Savvy investors who’ve done well with mutual and index funds may be tempted to try to buy stocks, but most financial experts agree that beginners should invest their money with care.
“Success investing in individual stocks demands patience and discipline,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, and author of “Strategic Value Investing.”
To limit downside while investing, beginners should consider the following tips before they invest their money:
Invest in the familiar. Professional asset managers are equipped with specialized knowledge about specific industries — it’s what they do all day. They also use complex algorithms to make their investments in the stock market and ensure they are buying stocks at a good price. Because you don’t do that, “stick with what you know,” says Daniel Lugasi, portfolio manager with VL Capital Management in Orlando, Florida. “If you are someone that likes to follow the consumer electronics industry, then focus on companies in this sector. You may be able to apply some of the qualitative knowledge that you have picked up to your research process.”
[See: The Fastest Ways to Lose All Your Money in the Stock Market.]
Seek value, not hype. Playing for value rather than for trends or aggressive growth pays off, especially when you sell or buy stocks. Do not go out and buy companies with sky-high price-to-earnings ratios, Lugasi says. “Instead, focus on firms with low P/Es versus their industry average. By being value-focused, you can help to limit your downside in the event of a market correction.”
Johnson says investors also should seek high dividend yields, low price-sales ratios and low price-cash flow ratios when trading stocks. “Over the long haul value beats growth and by a sizable margin,” he says.
Since 1926, the large capitalization value index had annual returns of 14.7 percent while the large capitalization growth index returned 11.4 percent, according to data compiled by Nobel laureate Eugene Fama and Dartmouth College professor Kenneth French.
Consider the collective, rather than individual, performance of stocks. The benefit of a mutual fund or exchange-traded fund is that an asset manager has already diversified it with lots of different companies of various sectors and industries. This bodes well for passive investors who are happy with a decent, steady return for their money, and low fees.
“It is extremely difficult for an investor — whether professional or amateur — to consistently outperform an index [with individual stock picking] in an efficient market,” says S. Michael Sury, CEO of Indorus Holdings. “When added fees for an advisor, commissions for additional trading, or taxes on short term gains are included, it can dramatically impact net performance.”
In other words: Don’t think you’ll necessarily make a better return on your money by handpicking your investments. And that’s partly because “certain stocks and sectors may be ‘in vogue’ for a time only to give way to others” later, Sury says.
[See: 9 of the Most-Loved Stocks in the Trump White House.]
Do your homework, and do it again. Stock market trends are driven not only by overall market and economic sentiments but also by taking the time to learn about a company’s fundamentals, such as its unique value proposition, branding, revenue and earnings growth, assets, liabilities and risk, Sury says.
Other investing factors that determine a company’s worthiness are subjective, which makes stock trading even trickier for new investors.
“Unfortunately, in the world of technical analysis, there are often multiple ways to interpret these factors — depending upon who you ask,” Sury says. They might include a company’s current trajectory, share volumes traded when the stock rises or falls, and support or resistance levels (the thresholds under which the price is likely to increase or decrease).
Take Amazon.com (ticker: AMZN): Even when the online giant’s share price reached $1,000, some technical analysts believed it would be “difficult for the stock to penetrate that level and so were lukewarm upon the stock,” Sury says. Other analysts recommended making an investment based on the belief that “once the stock broke through this resistance level, it would ‘break out’ to the upside.”
Invest for the future. Because stock market investments should be made for the short rather than long term, be forward-thinking when you sell or buy.
[See: 10 Skills the Best Investors Have.]
Smart investors like to trade companies that are solutions-focused and solving big global problems for a fair, just and sustainable economy, says Kristin Hull, founder and CEO of Nia Global Solutions. “Looking for companies with both top-down solutions stories as well as strong fundamentals is essential.”
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How Beginners Can Buy Individual Stocks originally appeared on usnews.com
