The investor’s age. [3] X Research source How much time the investor is willing to spend allowing his investments to grow. [4] X Research source Amount of capital the investor is willing to invest. [5] X Research source Projected capital needs for the future. [6] X Research source Other resources investor may have.
Understand that your financial goals may change over time, and adjust your portfolio accordingly. Generally, the younger you are, the more risk you can afford or are willing to take. You may be better served with a growth-oriented portfolio. The older you become, the more you’ll think about retirement income, and may be better served with an income-oriented portfolio. Even during retirement, many still need some portion of their portfolio for growth, as many people are living 20, 30 or more years beyond their retirement date.
Determining which sector(s) to invest in. A sector is the category a given industry is placed in. [8] X Research source Examples include telecommunications, financial, information technology, transportation and utilities. Knowing the market capitalization (aka market cap), which is determined by multiplying a given company’s outstanding shares by the current price of one share on the market (large-cap, mid-cap, small-cap, etc. ). [9] X Research source It is important to diversify holdings across a variety of sectors and market capitalization to lower a portfolio’s overall risk.
Growth stocks are those projected to increase in value faster than the rest of the market, based on their prior performance record. They may entail more risk over time but offer greater potential rewards in the end. [10] X Research source Income stocks are those that do not fluctuate much but have a history of paying out better dividends than other stocks. This category can include both common and preferred stocks. [11] X Research source Value stocks are those that are “undervalued” by the market and can be purchased at a price lower than the underlying worth of the company would suggest. The theory is that when the market “comes to its senses,” the owner of such a stock would stand to make a lot of money. [12] X Research source Blue-chip stocks are those that have performed well for a long enough period of time that they are considered fairly stable investments. They may not grow as rapidly as growth stocks or pay as well as income stocks, but they can be depended upon for steady growth or steady income. They are not, however, immune from the fortunes of the market. [13] X Research source Defensive stocks are shares in companies whose products and services people buy, no matter what the economy is doing. They include the stocks of food and beverage companies, pharmaceutical companies and utilities (among others). [14] X Research source Cyclical stocks, in contrast, rise and fall with the economy. They include stocks in such industries as airlines, chemicals, home building and steel manufacturers. [15] X Research source Speculative stocks include the offerings of young companies with new technologies and older companies with new executive talent. They draw investors looking for something new or a way to beat the market. The performance of these stocks is especially unpredictable, and they are sometimes considered to be a high-risk investment. [16] X Research source
In analyzing the fundamentals of a company, the investor is trying to determine the future value of a company, with all of its projected profits and losses factored in.
Try researching companies online before you invest. You should be able to find information about the company’s managers, CEO, and board of directors.
When looking at P/E ratio, figure the ratio for the stock for several years and compare it to the P/E ratio for other companies in the same industry as well as for indexes representing the entire market, such as the Dow Jones Industrial Average or the Standard and Poor’s (S&P) 500. Comparing the P/E of a stock in one sector to that of a stock in another sector is however, not informative since P/E’s vary widely from industry to industry.
As part of investing for the long term, determine the amount of money you can afford to commit to the stock market for five years or longer, and set that aside for investing. Money you’ll need in a shorter period of time should be invested in shorter-term investments such as money-market accounts, CDs or U. S. Treasury bonds, bills or notes.
A well-diversified portfolio is important because in the event that one or more sectors of the economy start to decline, it will remain strong over time and reduce the likelihood of taking a significant hit as the market fluctuates. [28] X Research source Don’t just diversify across the spectrum of asset classes. Some experts recommend you should also diversify your stock picks within each asset class represented in your portfolio. [29] X Research source
Checking your portfolio at least once or twice a year is a good idea but research has shown that making rebalancing changes (selling the gains from those holdings which have been profitable and buying shares of those which have lost value) more than twice per year does not offer any benefit. Some experts recommend checking on the quarterly earnings reports of a given company to see if your predictions for that company are holding true. Make changes as necessary, but don’t jump ship every time a share reports a minor decrease in value. Also important to keep in mind is tax implications of selling: if this is an account into which you’ve invested after-tax dollars (non-IRA or similar type of brokerage account), then try not to sell anything at a gain for at least one year in order to receive long-term capital gains rather than ordinary income tax treatment on your profits. For most people, the capital gains rate is more favorable than their income tax rate.
