When it comes to investing, there are a lot of options out there. You can invest in stocks, bonds, mutual funds, and more. But what exactly is investing in stocks? Investing in stocks means that you are buying a piece of a company. When you buy a stock, you become a shareholder of that company. As a shareholder, you have the potential to make money if the company does well. If the company does poorly, however, you could lose money.
Investing in stocks is not suitable for all people and purposes. It is a long term investment (otherwise we are talking stock trading and that is another story). You should look at a long term investment, at least 2 years but even better 5-10 years. If you are new to stocks you have a lot to learn. And the safest way to start is to think about what you know about a company and invest in a company you believe in.
Here are a few questions you should ask yourself before investing in stocks
What is the goal of the investment?
Saving up for retirement 5-20 years off? Saving up for the holiday? For a new car? If you are investing in your future several years off you have come to the right place. If you are saving up money for something less than a year off you are better off in some other kind of investments such as stock indexes, but more about that later.
How much can you invest?
Can you invest monthly? Remember this should be funds that you will not need for a couple of years. Putting aside a certain amount every month to invest is a good way to increase profitability. That means that you buy into the market at different entry levels and over time it is much better than just going in once or twice.
What kind of risk are you comfortable with?
Higher risk equals both possible higher returns as well as possible higher losses. One way is to divide the portfolio so that you invest say 70% of your money in low risk assets and the remaining 30% in higher risk assets. This way you are willing to bet a smaller part of your funds for the potential big win so to speak.
What is your knowledge level on the topic of stocks?
Be fair here. If you are completely new to stocks you have two ways to go: you can either let someone else manage your investments or you should start by learning as much as possible and stick to small investments to learn (see the money as an educational investment). It is important not only to research the specific company you are interested in investing in but also the external sources that affects the stock price. It can be anything from geopolitical events to inflation and rate hikes. Some of these sources can be quite complex, “the relationship between inflation and stocks is far from simple“. So learning how different events impact stock value is one of the most important aspects.
Different types of companies
Blue chip stocks
A blue chip stock is a stock that is issued by a well-established and financially sound company. These stocks are considered to be a safe investment, as the company has a history of stable growth and profitability. Blue chip stocks typically pay dividends, which can provide income for investors.
Many investors choose to invest in blue chip stocks because they offer stability and the potential for long-term growth. However, these stocks may not offer the same high returns as more volatile stocks. When choosing investments, it is important to consider your goals and risk tolerance.
Example blue chip stocks: Apple Inc, Amazon, Vodafone, HSBC Holdings PLC, British Petroleum (BP)
Growth stocks are stocks that are expected to grow at a rate above the average for the market. They are typically more volatile than other types of stocks, but they offer the potential for higher returns. Many investors choose to invest in growth stocks because they believe that these companies will be the leaders of the future.
When choosing growth stocks, it is important to consider a company’s history of growth and its current financial condition. You should also look at analyst ratings and recommendations to get an idea of where experts believe the stock is headed. It is also important to remember that growth stocks can be more volatile than other types of stocks, so it is important to have a risk tolerance when investing in this type of stock.
Example Growth stocks: Tesla, Shopify, Etsy, Amazon, Netflix
Invest in a stock Index
A stock index is a collection of stocks that are chosen to represent the performance of the broader market. When you invest in a stock index, you are buying into a basket of stocks that will go up or down with the market.
There are many different stock indexes to choose from, each with its own strengths and weaknesses. The most popular indexes are the S&P 500 and the Dow Jones Industrial Average. These indexes are made up of large, well-established companies that are leaders in their industries.
If you want to take on more risk, you can invest in small-cap or mid-cap indexes. These indexes are made up of smaller companies that tend to be more volatile than their large-cap counterparts. However, these companies also have the potential to grow at a much faster rate.