Investing in stocks, bonds and similar assets is one of the best ways that folks can save for retirement and increase their overall financial security and stability. Getting started is fairly easy, as investors can acquire stocks through their company’s 401(k) plan, open an IRA, or buy individual stocks and funds through a brokerage account.
Stock Ownership by Individuals has Declined in Recent Years
Despite the financial benefits offered by stock ownership, only around half of Americans are invested in the stock market. According to the results of a 2016 poll, Percent of U.S. Adults invested in the stock market conducted by Gallup, the number of Americans invested in stocks has dropped sharply since 2007, when nearly two out of three owned stocks as part of their investment portfolios.
There are many reasons why Americans have pulled back from investing in stocks, but the impact of the global financial crisis and recession that began in 2008 cannot be overstated. During that time some businesses failed, and the value of many stocks declined. While there has been a steady recovery in the market, many remain cautious about buying stocks.
Greater Investor Education Improves Stock Choices and Reduces Fear
Despite the short-term losses during the economic downturn, the stock market remains one of the best investments for the long term. One key benefit of buying stocks is that it allows individuals to acquire assets whose growth rate has historically surpassed the rate of inflation.
One key way that investors can feel more comfortable about investing in stocks and improve investment performance is by keeping up with analyst upgrades and downgrades of individual stocks to help pick the best time to buy and sell and choosing a sound investment strategy.
Top Basic Strategies for Stock Investments
Understanding the basic fundamentals of stock investing is crucial to making well-informed choices. Many brokerage firms offer free access to a variety of educational resources that can help investors learn more about the various factors that can influence stock prices, valuation and performance.
The Importance of Research
Before investing in a specific fund or company, investors should take the time to learn as much as they can about the company and the factors that can influence its performance. Key considerations when researching a stock include the same basics that individual analysts consider when rating a given stock.
These factors include a company’s past performance, sales and other revenues, debt to equity ratio, profit margin, and price to earnings ratios. Calculating these ratios, and keeping up with any changes in performance can be complicated and time-consuming, which is one of the reasons why the recommendations made by analysts carry so much weight with investors.
Other factors that can influence stock price and performance include what, if any, competitive advantage a specific company has over similar companies in its industry, and how well a company’s financial performance ranks in comparison to others in its industry.
One factor that can have a dramatic impact on business performance that is often overlooked when researching a company, is the level of experience, and the individual philosophy and background of the company’s CEO and other leaders in its C-Suite.
Diversification, Dollar Cost Averaging and Other Investment Strategies
In addition to researching individual stocks and measuring the key fundamentals that affect price and performance, it’s important for investors to have an overall investment strategy that can help them to determine why they are buying a given stock, and what, if any, factors will influence them to sell.
Rather than being motivated solely by price, or competitive advantage, in recent years a growing number of investors feel that it is more important to invest in companies whose mission and values correspond with their philosophy. For these investors, social justice and activism are the main motivations for buying a specific stock.
For example, many folks that are concerned about the effects of a wide range of political issues, from climate change to child labor, have been actively choosing to forgo investment in companies who take actions that disagree with these stances. Many analysts believe that this is a trend that will continue to grow and view the election of President Trump as a tipping point for ethical investing.
Other investors choose a more traditional investment strategy and include investments in real estate, international stocks, and large, mid and small caps to diversify their portfolio so that the risk of loss is spread out across different classes of assets.
Another investment strategy that can help investors reduce the risk of loss is dollar cost averaging. With this strategy, investors only buy shares of stock in a set price range, and then immediately begin to sell once the average price reaches a set high and a set low in order to lock in profits and minimize losses.