Just as there are no guarantees in life, there are no guarantees that you will accumulate enough wealth to assure a strong financial future and a comfortable retirement. However, having a clearly defined plan will help you achieve your financial goals. A strong portfolio may include investments in real estate, fixed income, commodities and equities. Finally, you should always have some readily available, highly liquid assets like cash or cash equivalents on hand.
In this article we will focus on equities. Equities represent ownership in a company. When you purchase one or more shares of stock, you are actually purchasing an interest in the company. For most people, that means buying a few hundred or maybe a few thousand shares of stock in an individual company. Unless you are in the very upper echelon of investors, an individual shareholder has no direct influence on the company's day-to-day operations. The individual benefits with the success of the company or does not do so well if the company fails to perform up to expectations.
Step 1 - Diversification
It is not recommended for anyone to buy just one stock. You may get lucky and pick a stock that appreciates handsomely, but it is a risky proposition. By having at least 5 stocks in different industries as a base for your total stock portfolio, you are well on your way to being properly diversified. As an example, your portfolio may consist of a technology stock, a pharmaceutical stock, a consumer staple, a financial stock and an energy stock. If you don't have enough money to take positions to create good diversification, you probably should think about investing in a good growth or value mutual fund.
Step 2 - Know Your Investment Goals
As touched on before, you should know your goals for your particular stage of life before investing in stocks. Some stocks are riskier, but can provide a greater reward. Other stocks are more stable and provide dividends, but grow at a much slower rate. At one extreme is a biotech stock, which can double in price if a new drug is approved for sale, or fall by 50% if the drug is not approved. Investors with a long time horizon and an affinity for taking risks might be good candidates for owning these types of stocks in their portfolio. On the other hand, if you are near retirement and can't afford to risk such swings in price, you may be well suited to buying shares in a utility company.
Step 3 - Learn to Read Financial Statements
Knowing how to read a balance sheet or an income statement will give you insight into the financial health of the company.
Step 4 - Pick the Best Stocks in the Largest Industries
Go with stocks in industries that are doing well. Try to pick the best managed and most promising stocks in that group.
Step 5 - Know What You Are Investing in
Above all, know the story behind the company before investing in their stock.
Investing in stocks on your own can be a risky yet rewarding proposition. While you are now have the proper guidance to invest wisely, it is always recommend to seek a financial advisor for a proper assessment of your personal situation.
