How to Invest Money Smartly in Stocks

Smart investors generally earn more money over time than short-term stock traders.

Stocks are by far the best way to beat inflation. Gold has typically held its value over time, and bonds and real estate have both outperformed gold. Stocks, however, have vastly outperformed all other traditional investments. With higher performance, though, comes higher risk. It is important to take a smart approach to investing in stocks to better manage their inherent volatility.

Instructions

1. Commit yourself to a strategic savings plan. It is important to invest only money you can afford to keep in the market for a long period of time. If you have a cash savings account for emergencies, you won't be forced to sell your stock to pay the bills.

2. Determine your investing goals. Are you investing for retirement? Are you saving for your children's education? How long do you plan to hold your investment?

3. Participate in your company's 401k plan or an IRA account. If you are investing for the future, it is important to take advantage of tax-deferral programs as capital gains taxes can erode your investment performance over time.

4. Buy an index fund. Mutual funds that are designed to mirror stock indexes like the S&P 500 have proven to outperform most other mutual funds over time.

5. Buy strong companies that show leadership and have future growth potential. The Wall Street adage buy low, sell high is generally bad advice. Good companies with great potential tend to lead the market and cost more as a result.

Tips & Warnings

• While stocks typically outperform other investments, investors with a well-diversified portfolio allocated in stocks, bonds and other instruments tend to weather the market storms much better. For instance, bonds rise when the stock market is falling. The future is unknown and plans change, so it is always a smart strategy to spread your investments over several asset classes.

• Cheap stocks that trade under $5 per share are cheap for a reason. Generally, companies with cheap share prices have underlying fundamental problems. Realistically, it is just as difficult for a $5 stock to grow to $10 as it is for a $100 stock to grow to $200. Those who buy cheap stocks, however, are likely unknowingly assuming much more risk.

References

• Motley Fool: 13 Steps to Investing Foolishly