Let’s face it: Buying stocks in the COVID era is no easy task. The coronavirus pandemic has left many investors scratching their heads wondering whether stocks are a good investment or whether they should put more money into savings.
To succeed in the stock market, you have to separate yourself from the emotional aspect of investing and look at it purely from a dollars-and-cents standpoint. Investing can be scary, but it’s one of the only proven ways to grow wealth over time.
There will always be reasons to avoid investing and it takes courage to move forward in the market and take risks. But, truth be told, making a few tough choices now can potentially lead to life-changing results down the line.
The Advantages of Buying Stocks
Short-Term and Long-Term Growth
One of the top reasons to invest in stocks is because they can lead to short-term and long-term profitability. Someone who bought Disney ($DIS) stock in March 2020, for example, would have doubled their money by the end of the year. Keep in mind that’s not typical, but it’s a glimpse at what’s possible, even with a company that’s been around forever.
Stocks are highly volatile, which means they tend to rise and fall over time. So it’s entirely possible that you could invest in a stock that produces rapid growth, if you’re lucky enough to get in at the right time.
At the same time, long-term growth can be achieved by investing in lasting companies that are highly profitable and pay regular dividends. It might sound ridiculous, but someone who bought shares of Apple in 2000 might have seen their investment grow more than 35,000%! — while getting paid dividends on top of it.
In short, stocks have the potential to produce double-digit or even triple-digit growth over time while also putting you in a position to capitalize on short-term gains.
Time Value of Money
Investing is easy to put off until tomorrow, or the next day, or the day after that. For many people, investing is not a top priority. They feel safer putting money in the bank.
What you have to consider is the time value of money, which states that a dollar today is more valuable than a dollar tomorrow. If you invest $5,000 in Amazon today, you can start growing your money immediately, assuming the stock goes up. If you invest $5,000 in Amazon next year, you’ve missed out on an entire year of investing, and with the way the stock has been growing, you might not even be able to buy a full share!
That being the case, you need to act with a sense of urgency with investing. You definitely don’t want to rush in and make poor decisions. Lots of money has been lost by people jumping in on the latest hot stock without even knowing what the company does. But stop delaying your investments out of fear. This approach is only going to hurt you in the long-run, costing you money and making you regret missing opportunities.
Young investors are taught to strive for diversification in their portfolios. If you’re young and in solid financial standing, you need to balance security and risk if you want to retire someday.
Oftentimes, investors put too much money into secure investments like bonds and funds, robbing themselves of money-making opportunities through stocks, securities, or alternative instruments like cryptocurrency. The trick is to achieve balance.
For example, a young investor may work to build a portfolio that contains the following:
- U.S. securities: 40%
- Real estate funds: 20%
- Cryptocurrency: 10%
- Bonds: 10%
- Foreign securities: 10%
- Cash: 5%
- Commodities: 5%
And many would suggest an even heavier emphasis on stocks, especially for someone who has decades of investment returns ahead of them.
Keep in mind that you can also diversify within these categories by buying a number of different stocks. For example, you might buy stocks in retailers, health care companies, and tech companies like the Alibaba Group. That way, if one sector of the economy tanks, you don’t have all your eggs in one basket. And you can blend large, stable companies with higher-risk, higher-reward companies.
As this investor gets older and approaches retirement age, that person may choose to move away from riskier stocks, reduce their reliance on equities, and put more of their portfolio into bonds to reduce risk.
- Check our list of the Best Portfolio Analyzers
The Disadvantages of Buying Stocks
Of course, it’s not all roses when buying stocks. As an investor, you would be wise to be cautious about jumping in without a clear plan and understanding of stocks.
With that in mind, here are some of the disadvantages of buying stocks.
When you invest in a stock, you could lose everything if the company goes belly-up. It’s a risk that every investor takes when putting their money into the market. Even if you base all your investments on valuations and only try to purchase large-cap blue-chip stocks, you never know when the next Enron scandal might break out, causing a company to crater.
However, there are ways to reduce risk when investing in the stock market. For example, putting your money into a stable company with years of profitability and a great offering is far less risky than putting your company into an emerging startup that could be out of business in two years. This is why stocks like Alphabet (the parent company of Google) and Berkshire Hathaway are so popular.
Be smart about where you put your money to avoid serious capital loss during selloffs.
Due to the volatility of the stock market, it’s easy to make decisions based on emotion rather than logic. For example, you may see a stock plummet 10% in one day, wiping out previous gains that you made and decide to sell — only to see it rise 20% over the next month, hitting all-time highs.
Lots of investors tell stories about getting scared when their shares of Amazon went from $10 to $100 so they sold … only to watch as the stock has climbed well past $3,000 per share.
Investing in the stock market requires patience and many financial experts, like Warren Buffett, recommend getting rich slowly. If you try to time the market with snap decisions, you will likely lose far more than you win.
This is one of the hardest things to learn about investing. Your best bet is to pick great stocks and let time lead to strong earnings growth.
Tying Up Your Money
Putting your money into the market makes it less accessible than stashing it in a checking or savings account — especially if you are buying stocks at low prices and waiting for them to turn around or using putting funds into an individual retirement account (IRA) or Roth IRA for long-term, tax-deferred or tax-free growth.
In some cases, like with retirement accounts, you can face taxes and early withdrawal fees if you access money in the fund before retirement age. And if you pull money from a brokerage account at a profit, you’re going to have to pay capital gains taxes.
If you’re putting money into the stock market, it’s a good idea to keep cash on hand in a high-yield savings account (HYSA) where it can remain on hand to cover your short-term financial needs — like bills and everyday purchases.
When to Buy Stocks
As you can see, buying stocks comes with advantages and disadvantages. Here are some tips you can use to determine if you’re in a good position to buy stocks in the first place.
1. Your Risk Tolerance is Low to Medium
You can take an aggressive or conservative approach to investing. It largely depends on your risk tolerance, which is determined by your age, financial status, goals, and temperament.
If you’re not sure what kind of investor you are, talk to a financial services advisor to determine your current level of risk to see how you should be allocating your money.
2. You Don’t Have Problematic Debt
In certain cases, you shouldn’t be investing at all yet.
For example, if you’re fresh out of college with a lot of credit card debt, it may be in your best interest to pay off your debt first before you focus on growth stocks.
Getting out of debt is a bit like climbing out of a hole — you have to get to the surface before you can think about making any gains.
For example, if you have hundreds of thousands of dollars in student loans, you may want to focus on paying it off while you put money away. Otherwise, decades may go by, and you might still never invest — which will make it that much harder for you to achieve financial independence.
3. You Have Healthy Cash Flow
Investing in the stock market requires a healthy cash flow. If you want to make serious gains, you need to put a reasonable amount into the market. This is not easy to do if you’re struggling to put food on the table.
If you aren’t making enough money, consider starting a side hustle and bringing in more income on a weekly basis. That way, you can form an investment strategy without suffering financially during the process.
Should I Worry about Market Conditions?
Here’s a disclaimer: As an investor, you’re always going to be worried about market conditions and downturns. Don’t let that deter you from jumping in if you have the cash on hand.
For example, the outbreak of COVID-19 caused the economy to plummet, and the stock market tanked. However, there were a ton of buy-low opportunities with stocks — and many people did very well for themselves by buying stocks when they were essentially on sale.
So, instead of getting worked up about short-term market conditions, think long-term and invest when you feel a stock is poised for potential growth — not when the market suggests you should invest.
Liquidating stocks and moving funds around strategically to reduce volatility is for people who have already invested a considerable amount in the market and know what they’re doing. For now, just focus on getting some skin in the game, and take it from there.
Tips for Buying the Best Stocks
Once you decide to buy stocks, the next step is determining where to set up a brokerage account (e.g., with Schwab, Fidelity, or Robinhood) and then figuring out which stocks to buy — a process that can be much harder than it looks when you’re faced with so many options. Keep these tips in mind to make the decision-making process a bit easier.
1. Look at Benchmarks
One of the best ways to judge stock performance and see if a company is worth adding to your portfolio is to follow various benchmarks or indexes. This gives you a good overview of some of the top-performing companies you may want to look into.
The S&P 500
In recent years, the Standard & Poor’s 500 (S&P 500) index has emerged as one of the most commonly used benchmarks for tracking the overall market. The S&P 500 measures the 500 largest companies listed on stock exchanges in the U.S.
The Dow Jones Industrial Average
The Dow measures daily price fluctuations of 30 large American companies across the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is an index that tracks over 3,000 companies on the Nasdaq exchange — including Apple ($AAPL), Microsoft ($MSFT), and Alphabet ($GOOGL).
2. Identify Stock Market KPIs
When reviewing stock market benchmarks, you’ll also need to be able to drill down into specific stocks to learn more about what they offer.
Unfortunately, the internet is loaded with misinformation, making it hard to rely on experts about stock choices. Learn to read stock charts and identify some key performance indicators (KPIs) to see whether a stock is worth investing in.
Price-to-Earnings Ratio (P/E Ratio)
The P/E ratio tells you the ratio of a company’s share price to its earnings per share.
Price-to-Book Ratio (P/B Ratio)
The P/B ratio compares a company’s market capitalization to its book value.
A dividend yield explains how much a company pays out in dividends annually compared to its stock price.
High and Low
The high and low reading tells you how much and how little a stock has been trading for during a set period of time. Charts range from one day to the lifetime of the stock.
3. Consider Funds
As you look at buying individual stocks, you might be overwhelmed by the range of choices. A lot of people start by buying index funds, exchange-traded funds (ETFs), and mutual funds, which will give you broad market access to a variety of stocks and securities. Just make sure you’re not putting too much of your investment funds toward management fees.
Frequently Asked Questions
How do you buy expensive tech stocks like Microsoft, Apple, Amazon, and Tesla?
If you don’t have the capital on hand to buy expensive and high-performing tech stocks, you have a few options.
The first option is to purchase them through a tech fund, such as the Vanguard Information Technology Fund ETF (VGT), which tracks small, medium, and large companies across the IT sector. Look for funds with low minimum investments, which will give you access to a broad range of cloud computing, data, and e-commerce providers, among other technologies.
The second option is to buy stock slices, which are fractions of the overall stock. For example, you can become an Apple investor for as little as $1. One strategy is to buy a slice of a company’s stock and reinvest dividends. Over time, you can work your way up to a full share.
The third option is to look for emerging tech companies that are still trading at a bargain price. Set some money aside into a growth fund, and monitor to see whether it grows over time. You just may invest in the next Amazon or Microsoft. It’s risky, but it could pay off.
Is it safe to buy stocks in the post-Trump economy?
The economy will always have a certain amount of instability and risk. Form a long-term investing strategy and look for buy-low opportunities when you can. If you wait for a golden age of investing that is completely risk-free, you’ll never find it. The best investors know how to manage risk and capitalize on it when conditions aren’t in their favor.
What is a bear market and a bull market?
The market is said to be in a bear state when the economy is in a recession and stocks are declining in value. During a bull market, the economy is improving, most stocks are rising in value, and investors are excited about the future.
One trick is to buy stocks when the economy is in a bear state, ride it out, and rake in profits during bull runs. But trying to time the market often leads to missed opportunity. As we’ve seen recently, bull markets can last a long time, and those who waited on the sidelines over the past year have missed out on huge returns. Over the course of your lifetime, you’re going to experience many bearish and bullish markets.
These terms can also be applied to investing strategies. For example, investors may be bullish — or aggressive — or bearish about a particular stock.
The Bottom Line
At the end of the day, you don’t have to be a Wall Street professional to trade stocks. Anyone can get started by learning how the market works and identifying great values.
Take your time, keep studying the market, and most of all, just get started. The longer you wait, the more potential gains you’re going to miss out on.
There’s only one question left: What stock are you going to buy first?
No comments yet. Add your own