You might have heard of people who became millionaires by investing in stocks. But that didn’t happen in a day or even a month. It takes years (and by years, we mean at least 15 to 20 years) for stock to grow manifolds in its value. When investing in long-term goals, you have to remain disciplined and open-minded. Don’t start selling at the slightest of price inflation or deflation.
The trick of long-term investment is to pick good stocks and hold on to it. Benjamin Graham defined intelligence in investing as ‘not time on the market, but time in the market.’ Your investment should be backed by research and science. Investing in a particular stock based on a hot tip or hearsay will be the first mistake you’ll commit in the process of investing.
To confidently choose a stock to invest in, you should understand and keep in mind the below-mentioned pointers. Start your stock and investment research under the following points’ guidance to stumble upon a true treasure trove of a stock.
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A good investor isn’t the one who knows what to invest in, but the one who knows what not to invest in. The elimination process helps you land a qualitative stock with high long-term returns and a low risk of loss. Before buying any stock, ask yourself the following questions:
Does the company keep innovating? – To remain efficient and relevant, a company needs to keep innovating from time to time. Huge profitable companies that failed to get behind technology and update themselves eventually suffered in the market—for example, Kodak and Nokia.
What is the size of the company? Though small companies can grow to give consistent returns, investing in a bigger company for long-term low-risk perspectives is better. A bigger company has more resources, a bigger scale, better networking, and brand awareness. These factors help it grow exponentially in good times and tide over the bad ones.
How is the company’s management? – Research well on the board of directors and company governors. Always put your money on ethical and reliable management. Many companies crash in the market due to the surfacing of scams or reputation loss of the directors.
Is the stock falling? – It is the best practice not to invest in an already falling stock, for it can fall lower or crash.
A company should be consistent in its ability to pay and raise its dividend. This consistency underlines two things; one, that the company has predictable earnings and profit. Two that the company is financially stable and not volatile in the market. To assess a company’s dividend consistency, you should trace its dividend payment record of minimum last 5 to 10 years. You may dive deep and research up to as many years as you would like.
P/E ratio is the formula for dividing the stock’s current price by the company’s earnings per share. This tool or formula helps you determine whether a certain stock is overvalued or undervalued. A high P/E ratio would mean that a stock is overpriced due to a market pull back. Low P/E would mean that the stock is currently below its actual value and attractive to invest in.
However, extreme importance shouldn’t be placed on the P/E ratio. Relying on a single metric of determination is never a good judgment. P/E ratio would give the best possible insights when read parallelly to other analytical processes and economic indicators.
Avoiding Value Traps
A value trap is a stock that looks cheap and attractive to invest in but is headed to go down a lot lower. You have to be vigilant and avoid value traps. Not every undervalued stock would be a good buy. It can go down a lot lower or crash in the market. Analyze a value trap based on the debt ratio and current ratio of the company. It can be calculated by dividing the total liabilities a company has by the total assets it owns. If the debt is high, likely, the particular company’s stock is likely a value trap.
Focus On Future
When investing in long-term stocks, you have to be open-minded and disciplined. You need to focus on the future investment goals and not run after small price appreciations. When researching a company, it is extremely important to see its future aims and projects. Along with research the future market projections for the company. Use economic indicators to review whether buying this particular company’s stock would be beneficial for long-term investment.
Investment is not akin to gambling. All your investment-related decisions should be backed by logic and research. The thumb rule of investing is preserving your capital while minimizing all risks. Investment should be made of ‘disposable’ money. Know how much you can afford to lose before you invest in any stock. You should have the capacity to take a risk and the heart of losing all money; only then can you succeed in investment.
Warren Buffet, also seen as arguably the best stock investor globally, has a very famous quotation on investment. ‘Rule Number 1: Never lose your money. Rule Number 2: Never forget rule number 1’. In stocks and investments, prioritize preservation and always know your capacity.
The long-term investment is all about patience. It is a testament to the saying, ‘good things come to those who wait.’ Investing in the stock market is a skill that is only learned with hands-on practice. Using the given formulas and strategies will help you ease your feet in this venture safely. You don’t have to be a commerce whizz or business genius to earn from stock markets. What you do need is due diligence, investment of your time, and reading researching a lot.