How to invest in stocks and indices
Getting started picking stocks and indices needs some goal setting, analysis and vigilance. With a little help from the right quarters, you can set a process that helps make the right choices for the portfolio.
So, you’ve got all your apps and accounts in order to finally start trading and investing. You know the basics: cash in abundance on the balance sheet is better than debt, recommendations from analysts aren’t something you can rely on completely, and a diversified portfolio is a safe bet. With that done, you’re all good to go.
And then you see that the market has thousands of stocks: how do you choose just a few for your portfolio? Even if you’ve gained the expertise, it’s near impossible to go through the financials of each company to choose stocks worth investing in.
Fret not, we are here to help. But before you get to the market side of things, there are to-dos that you need to take care of.
- Don’t deviate after you decide on what you want to pursue for your portfolio. Diversification is key, but so is consistency.
- There’s no point in pursuing industries just because they seem high value. Pick something that intrigues your interest. That way, it becomes easier to track news, updates, and trends which can affect your trading decisions.
- Once you choose the industries, pick the leading companies in those domains.
What does it take to pick a stock?
- Decide on the goals for your portfolio and stick to them.
- Always stay updated – track the news, follow updates and listen to what the experts are saying. You needn’t take their word for it, but it is ok to just know what the word on the street is.
- The best stock-pickers use a combination of these goals and information to make informed decisions.
Deciding on your goals?
Well, it sounds easy to say ‘decide on your goals’, but what does it actually entail. Of course, the goal in general is to make money. But how much? And for what ends? There are some who want to have an addition to their retirement corpus, some who want to generate and/or preserve wealth and some who eye capital appreciation. You’ll need a different strategy for each of these goals.
Types of investors and their strategies
Investors’ goals are what typically influence their share choice and purchase and holding decisions. There are a few common investor types.
- Investors keen on supplementing their income ought to look for low-growth companies that have solid foundations and pay dividends regularly. Master limited partnerships, real estate investment trusts (REITs), and highly-rated bonds are among the other options.
- Those keen on wealth preservation tend to be more risk averse. They prefer blue-chip companies that are stable. They also tend to avoid initial public offerings (IPOs) and opt for companies that deal in more stable consumer staples.
- Investors looking at capital generation don’t mind taking risks in favour of higher returns; they park their money in companies that are in the early growth years.
How should you go about it?
Your obvious goal is to make money and minimize the chances of losses through diversification. The easy part of planning your strategy is determining what type of investor you are. Once that is done, we arrive at the difficult bit: deciding which shares to buy. If you choose to take the conservative route, a small part of your portfolio can be dedicated to growth stocks. An aggressive investment strategy could entail allocations for blue-chip stocks to mitigate losses.
The most important trick for success in trading in stocks and indices is ‘constant vigilance’. Follow the news and keep an eye out for updates, see what the experts are saying, and read blogs and articles. And soon enough, with knowledge, you can begin to formulate opinions and judgement. The tenet is simple: you use the information at your disposal to gauge whether the price of a stock will rise (or an index will appreciate), and you buy it in anticipation of its value improving in the future.
Choosing your stocks and indices
Once you must select the companies, an amalgamation of all the decision-making factors described earlier comes into play.
- Use screeners and filters to find stocks based on the criteria that suit your portfolio’s requirements. You can use these to sort companies based on investment metrics such as dividend yield and market cap.
- Get your information from blogs, news articles and experts’ analysis on your chosen industries to see what’s trending and has investors’ attention. Take in all the info with a pinch of salt and be critical. Most of your stock picks in all likelihood will come from this step.
- Locate exchange-traded funds (ETFs) that monitor the industry of your choice, evaluate the performance and identify the companies whose stocks they have invested in. Investing in index funds has its advantage because it is spread across industries.
The next and final step
At the end of all the research and tracking, you arrive at a list that may have twenty companies, five, or none. The outcomes are not really, either better or worse. If you have arrived at none, it could mean you avoided a bad investment, or selected companies incorrectly. The outcome is indicative of two things: how your investments will bear future results and how your research needs to evolve further.
Now that you are informed, put it in practice and get picking and trading.