The first question to ask yourself before buying a stock | Smart Change: Personal Finance

(Maurie Backman)

Investing in stocks can be a risky prospect. Stock values ​​can fluctuate widely, meaning you could see a fair share of losses on the screen in your portfolio from day to day or week to week.

But investing in stocks also has many advantages, namely that stocks often yield high returns that can make you very rich. Of course, that assumes you’re willing to take a buy-and-hold approach to investing – buying stocks and holding onto them for many years so they can gain value. But all things considered, piling up stock is a great way to build a lot of wealth for retirement, and it can also be your ticket to other important goals.

But if you are going to buy stocks, it is important that you do so strategically. So the next time you’re tempted to add shares of a particular stock to your IRA or brokerage account, ask yourself this important question.

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Why am I investing in this company?

There are several factors that can motivate you to invest in a particular company. You might like the way that company has expanded its product line without taking on too much debt. Maybe you are a fan of the company’s management team and think it will take the company to a very profitable place. Or maybe you’re looking to diversify your portfolio, so you’ve ended up with a company that you’re not currently in the market for very much.

These are all valid reasons to buy a stock. But one thing you don’t want to do is pick a stock at random without a specific mindset behind it.

In this sense, it is generally not a good idea to invest in a specific company simply because it is often in the news. Sometimes companies get publicity for reasons that aren’t ideal (think executive scandals or speculative products). And so hearing a company name often isn’t automatically a good reason to buy it.

Have a specific plan

It is always a good idea to establish an investment strategy based on your goals and risk tolerance. When you’re tempted to buy a stock, you really need to make sure that the company in question fits your strategy to some degree.

If part of your strategy is to charge a certain number of growth stocks, and you come across a company that you believe has solid growth potential, then you should feel comfortable moving forward with that investment. . But you should definitely not just pick stocks out of a hat, or buy the same stocks your friends buy and hope for the best.

The more strategically you are in building your portfolio, the more successful you are likely to have as an investor. So it’s a good bet to get into the “why” before moving forward with an investment choice, even if it’s a company you’ve bought shares of many times before.

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