You must’ve heard a lot about how stocks can amplify your wealth. If you manage to get over 8-10% compound annual growth consistently, you can accumulate tons of wealth for you and your children. Some people have even become multimillionaires relatively quickly by acquiring IPO of unicorn companies, such as Amazon, Uber, Facebook, etc.
It’s possible to get rich within a few years by being an active trader, but it has a high risk. Instead of trading, you can be a proficient long-term investor and get a steady return on your investment. However, you need to acquire financial management knowledge and be updated with the latest stock market updates to continue performing well.
9 Critical Things To Know About Stock Market
It’s easy to get into the stock market game today thanks to advancements in information technology. For instance, there’re great platforms like Pepperstone that allow you to experiment with virtual funds to test your skills and then start using real cash. With that said, you still need to know some critical things about stocks before getting into the platform.
Here are nine critical things to know about working with stocks:
1. Short Term Trading Is Way Riskier Than Investing
The stock market is volatile, especially in the short term. Some people want to grab a quick profit with day trading or swing trading, which is possible. However, you’ll see extreme fluctuations and dramatic highs and lows in prices without any great reasons. Even if you check out stocks today, you can see unpredictability in the market.
With that said, the stock market has been growing at a steady rate of over 7% in the long run. Going the route of the long-term is a safer investment option.
2. Stock Is One Of The Investment Options
Stock is one of the most popular investment options for many people. You get to purchase a part of some of the most reputed companies, which is exciting. However, it’s not the only investment option available. Furthermore, it’s not wise to only invest in the stock market.
Besides the stock market, you can allocate some money in real estate, precious metals, forex market, and other assets.
3. Don’t Take Market News For Its Face Value
Don’t take market news and expert predictions as absolute prophecies. You may see a report of a small lousy incident in a company and a considerable decline in stock price. Is it a reasonable drop? No, it’s not. Sometimes, you’ll see positive news, but a dip in the stock market index.
Keep track of the market news, but don’t take it as a prophecy.
4. Tax Can Get A Piece Of Your Pie
You need to be aware of how tax works if you’re investing in stocks. If you’re involved in short-term trading, you’re going to pay more taxes to the government. It can go up to 35% or more, as the government considers it an ordinary income.
However, you’ll pay around 15% tax if you hold those stocks for more than a year,
5. Cheaper Stocks Don’t Mean Good Deal
Purchasing cheaper stocks or even penny stocks isn’t always a good deal. It’d be best if you considered various things to know the potential of that stock, like the P/E ratio, growth rate of the company, management team potential, industries, etc.
Purchasing a highly profitable stock at $100 per share can be more valuable than acquiring 100 shares of a low growth company at $5 per share.
6. Dividend Stocks Are Your Friend
Dividend stocks can help you get a steady flow of income. Even if your stock price drop by a certain percentage, a dividend can minimize that loss. For instance, Apple Inc pays $2.03 of profit per stock, and even when the stock price plummets by 11%, their investors will lose less than 11%.
In addition to minimizing losses, dividend stocks can also make investors feel they’re getting some form of compensation for their investment.
7. Price-To-Earnings Ratio May Not Always Be Reliable
Price-To-Earnings ratio is a ratio that you get by dividing the current stock price by the earning per share. A lower price-to-earnings rate means you’re paying a lesser amount for every dollar earned by the company. However, it’s not always reliable. For instance, a stock with a lower P/E ratio might have a short history with lesser growth potential. Furthermore, the earning figure may also be distorted at times.
8. Buying During Bear Market Can Be Profitable
Warren Buffet always loves to purchase the stock when the majority of investors are selling in fear. By buying tons of shares during the bear market and holding it for years, you can bag a huge sum of profit. You’ve got the chance to purchase a high-value stock at a lower price.
9. Not All Brokerage Firms Are The Same
Some of you might want to get sensible advice from brokers, while others might want to have a low fee. When selecting a brokerage firm for buying and selling your shares, please take a look at its strengths and weaknesses first.
Investing in stocks can significantly increase your assets. In case you’re new to a stock market, you should start low and then slowly raise your capital. It’s possible to mitigate your risk by investing in multiple stocks or choosing a reliable mutual fund or index fund. In addition to that, you also have the option of investing in dividend stocks for receiving regular income.
The stock market has everything for every type of investor. However, starting can be a bit scary. Try to start your investment journey by putting money in an index fund or reliable mutual fund while learning the game. Later, you can move to pick up individual stocks to grab more returns if you wish to do so.