People say this often: Long term investment is the safest way to earn money from stocks. Still they make mistakes of buying the stocks at the wrong time to get trapped under contraction period for God knows how many years. Getting impatient from narrow range, they sell stocks, too early than intended, only later to notice that their stock has touched the sky-high price.
So, of course, long term investment is a safe approach only when you know which stocks to select at which time with a solid strategy.
Best 8 Tips for Successful Long Term Investing
This article will teach you to select stocks for long term investment:
Select Stocks with familiar Products
Newbie traders always chase stocks from different sources like news, magazines, friend recommendation, brokers’ suggestion, etc. They blindly invest in stocks that sound good to their ears. No matter if they understand the company or not. This process may look easy but it’s full of risk. You invest in company you don’t know anything about.“
“When you think of long-term investment, you are buying a part of company”
That doesn’t mean you have to follow a complicated strategy to choose stocks. The truth is stocks are available at your home or nearby. Simply go to your kitchen and see which brands you using since years, which brands you wear, which toothpaste you are using daily in the morning, which is your favorite restaurant, etc.
All in all, you have to select stocks whose products are familiar to your liking.
Also Read: How to Select Stocks for Intraday Trading?
See the Future Potential of Stock
Only familiarity won’t work. What if the product you are using today won’t be useful tomorrow? We have seen the revolution of smartphone from keypad mobile.
Ask yourself these questions to see the future of stock
- Will the product of company be useful tomorrow even after upgrade?
- Will this be a desired product, no matter whatever happens?
Answering these questions will help you see the future as per products’ perspective.
Go for Debt Free Company
What if even after having great future potential, the company won’t make it? There is a pretty good chance, for company under debt, to fail in the face of adversity or can’t keep up with the trend.
Two Characteristics of Good Company
- They keep debt in control
- They minimize debt with each passing year
Ways to check Debt Level of Company
- Debt to Equity Ratio
Debt/Equity = Total Liabilities / Total Shareholders’ Equity
More than 1 ratio indicates that company’s more than 50% assets are funded by debt. Eliminate companies having more than 1 ratio. If you know the company very well, you can avoid this factor at your own risk.
- Pledged Shares
Taking loan in exchange of shares is called pledging of shares. This comes under “Shareholding Pattern” section in balance sheet.
If more than 50% of shares are pledged, the company is risky to invest.
Quick Check on Management
This is something complicated to implement for small traders or traders not having access to management people of the company.
Still you can have a quick check with the below given tricks
- Read news about the company
- See what the owner is upto
- Is he/she talking about shares only or about growth of the company
- Are they upgrading products as per the growing or changing demand
- Simply call the management and say them that you are going to buy a big quantity and you need some details
- Have a small talk with your broker about the company
This will give you a good idea of what the company is upto. Plus, you will get the answer of: is it worth investing or not?
Diversify Stocks and Money
Everyone talks about diversifying stocks. Obviously, this keeps you safe. When one sector goes through tough times, you have back from other sectors.
But what about diversifying money?
Diversifying money means not to put all your money at a time in one stock. When a stock fascinates you enough, you may have the urge to throw all your money in, stop yourself and ask below given questions:
- What if tomorrow you like another more interesting stock?
- What if the stock fails to perform as per your expectations?
Better to play on a safe side. Invest a little part of your money on each stock.
Stick to your Strategy
For long term investment, patience and faith matter more than strategy. No matter whatever strategy you choose and how much time you decide to wait on, it is your faith in your selected that will do the trick. So, stick to your strategy instead of jumping from here to there.
You can’t be 100% right even with long-term investment. Keep an eye on your stocks quarterly. Eliminate stocks that are not performing since 1.5 year and put new ones based on the above given tips.
Secure Yourself with Fixed Income
You already have seen the history when nothing worked. You have to prepare yourself for such times even if your stocks are touching sky high. To keep the flow of your income, you have to put at least 20% cash on hand and a bit of investment in most safe options like fixed deposit, tax free bonds and other corporate bonds. This will shelter you from tough times like 2008.
Now you are ready to select stocks for long-term investment without getting your money in risk. We will be back with indicators signaling perfect time to invest in stocks.
Also Read: How to Select Stocks for Swing Trading?