Investing in stocks isn't like shopping in a store – it's a bit more complex. To buy stocks, you'll need to do a few things: create a brokerage account, add money to it, and do research to understand what you're investing in before making a purchase.
Investing in stocks can help you grow your money over time. If you invest enough, it might also bring in extra income through dividends. It's important to learn how to begin, how to pick stocks, and to understand the risks involved before diving in.
"Blue-chip stocks" refer to stable and reliable companies that have been around for a long time. They might not grab headlines, but they're solid and can withstand market changes. These stocks are great for new investors as they tend to follow the market's ups and downs predictably and carry lower risks compared to other stocks.
The S&P 500 tracks major companies in different industries, many of which are considered blue-chip stocks. These companies have a long history of success, making them a dependable choice for beginners in investing.
A classic example of a blue-chip stock is Walmart (WMT). Walmart has been around since 1962 and boasts a massive market value of over $400 billion. It's known for its stability and in 2020, it topped the Fortune 500 list with an annual revenue exceeding $500 billion.
The Fortune 500 is a yearly ranking of American companies based on how much money they make. It's a good source to discover reliable investment options like blue-chip stocks.
Value investing means searching for stocks that seem cheaper than they should be. This involves studying a company's finances to find stocks that are priced lower than what they're really worth. Big investors like Warren Buffett believe in this approach.
The S&P Global Index checks value stocks using three things: book value, earnings, and sales compared to their prices. Some stocks that might be good value options are JP Morgan Chase (JPM), Bank of America (BAC), and the Walt Disney Company (DIS).
However, finding these undervalued stocks can be tough. One helpful way is to look at a metric called book value per share, which compares a company's assets to its share price. Other ratios that are commonly used include:
Be very careful when investing in smaller companies as they tend to be riskier and more unpredictable compared to well-established stocks. Be cautious especially if a company has recently experienced big changes in its stock price. These sudden swings and any recent news about the company could impact different ratios and methods used to evaluate its value.
Some investors focus on seeing their stock prices go up, while others aim to earn money regularly from their investments. If you're interested in getting paid from your stocks, dividends are what you're looking for.
Dividends are portions of a company's earnings that they give to their shareholders. Companies usually pay these dividends every three months. You can receive these dividends as cash or use them to buy more shares. When searching for dividend stocks, look for companies that consistently pay steady dividends or, even better, increase their dividends over time. This often indicates a financially strong company with good future prospects.
"Dividend Aristocrats" is a term created by S&P Global Indexes. These are companies that have increased their dividends every year for the past 25 years without a break. Some examples include Albemarle (ALB), Nucor (NUE), and Chubb Limited (CB).
Investors don't like it when companies reduce their dividends, usually happening after a period of losses or decline. It's a red flag, so be cautious about stocks that cut their dividends.
Be cautious if you notice dividend yields that seem unusually high. Stocks offering very high dividends might be a sign of trouble, suggesting that investors anticipate the stock price to fall or expect a dividend cut soon.
To check current dividend yields, you can use your brokerage account or free investment websites. Another way is to visit the company's investor relations website, annual report, or public filings to find dividend information.
Growth stocks are assessed using three main factors by S&P Dow Jones Indices: sales growth, earnings change compared to price, and momentum. Companies like Netflix (NFLX), Amazon (AMZN), and Meta (FB), formerly known as Facebook, meet these criteria.
These stocks have earnings that grow faster than the market average. Usually, young companies in exciting fields fall into this category, often seen in the technology sector. Although smaller and newer companies pose more risks for investors, some offer excellent opportunities for growth.
Growth stocks can emerge from any industry. Tech companies based in Silicon Valley have shown impressive growth potential in the 21st century. These stocks can belong to companies of any size.
Bigger growth stocks are generally more stable and less risky, but they might offer lower returns compared to smaller, newer businesses with more room to expand.
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To minimize big losses, make sure your investments are spread across various stocks. Select from different industries and regions. Before purchasing any stock, check its recent performance, analyst views, competitors, and future outlook.
Consider buying if you believe it's a strong business with good management and promising prospects. If you have doubts, hold off on making the purchase. Wait for a safer investment opportunity to arise.
To figure out which stocks to buy, consider your comfort with risk, your financial situation, and how long you plan to invest. These aspects can guide you in selecting the right kinds of investments, setting goals for diversification, and planning other aspects of your portfolio. If you find it challenging to understand how these factors influence your investment decisions, seek advice from a financial advisor.
"Margin" is like a loan from your brokerage that allows you to buy stocks using borrowed funds. It works as a credit line, and you can use it when needed for trading. For instance, you might purchase $100 worth of stock and add another $20 using margin, making your total investment $120. If your investment grows to $200, you can close the position, repay the $20 borrowed, and keep the remaining $180. Remember, you have to pay back the borrowed amount whether the trade is profitable or not.
Trying to time the market is very challenging, and even experts who claim to do it well often have different opinions on the best strategy. Many people prefer simpler approaches like "dollar-cost averaging," which involves regular and systematic buying without attempting to predict market movements.
