk of their time studying commodities and markets. They might only make a single or just a handful of decisions per day, but the beauty is that the decision they make holds true for many months, even years to come, and it protects the millions, even billions, of dollars that they risk with each decision. With the right research, you can profit even from the weakest of stocks.