Lots of people begin investing with hopes of fast and easy gains. However, it’s not as easy for new traders to navigate the stock market as it seems at first glance. Success depends on the right decisions and to be able to make them. You need to know how to begin and proceed.
The fact is, investing in stocks is one of the fastest ways to grow your wealth. This is especially compared to growing wealth in a savings account with small monthly increments. Numerous articles are advising new investors about the market, though, and the information avalanche could be quite overwhelming. More often than not, it’s impossible to pick out useful tips from so much news.
That’s why we decided to tell you about the three most important points that are crucial for success when it comes to stock investments.
Do you want to pick Income stocks or Growth stocks?
If you want to successfully navigate the stock market, you need to know the crucial difference between growth and income stocks. Practically all the stocks in the market can be classified as either income stocks or growth stocks.
Income stocks do not usually record high-speed increments in their share prices. Their appeal lies in the dividend yield that such stocks pay shareholders. For example, if income stock pays a quarterly dividend of 4%, it will pay out $6,400 in dividends on a $40,000 investment during a year. Yes, that’s a relatively low gain. However, the attraction is that your initial investment will still be worth $40,000 at the end of the year.
On the other hand, growth stocks are high momentum stocks. They have the potential to increase their earnings, along with their share price in a short time. As a result, if you buy a growth stock for $40 apiece today, it might gain 25% to trade around $50 apiece during the next 12 months. It means that a $40,000 investment in growth stocks might be worth $50,000 in a year.
However, growth stocks are very volatile. The momentum that drives a fast and high rise in share price can also drive a speedy, devastating drop in their share price.
Technical VS Fundamentals Analysis
To understand the stock market, it’s important to know about business fundamentals and technical analysis and how they should inform your investment decisions.
Technical analysis refers to parameters that describe and determines how a specific stock is likely to react if certain functions remain constant. Technical analysis includes RSI index, and Moving Averages, as well as Stochastic and Volume action.
Meanwhile, Fundamentals refer to the cogent/tangible aspects of a business that can determine both success or failure. Business fundamentals include qualitative and quantitative information such as competitive advantage, products/services, key markets, the scale of operations management, and financial metrics.
To achieve success, beginner investors need to know when to buy or sell stocks based on what the technical indicators project or what the business fundamentals say. The ability to read, interpret, and understand technical indicators and business fundamentals will help you determining success in the stock market.
Right timing is all
Time and timing greatly affect stock investments. Timing is the ability to predict market direction. It enables you to buy a stock at the lowest possible price before the price jumps or to sell another stock at the highest possible price before its price plunges low.
Usually, experienced stock investors might predict 3 timing wins out of 5. However, beginners are likely to often be lost as they will most likely be late to act on information.
On the other hand, Time refers to the patience that is required to gain success in the stock market. Many successful investors would advise holding your positions for 3 to 5 years before you make any major changes.