Investments

Stocks as an Investment: Is it a good idea?

Before investing in stocks it's important to know a few basic things. In this article, we're going to help you understand the ins and outs so you can safely invest your money!

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Here are some important things to keep in mind before choosing stocks as an investment.

stocks as an investment
Thinking about stock investments? Read this post to learn about it! Source: Pixabay.

One of the best ways to make your money work for you is through investments. Have you thought about stocks as an investment option?

Investing means putting money into things that are going to make it grow over time. Stocks are one of such things.

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When you regularly buy stocks, you are in a position to make your initial investment increase by many times. The earlier you start investing, the more time the money has to grow.

You do not need a lot of money to start investing in stocks. It does not matter whether you have $1,000 or $25. You can start investing today.

But first, let’s go through an important definition.

What is a stock?

A stock is one type of investment. It is a contract that represents ownership of a fraction of a company. When you buy a stock, you are basically becoming a partial owner of the business. 

If you buy a big enough number of stocks, you may even become what people from the investing community call a majority shareholder. We are talking about buying over 50% of a company’s stock.

Someone who buys a stock does so for a number of reasons. The most common one is what you probably have in mind: that the stock’s price is going to increase. We call this “capital appreciation”. 

The second reason, which is often less known but still a very popular one among investors, is for the dividend yield.

Dividends are periodic payments that a company makes to its shareholders as a distribution of profits. It is usually equal to a percentage of the investment.

Knowing what a stock is should light up a signal in your mind: for you to make money off a company’s stock, the company must perform well.

This brings us to another important point.

What is your risk tolerance?

stocks as an investment
Consider your risk tolerance before picking an investment to add to your portfolio. Source: Pixabay.

There are a huge number of companies whose stocks you can buy, whatever industry and whatever company size you can think of.

Different businesses offer different categories of stocks. There are “large-cap stocks”, which are stocks from companies with a capitalization of $10 billion or more.

These are well-established businesses whose stocks offer stability to your portfolio, as well as steady long-term growth and dividend payouts.

In contrast, there are “growth stocks”. These are companies that may or may not be well established in the market but demonstrate high growth potential. With this type of stock, investors expect a sharp increase in the stock price.

Another type of stock is “small-cap stocks”, which are offered by companies whose market capitalization is between $300 million and $2 billion.

Why is this important? Well, different types of stocks offer varying degrees of risk. Whenever you think “high return”, you can automatically assume “high risk”.

Once you define your tolerance to risk, keep in mind these major categories of stocks as investments. It will help you focus on companies whose stocks best fit your strategy and goals, which brings us to our next point.

What are your investment goals?

stocks as an investment
Your investments have to match your goals! Source: Freepik.

Your investment goals have a direct relationship to how much risk you are willing to take. And this will impact your decision about getting stocks as an investment or not.

Knowing your risk tolerance will give you a realistic approach to your investment goals. You can not expect to achieve incredible results by taking on a little risk.

In much the same way, you can not expect the security of the principal (which is what we call the initial amount you have invested) if you take on greater risk.

A good starting point to set up investment goals is to understand where you are at in life right now clearly. A 20-year-old’s investment goals are usually not the same as a 40-year-old’s.

Forget about getting rich overnight. Whatever you have heard about people making millions in stocks by investing just a couple of thousand bucks does not happen in 99% of cases, probably more than that.

Those are lucky shots. Unless you are a YOLO type (an acronym for “You Only Live Once”, widely used during the GameStop phenomenon by people betting their life savings on that stock), you do not want to gamble with your savings. It’s unwise, to say the least.

You can get rich, just not tomorrow. The question is, how much of your time are you willing to dedicate to doing research and selecting your investments? This brings us to yet another important point.

What is your investment style?

The world of investing is one where you can proof-test your information-gathering and decision-making skills.

Whatever you think you know about the world, would you bet your money on it? Talk about putting your money where your mouth is. 

However, as sexy as that may sound, making accurate forecasts about a particular stock’s performance requires a substantial amount of reading.

Not just news, but a long list of thick, passionless, repetitive, and boring books. You’ll have to study a lot if you’re thinking about stocks as your major investment.

There are people who have that kind of drive and are not afraid of a few dozen thousand pages on risk management, options strategies, and technical analysis. Only to spend even more time reading spreadsheets and analyzing companies.

If this is you, you might even go as far as turning this into a full-time job working for an investment fund or a hedge fund. Nonetheless, spending long hours analyzing investments is not what most people want.

Most of us want freedom from bother, and this can be achieved by simplifying your investment decisions. Investment vehicles such as mutual funds, exchange-traded funds (ETFs), and index funds are popular choices among investors of all levels of experience.

You might also want to be advised by an experienced broker or a financial advisor. In this case, make sure you hire someone you trust and do your homework, so you understand their lingo.

In Conclusion

Whatever your objectives and investment approach, bear in mind stocks deliver their best results in the long term. Also, if you decide to pursue this path, make sure you read at least a few books on the subject.

A few widely acclaimed readings are The Intelligent Investor by Benjamin Graham, The Little Book of Common Sense Investing by John C. Bogle, and One Up On Wall Street by Peter Lynch.

And if you’re a beginner investor, it is crucial to learn how to take care of your finances. Actually, everyone should learn more about this. So check the following content about financial planning!

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About the author  /  Danilo Pereira

Danilo is a copywriter with a passion for learning. Deeply interested in philosophy, politics and arts.

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