Disclaimer: I am by no means a stock investing professional and am not licensed to give professional advice. I am simply someone who loves investing and have picked up a few tips and tricks to get the most out of the stock market. Without further ado, these are my top tips for everyday investors looking to get into stock investing:
- PIck companies that you understand and stand by.
- Don’t try to time the market.
- Dollar cost average to help mitigate risk.
- Continually assess if/why your stocks aren’t performing well.
- Hold stocks for at least a year for them to be taxed as long term capital gains.
- Remember that in a recession, the value of all stocks are dropping, not just yours.
1. Pick companies that you understand and stand by.
Remember that stocks represent shares of companies. If you haven’t spent time understanding exactly what a company does, why give them your money? You wouldn’t lend/give money to a friend without knowing what they would do with it; the same should apply to the companies you invest in. On a similar note, you shouldn’t be fazed by everyday fluctuations in stock price. Remember that you’re investing for the long run and that a company is a living, changing thing with inevitable ups and downs.
2. Don’t try to time the market.
Earlier this year, I wanted to buy Apple, but I was convinced that their stock had reached an all-time high at around $150. I wanted to wait until the market went down before buying in, but it never did…The reality is, timing the market perfectly for entry or exit isn’t going to happen. If you’ve done the research and strongly believe in a company’s growth, don’t wait around finding the best time to enter the market. If you’re making a speculative purchase (which I wouldn’t recommend, but I know it can be tempting), then purchase a little at a time. Buy a little now and if it performs well, a little more later. The nice thing about purchasing a little at a time is that it helps investors overcome “analysis paralysis” by taking small actions instead of a big one.
3. Dollar cost average to help mitigate risk.
Dollar cost averaging is simply purchasing more of an asset when it’s cheaper and less of an asset when it’s expensive. Say you want to invest $1000 in stocks: rather than investing it all at once in a single transaction, split it up over time so you’re entering the market at different prices. Dollar cost averaging is a way for an everyday investor to react to stock price momentum and react by either buying or selling before it’s too late. My terrible analogy is that when groceries are on sale you want to stock up and buy a little extra, and when grocery seems expensive you want to buy less but you still gotta eat. Having cash sitting, unused, in a brokerage account waiting indefinitely for “the right time to enter” is an easy way to lose out on potential gains.
4. Continually assess if/why your stocks aren’t performing well.
When your stock drops in value, it’s hard to decide whether to sell it or whether the stock will eventually bounce back. If the reason why you invested in a stock in the first place no longer applies, then it’s time to get out of it. Maybe you purchased a stock for it’s high dividend yield, or because you had faith in their senior management, and those factors have changed.
5. Hold stocks for at least a year for them to be taxed as long term capital gains.
Waiting a year before selling stocks has allowed me to not only save a lot in taxes, but also resist selling during some price scares. If you purchase a stock on December 1st, 2019, you could sell it December 2nd, 2020 at the earliest for your gains to be considered long term capital gains. The maximum amount you would pay in taxes is 15%. In case you don’t have your tax bracket memorized (which, believe me, you’re in the vast majority), here’s a federal tax bracket breakdown from Tax Foundation:
Depending on your tax bracket, that could net you anywhere from 7-22% in tax savings. Buying and selling stocks for the long term is one of the easiest ways to avoid paying unnecessary taxes.
6. Remember that in a recession, the value of all stocks are dropping, not just yours. The stock market inevitable cycles through inflations and recessions, and while it’s alarming to see your stock drop significantly in value, it’s not uncommon. If you still believe that a company has value, then hold on to it in the faith that it will bounce back in the long-term. Selling your positions in recessions at deep discounts will only cause your losses to be realized, and generally isn’t a good idea.