The stock market has been an alluring destination for over a century. It has helped create massive wealth for a few and led to incredible losses for some. It has allowed individuals to grow their retirement savings over decades and day traders to earn money through small jumps in value. So, how should you go about investing money in the stock market?
There is a wide range of strategies for how to invest in the stock market. There are day traders and long-term index fund holders. There are individuals who adhere an active investment strategy and passive ones who are invested only through their employer-provided 401(k) plans.
Finding the right fit for you depends on both understanding your overall objectives, as well as educating yourself on the different investment options available to meet them.
Understand Your Investment Objectives
The first and most important step is to understand your investment objectives. In other words, what are you looking to accomplish in the market?
This can run the gamut from investing the majority of your savings for retirement, dedicating a small portion of your funds in more riskier stocks, or increasing your child’s college education fund. Each of these objectives carry different types of risk, and thus will influence your investment decisions.
Your desired timeframe is also closely linked to your investment objectives. The longer you are able to keep you money invested in the market, the more risk can afford to bear. For instance, if you are looking at a 30-year horizon you can afford to take on more risk, as you will have time to recoup any losses that occur in the initial years of your investments. However, if you are planning on cashing out your portfolio in five years as you approach retirement, your ability to absorb losses in the early going will be more limited.
Investing in the stock market is a means to an end. Before you can decide on how you plan to invest your money, you need to understand what you want to use it for.
Learn About the Different Investment Strategies
There a number of different types of investment strategies for the stock market. Before you can choose the one that seems the best fit for you, it is important to understand the basic details of each. Here are six common strategies to help get you started.
(1) Value investing: Value investing involves finding companies that the market has undervalued. This strategy depends on reviewing financial data from publicly-traded companies, and trying to find ones with good fundamentals that other investors have overlooked. TipRanks has a wide variety of data available on individual stocks and companies, along with analysis by leading (and rated) stock analysts.
(2) Growth investing: Growth investing tends to fall on the riskier side of the investing spectrum, as it relies on finding companies that have yet to reach (one hopes) their full potential. These are often found in the tech industry, with investors hoping to find the next Apple (NASDAQ:APPL) before it launches into the stratosphere. Here too, the importance of information is paramount, and it is vital to conduct your research using resources such as TipRanks before making decisions.
(3) Dividend investing: By investing in dividend-paying companies, investors enjoy two main benefits: (1) they are buying into established companies, which tend to be safe bets, and (2) they can expect to receive dividend payments, usually on a quarterly basis. Dividend-paying companies share their profits with their shareholders, giving them a regular source of passive income throughout the year. Using TipRanks’ Smart Dividend newsletter can help you find solid options to generate this consistent stream of income.
(4) Day Trading: Day trading is a technique of buying and selling stocks within the same day, holding on to these equities for extremely short periods of time. This is an active, risky strategy, and relies on anticipating market moves and acting quickly through short bursts of buying and selling activity.
(5) Dollar-cost averaging: Dollar-cost averaging consists of investing a consistent sum of money on a regular basis into the same investments, regardless of market volatility or share price. True to the name, dollar-cost averaging seeks to “average” out the purchase price you pay over time.
(6) Passive investing: A passive investment strategy aims to keep pace with the markets, generally through holdings of investment vehicles such as index funds, mutual funds, or ETFs. These types of investments are comprised of numerous holdings and assets, which are often designed to mirror markets or certain industries. TipRanks’ Mutual Fund Analyses Pages provide key data about numerous funds, including the assets, liabilities, and 52-week range for these investment vehicles.
Familiarize Yourself With Different Types of Stocks
Stocks are essentially small ownership stakes in individual companies. While markets and industries can sway their performance, at the end of the day the most important factor is the underlying strength of the business itself.
Just as companies come in various shapes and sizes, stocks can vary just as much. For this reason, it is important to understand the different types of stocks that are bought and sold on the market.
Dividend-paying stocks, for instance, tend to represent established companies, which can afford to share their profits with investors. Growth stocks, on the other hand, rarely pay dividends, as these companies are more focused on reinvesting their revenues to grow their operations or expand into new markets. ETFs or REITs combine many different assets–not all of them sold on the markets–which can offer both instant diversification as well as access to certain investments that would be out of reach for the average investor.
It is never a good idea to purchase something that you do not understand, so make sure to familiarize yourself with any investment prior to acquiring it.
Decide How Hands-On You Will Be
For most individuals, staring at a trading screen all day or constantly monitoring stock prices on their smartphones is not feasible. For the majority of investors, working with a money manager or simply purchasing a mix of dividend-paying, value, and growth stocks and then sitting back and letting the markets work makes the most sense.
Investing can sometimes be done automatically, into either a 401(k) account or an Investment Retirement Account, which are handled by brokerage, bank, or other type of financial institution.
Others, however, may find that it suits them to be an active trader, as they enjoy following the twists and turns of the market and trying to find value through short-term acquisitions.
Whichever you choose to pursue, make sure that it aligns with your stated investment objectives and the time you have at your disposal.
If you decide to purchase stocks or ETFs directly, you will need to open up a trading account at a brokerage. Alternatively, you can buy mutual funds either from the fund itself, through a fund provider, or via a brokerage.
Conclusion: Finding the Best Strategy for You
Investing in the stock market can be a worthwhile strategy for those who are searching to grow their money. Before doing so, it is important to think about what you are looking to accomplish.
In a similar vein, it is vital that you do your homework to make sure that you understand the various types of investments and strategies that exist to allow you achieve your goals. TipRanks has a slew of investment tools that can help you to navigate the market, helping to make sure that you are making informed decisions.
There are plenty avenues to enter the stock market. Be judicious when choosing the best way for you to do so.
Learn money management, and use data-driven stock insights with TipRanks.
