People invest in the stock market for growth or income or both. Successful investors are those who have the right stock picking strategies based on market situation.
You need to work on two things;
- Choose the stock, and
- Approach that matches the financial goal
Therefore, financial goals must be defined first. Then accordingly you should choose stocks. The length of time your financial goal will define what stocks you should buy.
Another factor that determines your stock picking strategy is the risk taking capability. If you are a conservative investor who doesn’t want to take risk, then for a 5 years or above goal, better to go for large-cap stocks, preferably with dividend.
If you are an aggressive investor, who has a better risk tolerance level, then go for mid-cap and small-cap stocks.
Every investor is different. A particular strategy and stock picking style may work for investor A, but it may not work for investor B. It depends on goals and level of risk tolerance.
Define your financial goals
Stock prices fluctuate on a daily basis. A stock that goes down may see rise and possibly go above your invested price. You need patience and the right stock picking strategy.
Based on the time period of your financial goals, you have to focus on individual stocks.
Based on the length of time, financial goals can be divided into;
- Short term
- Medium term, and
- Long term
Short term generally has a time frame of one-two years or less.
Short term goals can be;
- To arrange fund for buying a car
- Down payment for home loan
- Fund for honeymoon trip
If you have these kinds of goals, it’s better to avoid the stock market. Stocks are generally unpredictable in the short run. Even the best one in the large-cap, mid-cap segment fluctuates in the short-term.
And, in a negative environment such COVID-19 and in economic downturn, all stocks can be very volatile.
To be on a safer site, you better focus on short term investing plans such as fixed deposit and risk fee government securities.
Medium term goals
Medium term goals are those financial goals that you are planning to reach within 5 years. It’s also referred to as Intermediate term goals.
Medium term goals can be;
- Buying a home
- Fund for children’s education
We have different types of stocks that exist in the market. For a five year plan, you need to stick to those stocks that are stable and fundamentally sound for investment.
You can go for large companies which are financially sound and consistently pay dividends. These companies have gone through many economic downturns.
You can try buying leaders of specific industries such as IT, food and beverage companies, utility companies etc.
Long term Goals
Long term goals means, you want to achieve your target within 5-10 years time limit or after that.
Long term goals can be;
- To fund college education for your young child
- To buy a home
- To have a farm house
- To accumulate fund for retirement
Stock investing is best for these types of goals. You can keep accumulating stocks of good fundamentally stock companies to generate a good amount of money for your future.
In the long run, stock market investing has always been way ahead than other investing options.
Whatever be your target, while choosing stock you have to be very careful as you may lose money if invested in bad companies that go out of business.