A lot of people jump at the first cheap stock that they find online without taking the time and effort to analyze it. And who can blame them? The cheaper a stock is, the more shares you can buy, which means the more profits you can gain in the shortest amount of time.
Unfortunately, profitable portfolios aren’t built with just cheap company tickers that costs a few pennies a share. The good news is, investing isn’t in the realm of rocket science either. With a hint of common sense and some valid form of analyzing and filtering your options, you’ll be able to construct a winning portfolio in no time:
Know the Company
It’s an overused piece of advice, but for good reason. Knowing the company whose shares you’re buying is only practical. If you’ve never heard or used of company XYZ, then you probably shouldn’t be buying it. Take Warren Buffett, for instance. Perhaps the most successful value investor in his time, Buffett only loads his portfolio on companies that he knows of and understands. Start with prominent brands, like Coca Cola or Disney, companies whose products you see and likely use on a daily basis.
Build Your Portfolio Gradually
Don’t invest all your money in one company, at least not all at once. If you have $2,000 to invest in stocks, limit each position to a fixed percentage of your total account size. Use dollar-cost averaging to build up positions in a systematic way. Although it sounds like a very sophisticated strategy reserved for Wall Streeters, dollar cost averaging simply involves buying shares with a fixed amount of money at predefined intervals, usually every month. Many online brokers allow you to automate this process so you don’t have to manually buy and sell.
Avoid the Common Investor Pitfalls
At its core, investing isn’t technically difficult. What makes it difficult to succeed as an investor are our innate human characteristics including fear and greed. The fear of missing out can lead to overtrading, which overtime leads to more losses. Greed works in similarly destructive ways. To keep your money safe, ignore your emotions and follow your plan. This is easier said than done, but it’s the only way you’ll be able to cut losers short and let winners run.
Prepare For Every Possible Scenario
There’s a lot of things that could happen when you invest in a position. It could just drop right away into a gigantic loss. It could skyrocket and make you money. It could go up and down without any definite direction for days. Planning ahead for both best and worst case scenarios will help you keep calm and follow through with your plan when things start turning awry.
Investing in stocks is a good way to make passive income. But before you can reap the rewards of capital gains and dividend yields, you’ll first have to learn and master the ins and outs of investing. This includes finding the right strategy that fits your investing goals and risk appetite as well as inhibiting detrimental emotions.