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Four things you must know before investing in stocks

In our youth, we often feel invincible. Why save for retirement when you have the whole world ahead of you? Well, that is exactly when you should start saving. The more time your money is invested, the more time it can grow. One proven method for long-term growth is investing in stocks. The reason is U.S. stocks have had consistent growth since the S&P began tracking performance in 1926. Of course, there have been fluctuations, but that hasn’t stopped the upward trend. So, now is the time to buy stocks. Yet course, you must learn which stocks to buy. Below are some tips for picking out your first stocks.


Determine your investing goals

We all have dreams–in what ways would you like to improve your life? Are you trying to build wealth? Do you want a consistent income stream? Naturally, everything depends on your current life situation. If you want to supplement your income, then you may look into dividend stocks. If you want growth, then you should research stocks with a lot of potential.


Stick to what you know

When figuring out what stocks to buy, one of the most important questions to ask is how well you know the company. The reason you want to start with a company or industry that is familiar to you is because you want to enjoy investing. Think of the answers to questions such as:

  • What are your favorite brands?
  • What are your favorite chain restaurants?
  • What’s your favorite software company?

You will probably favor brands that have good long-term earning potential. There is a reason why they attract so many fans. What you should stay away from is hype. Don’t invest in a company simply because it’s “hot” at the moment.


Understand the basics of stock investing

The stock market may seem daunting, but it isn’t as complex as you think. The only terms you need to know are:

  • Revenue growth–The total sales of a company over a specified time frame.
  • P/E ratio–This is the price-to-earnings ratio. It is the price per share divided by earnings per share.
  • Dividend yield–This is the annual dividend payout divided by the stock price. The best dividends have a yield of 4 percent or higher.


Look at price and valuation

Many investors look for “undervalued” stocks. If a stock has a P/E below 15, it is considered inexpensive. Anything with a P/E ratio over 20 is expensive. Nonetheless, a company that is expected to grow quickly will have a more expensive stock.

Also, sometimes a stock is inexpensive because isn’t growing as rapidly as it has in the past. So, it’s not about whether a stock is cheap or expensive. What you want is a stock that you expect will increase in price–that is how you make your profits.

Now that you have figured out your investing goals, your favorite brands and studied stock basics, you should be ready to pick a stock. You may look at dividend yield or P/E, but the most important thing to consider is whether the stock has long-term potential for growth. You want the stock price to rise higher than your initial investment. Don’t be intimidated by fluctuations in the market, they come and go.



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