How to Deal in the Stock Market

Deal effectively in the stock market to create wealth.

Investors deal in the stock market to establish long-term wealth and achieve their respective financial goals. This process begins with a self-assessment, in which you can prioritize life objectives while evaluating your current financial standing. From there, you are better able to put together a stock market portfolio that effectively satisfies your needs for growth and manages risk. Dealing in the stock market requires regular adjustments to your portfolio, as conditions change.

Things You'll Need

• Annual reports
• Brokerage account
• Financial statements

Instructions

Take Financial Inventory

1. List your financial goals according to their projected costs and time horizon. Common financial goals include retirement income, first-time home ,and higher education savings. Investors with longer time horizons can afford to take on more financial risks.

2. Inventory your current assets, liabilities, insurance policies, income and expenses. Work to pay off debt, and sell off poorly performing assets to build cash. Next, calculate an amount of monthly cash flow that could be spent to build your portfolio.

3. Choose a class of broker that operates in accordance with your objectives. Financial advisers offer investment recommendations in exchange for fees and commissions. Alternatively, discount brokerages offer no advice, and they are ideal for value-conscious investors who prefer to do their own research.

Research and Buy Stocks

1. Identify the risk-versus-return trade-off of various stock market sectors. You should expect higher potential returns for taking on more risks. Smaller companies, international equities, and technology stocks are high-risk and high-reward stocks. Conversely, large firms that operate within mature industries, such as oil, attract conservative investors.

2. Develop your investment strategy. Value investors work best in a recession, when they purchase shares that are trading beneath the value of their underlying businesses. However, growth investors prefer to buy stocks of companies that offer rapid profit expansion.

   Diversification is another alternative, in which you build an investment portfolio that can generate growth in different economic examples. For example, a portfolio of technology stocks and U.S. Treasury bonds can manage risks. In recession, the Treasuries will hold value and pay interest.

3. Identify prospective investments, and contact those companies' corporate investor-relations departments for annual reports. Analyze the financial statements and news within these annual reports, as you evaluate the investment.

4. Buy and hold shares of stock, or mutual funds for diversification. Dollar-cost average into your positions with monthly or quarterly purchases. Dollar-cost averaging minimizes the risks of making large commitments at market peaks.

5. Compare your stock market returns to the major benchmarks. In America, the S&P 500 and the Dow Jones Industrial Average track large-capitalization stocks, such as ExxonMobil and General Electric. If your portfolio significantly underperforms the major averages over 18 months, consider changing strategies.

Tips & Warnings

• Your investment technique should evolve as you age. Younger savers covet capital gains to build wealth. However, retirees seek capital preservation and investment income, such as interest and dividends.

• Severe illnesses or natural disasters could force you to liquidate your investment portfolio. Purchase adequate insurance coverage to alleviate these risks.

References

• Investopedia: Stocks - Basics
• Securities and Exchange Commission: Check Out Brokers and Investment Advisers
• SEC: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing

Resources

• SEC: Invest Wisely - Mutual Funds
• Investopedia: Risk-Return Tradeoff