Many consider the stock market as an attractive and lucrative investment area. Stock markets can even double your savings in no time. While a bank savings can earn you a maximum of 2% to 3% interest in a year, a mutual fund can help you earn more than 10% per year. Though stock investing has high returns, it also has high risks. These risks can be minimized with careful decisions and planning.
Usually an average person falls into one of two categories, the first category believes that stock investing is a form of gambling and the second, who know how to invest in the stock market but don’t educate themselves or make wise decisions. Someone who falls under these categories does not understand what the stock market is and why it exists and ends up with mediocre results.
An investor interested in good profits and low risks should be a good researcher, keen observer and a good decision maker based on his education of the stock market.
There are also many ways to step into the stock market. The most familiar ways to invest in stocks include:
- Investing through a 403b plan if you work for a non-profit, or else invest through a 401k plan
- Investing through Brokerage account
- Investing through a Dividend Reinvestment Plan (DRIP)
- Investing through a Direct Stock Purchase Plan
- Investing through an SEP-IRA, Roth IRA or Traditional IRA account.
There are six types of assets that an average investor might own:
- Common Stocks: A security that represents ownership in a company.
- Preferred Stocks: A security that represents partial ownership in a company. Preferred stocks are a special type of stock or capital stock, which is a higher ranking stock than voting shares. It carries the specific dividend that is paid before any dividends to common stock holders.
- Money Markets Fund: It is a segment in the financial market. It provides high liquid funds to protect your purchasing power and very short maturities are traded.
- Corporate bonds, etc are issued in various cities and have lower interest rates.
- Mutual Funds: Mutual funds are specific investment companies which handle investor’s money by reinvesting it into a diversified portfolio of stocks and bonds.
- Real Estate Investment Trusts (REITs): It is a special type of company managed by one or more directors or trustees, which uses investors’ money to purchase and manage real estate. Investors get tax advantages when owning real estate.
You have to validate three Financial Statements to invest in stock:
- Income Statement
- Cash Flow Statement
- Balance Sheet
Guidelines for Investors
To invest in the stock market an investor should be cautious and first understand in detail all the terms, conditions and agreements set by the firm. Some of the basic guidelines you have to follow to successfully yield returns are listed below:
- Learn about how the stock market works, how to invest, and how to review financial data by attending classes or seminars or by reading.
- Build an investing and stock-picking strategy.
- Set financial goals.
- Check annual reports, quarterly reports and other related documents to educate yourself about the stocks.
- Research and review stocks daily.
- Always invest in what you know or are familiar with.
- Avoid investing money in just one or two stocks, diversify your portfolio.
- Use a discount brokerage to invest in and buy stocks. This can be done offline or online.
- Buy the stocks that you are comfortable with to hold long-term.