Tips for Choosing Stocks for Long-Term Investment
Currently, stock investment is on the rise. Not only among seasoned business people, but its popularity can be said to have successfully reached the Millennial generation. So, what is a stock?
A stock is proof of ownership of a company's asset that represents a claim on the company's earnings and wealth. In the homeland, buying stocks can be done on the Indonesia Stock Exchange.
Stocks are always known as one of the capital market products that serve as an investment instrument for the long term. Many say that playing in this realm brings a lot of profits. Is it true? Here are some advantages of investing in stocks.
1. Obtaining Capital Gain (Profit from Price Increase)
2. Receiving Dividends (Distribution of company profits).
It is important for you to know that all forms of investment carry their own risks. The magnitude also depends on the types of stocks. Now, when playing stocks, the risks are as follows.
1. Capital Loss (Loss from price decline)
2. Liquidation Risk (If the company goes bankrupt)
In other words, if you succeed in investing in stocks, then the money will come back. In fact, it can multiply many times. However, if the stock value falls, you could lose money.
How to buy stocks for long-term investment?
The first thing to consider is how to start investing in stocks. Some investors choose to buy individual stocks, while others take a different approach.
You need to set aside time and willingness to research and evaluate stocks thoroughly. Usually, smart and patient investors manage to master the market over time.
In addition to buying individual stocks, you can also choose to invest in index funds, which track stock indices. Or you can invest in actively managed funds that aim to outperform the index.
Index funds typically have much lower fees and are almost guaranteed to match the long-term performance of the underlying index.
Finally, another popular option in recent years is robo-advisors. Robo-advisors are brokers that essentially invest money on your behalf in a portfolio of index funds that align with your age, risk tolerance, and investment goals.
Robo-advisors can not only select investments but can also optimize tax efficiency and make changes over time automatically.
It is advisable to research stock market investment options and see which ones are most appealing.
There are many fundamental factors that analysts examine to decide which stocks are good to buy for the long term and which are not. These factors can indicate whether the company is financially healthy and whether its stock price has been driven down below its true value, making it a good buy.
Strategies for determining stock value
Here are some strategies you can use to determine the value of a stock.
1. Dividend Consistency
The consistency of a company's ability to pay and increase dividends indicates that its earnings can be predicted. It also shows that it is financially stable enough to pay those dividends (from current or retained earnings).
You will find many differing opinions on how many years to look back for this consistency; some say five years, others say as much as 20 years. But in reality, anywhere in this range will give you an idea of dividend consistency.
2. Check the P/E Ratio
The price-to-earnings (P/E) ratio is one of the common tools used to determine whether a stock is overvalued or undervalued. It is calculated by dividing the current stock price by the company's earnings per share.
The higher the P/E ratio, the more investors are willing to pay for those earnings. However, a higher P/E ratio is also seen as a sign that the stock price is too expensive and may be pulled back.
A lower P/E ratio may indicate that the stock has attractive value and that the market has pushed the stock below its true value.
3. Watch for Fluctuating Earnings
The current economy moves in cycles. Sometimes the economy is strong and earnings rise. Other times, the economy slows down and earnings can fall.
One way to determine if a stock is a good long-term buy is to evaluate past earnings and future earnings projections.
If a company has a history of consistent earnings growth over several years, it could be a good long-term buy.
Not only that, but also look at the company's future earnings projections. If projected to remain strong, this could be a sign that the company's stock could be bought as a long-term investment.
Conversely, if the company cuts its future earnings guidance, this could be a sign of earnings weakness, and you may want to stay away.
4. Avoid Value Traps
How can prospective stock buyers know if a stock is a good long-term buy and not a value trap (a stock that looks cheap but could drop significantly)?
To answer that question, you need to apply some common-sense principles, such as looking at the company's debt ratio and current ratio.
5. Analyze Economic Indicators
There are two ways to use economic indicators to understand what is happening with the market. Starting from understanding economic conditions to knowing the big picture of the economy. Here is a detailed explanation.
1. Understand Economic Conditions
The average stock market is considered a forward-looking economic indicator. For example, consistent weakness in the Dow Jones Industrial Average may signal that the economy has begun to peak and earnings are starting to decline.
The same applies if major market averages begin to rise consistently but economic figures indicate that the economy is still weak.
As a general rule, stock prices tend to lead the economy by six to 12 months.
A great example of this is the stock market crash in the United States in 1929, which ultimately led to a crisis.
2. Evaluate the "Big Picture" of the Economy
This is the right way to measure how far long-term purchases relate to the economy by using headlines as indicators. Essentially, you can use opposing indicators from news media to understand whether the market is becoming overbought or oversold.
Thus, information about stocks for long-term investment. Make sure you choose wisely. Good luck investing in stocks!
Author: Dinno Baskoro
