Many investors either buy the wrong stock or buy the right stock at the wrong time. That is why a majority of stock investors end up losing money. When you invest in stocks, there are a few cardinal rules that you always have to follow in order to get good returns from your stocks investments. Up until now, if you haven’t been able to create a profitable portfolio, our tips below will certainly help you.
This article reveals five tips which you should follow if you want to make money through stocks.
1. Buy Undervalued Stocks
You always have to remember to buy undervalued stocks. The best way to determine the stock value is to take into account its fundamentals. You have to consider the prospects of the company. Some of the factors which you should consider to determine the value of the stock include:
- Profit growth rate
- Assets and liabilities of the company
- The positive cash flow of the company
- P/E ratio (price-to-earnings)
After considering these factors, you have to also conduct a macro analysis before making your buying decision. It will help you determine the undervalued ones. When you’re buying such stocks, you are at a distinct advantage. You have to always search for such stocks rather than buying the overhyped ones.
2. Buy Only After Proper Due Diligence
Due diligence is pretty essential when looking to buy stocks… and needless to mention, it can be a pretty time-consuming process. First, you need to procure information from different sources before buying any stock. If you cannot do so, you have to rely on a credible source to prepare a list of stocks. Once you have found a reliable source to build the list of stocks to buy for you, you can go ahead and think about investing. You should not just consult your family and friends for this. You have to go with the professionals if you want to buy the right stocks.
It is always advisable to double check the stock recommendations from professionals as well before making your investment decision. It will help you protect your capital.
3. Learn to Hold
Even after the above two steps if you’re not able to hold the stock patiently, you will not make money. Chances are if your holding time is not long enough you will panic and end up selling it at a lower price. It will result in a loss. You have to ensure that you are ready to hold it for at least five years before making your investment decision. It will ensure that you are giving enough time to the company to increase its profits and prove its mettle. A time period of 3 to 5 years is a reasonable timeframe to let the company and the stock grow.
4. Use The Power of Diversification
Many people invest their entire investment amount in that one fantastic stock. You need to keep in mind that if you want to make money in the stock market, it is essential to use the power of diversification to your advantage. We are not recommending you to invest in 50 stocks. A list of 10 to 12 properly researched ones is a good number to start. You should have a maximum of 20 stocks in your portfolio.
Even if you turn out to be a brilliant stock market investor, at least 30% of your stock investments will not work. That is why, when you have a diversified portfolio, the winners will take care of the losers, and your portfolio as a whole will be in profit. If you invest in just a single stock and that turns out to be a dud, you will lose a significant portion of your corpus. That is why; you have to use the power of diversification to your advantage.
5. Start With The Blue-Chip Companies
Instead of investing in smaller companies which promise exponential returns, it is better, to begin with, the blue-chip companies. These companies will not disappear overnight. You can be sure that the chances of any fraud or corporate mismanagement happening in these companies are also minimal. That is why; you can easily protect your capital to a great extent.
So, when you’re looking to buy stocks, these are the five tips which you should consistently follow. These five tips will not only help you protect your capital but also earn significant returns. Once you follow these five cardinal tips, it is easy to make money by investing in stocks.
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