Doing Stock Investing the Right Way

Stock investing is actually simple task but yet many individuals are still losing their hard-earned money to the market. These individuals lose their money mainly because they are investing in stocks the wrong way. Doing stock investing the right way and you will benefit from the profits of investing. Do you know what is the right way?

When it comes to stock investing, many people will be freaked out with all the stories of individuals losing all their investment amount. These individuals may not be investing stocks correctly and thus resulted in losing their hard-earned money.

Doing stock investing the right way is an almost guaranteed success as stock investing is actually very simple and easy.

But what is the right way?

Start Early

As always mentioned, investing is a long-journey. The longer you hold on to your investments, the better returns they can give you.

In one of my earlier posts, I had done a simple calculation for dividend investing and showed how an annual investment of $6,000 is able to generate a passive income of $37,496.87 in dividends in 20 years.

20 years is not a short period. For a person who is in his mid-thirties, by the time the 20 years period is up, he will be in his mid-fifties. Just in time for his retirement.

If you start your investments early, you will likely be able to retire comfortably earlier.

Read more: Start Early

Do Your Homework

Stock investing is not about following the tips from stock-advisers. These people are mostly analysts who analyse the market and give their take on how they perceive the stock price will react with the market situation. They may not even be investing in the stock market themselves.

Stock investing is also not about following what the gurus are buying. The portfolios of investing gurus, like Warren Buffett, can be found online. They have good track records on their investment and it seems very tempting to just copy what they invest. However, unless you are able to read the minds of these gurus, you may never know why they picked these stocks in the first place which might be the very reasons why they will exit their positions.

Doing your own research on the companies you are about to invest in is a very important step for a stock investor. When I was deciding on whether to invest in Coke or Pepsi shares, I did my own homework and chose Pepsi eventually, even though the guru of investment, Warren Buffett, owns Coke shares.

Read more: Dividend Investment: Coke vs Pepsi

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Discipline in Investing

Investing is a “game” that requires a lot of discipline. As investors, we will have to be very disciplined in order not to freak ourselves out whenever the market is adjusting downwards. To be able to succeed in investment, one will have to be very disciplined so as not to close the positions when the market is being volatile.

How many of you investors, like me, out there are being freaked out when the market drops and prices of the stocks in your investing portfolio all suddenly turns red?

Especially with the market being very volatile recently due to the rumours of the Fed increasing the interest rates, prices of stocks starts to whipsaw. The volatile market also starts to worry many investors and they start to exit their positions, cutting losses or taking profits prematurely, only to realise the price goes back to where it started a few days later.

One trick that I am using to manage volatile markets during the times when the market takes the heat boils down to one word, discipline.

Discipline in Investing

Investing is a “game” that requires a lot of discipline. As investors, we will have to be very disciplined in order not to freak ourselves out whenever the market is adjusting downwards.

How can one be discipline in investing then?

Many investors choose not to watch their portfolio every day. Though it may seem a good way not to freak oneself out when the market goes the wrong way, it is actually a very dangerous way to do.

When you are not updating yourself in what is happening to the company that you are investing in, you may not realise what had happened a few days later and the price of the stock may have drop drastically.

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How to Maximise Your Profits with DRIP

Dividend Reinvestment Plan, or DRIP, is a plan that allows the investor purchase additional or fractional shares of the company they invested in with the dividends paid. A look at how to maximise your investment profits with DRIP.

Dividend Reinvestment Plan, or DRIP in short, is a plan allowing investors to use the dividends received from their portfolio to buy additional shares or fractional shares on the dividend payment date. Brokerage firms usually charge little or no commissions for such purchases.

Let us take a look at the opportunities of enrolling in DRIP.

Benefits of DRIP

There are lots of benefits of DRIP that an investor can reap by enrolling in the program

  1. Saving on commission. Many brokerage firms offers the purchase of the additional or fractional shares at little or no commission. The low or no commission allow the investor to increase their portfolio without having to worry that their profits will be reduced by the commission.
  2. Starting small. As the saying goes “Better to start early than never“. This is especially true in investment. Many people claim that they would start their investment whenever they have enough cash or when they have a windfall. The smarter investor will try to put their money to start working, no matter how small the amount is. Enrolling in DRIP increases the investor portfolio. Though it may be a fractional of a share, this investment will eventually reap more profits.
  3. Automation. One of the most important point why enrolling in DRIP is beneficial to an investor’s portfolio. Unless you are very disciplined, most of the people will tend to spend “what is there” and the dividends paid out will very soon be spent. When the dividends are automatically reinvested, the possibility of spending the dividends is immediately reduced to zero.

Let us take a look at how DRIP helps to maximise your profits using Visa Inc. (NYSE: V) as an example.

Visa pays out a quarterly dividend. Assuming an investor starts off with 100 shares of Visa in March 2012, before the Ex-Date of the March payout, by the end of the last dividend payout in December 2014, his portfolio would have been worth $553.73 more if DRIP was enrolled.

DRIP Comparison | Investor Monkey

Why not do it?

If enrolling in DRIP can help to increase the profits of a portfolio, why then do people not enrol in it?

  1. Not knowing the existence of DRIP. Some investors, surprising, do not know the existence of the program.
  2. Not appreciating the profits. Without looking at the benefits in detail, the profits from the program cannot be appreciated.
  3. Diversification. By reinvesting the dividends back to the same company will have its own risks. By taking the dividends and personally reinvesting it in future can allow the investor to reinvest the dividends in other companies to diversify their portfolio.

Bottom Line

The true benefits of DRIP can only be realised for long-term investments. If your portfolio is targeted at growth stocks, it might be better to better for you to take the dividends and invest them in other stocks or wait till the stock price of the company is more attractive before you reinvest.