Sometimes I hear people tell me that the stock market is like magic. That’s not the case at all.
Making money in the stock market does not have to be an impossible or difficult feat. Perhaps the biggest obstacle when it comes to investing is making sure time is on your side. Time is maybe the most important factor in investing for two reasons:
- there is longer for your money to compound
- you can make mistakes and learn the basics through trial and error
By reading some of the tips below on how to succeed in the stock market, you should be well on your way to starting an investment portfolio in stocks.
History proves that with time on your side, you can count on the history of the market to know that your investments will pay off. It is a well-known fact that in the long term, stocks have historically outperformed all other types of investments. Over long periods of time, that stock market has averaged around 10 percent.
What About Over Shorter Time Frames?
Quite to the contrary, stock performance over the short term is a much riskier. There are countless examples in history where stocks have plummeted in a single day. When it comes to stocks, timing the market or day-trading is a skill that takes a lot of time and knowledge, and still is a dangerous pursuit. All in all, stock investments should only be relied on as long term investments unless you want to risk your savings. If so, I’d still recommend a day at the casino over the stock market. You’ll probably lose all of your money there, too, but you’ll certainly have more fun!
It’s true that as you increase your risk, you have a greater chance for a nice reward at the end of the rainbow. This is certainly the case when it comes to stocks. To take more risk, focus on sectors that historically have seen more volatility, such as real estate. If you’re hoping to lower your risk while investing, do your due diligence and never invest in something that you have not researched completely. Most investors have problems when they “take a flyer” or “trust their gut.” These are horrible ways to invest.
How To Pick Long Term Winners
Nothing is a better predictor of stock price appreciation over the long term than earnings. Companies with solid earnings sometimes can outspend their profits, but usually if you focus on earnings, you’re headed toward winning companies. When it comes to valuing a stock or determining how risky it is, looking at the historical data on earnings to discover risky or potentially successful the investment will be to you. The company earns little money but shows a profit? That company is downsizing and showing profits through cutting. You can’t do that forever. One huge quarter for earnings? You should ask yourself how the company can duplicate that feat in the future. You can learn a ton from earnings.
While earnings is a great place to start as you’re getting your feet wet, it’s definitely not the only indicator. Remember the whole “Time on your side so you can learn” speech above? This is meant to point you in the right direction. People spend years perfecting their knowledge of more advanced concepts such as price to book and price to earnings ratios.
Stocks Vs. Bonds
When comparing a bad day for a stock to a bad day for a bond, the differences are significant. Bonds tend to bounce back from a bad day much more quickly than a stock would. Historical data shows that a small dip in a stock’s price versus a bond’s price can mean entirely different long term results. A bond may bounce back quickly while a stock may take more than five years to recover. While bonds will rebound (or the company will go bankrupt), you never know with a stock.
Another good indicator for both the performance of stocks and bonds comes with a look at what interest rates are doing. When interest rates go up, bond prices fall. On the other hand, when interest rates fall, bond prices go up. Similar trends occur with stocks. Knowing these patterns can help you determine when a good time to buy or sell would be. While it is never a good idea to time the market without significant experience in investing, it is wise to know what the economy is doing. In general, the success of your investments will follow the success of the economy.