Regardless of our age, education level, or even social & financial levels, most of us are always thinking about how to better our lives from a financial perspective.
One of the best ways to do so is by investing.
Investing is the act of allocating resources with the goal of generating income or capital gains. It can come in different risk & return levels, & as a general rule of thumb, the higher the risk the higher the potential return, & vice versa. You can invest in all things ranging from stocks, bonds, mutual funds, real estate, foreign currency & gold. In this article, I’ll be focusing on investing in stocks.
When investing in the stock market you need to think about two things:
- When should I invest?
- What should I invest in?
The answer to the first question is really whenever you have spare cash. But as for the second question, well that’s the goal of this article: identifying the right stocks in the right industries to achieve maximum returns.
Picking the right industry
You always want to be in a market-outperforming industry.
So if the market is going up, you want to identify the industry that is achieving more returns than the market. If the EGX30 goes up 3% & the technology industry goes up 10%, you’d rather have been invested in the tech sector.
Industries can outperform the market for several reasons. It could, for example, be that the government has directed efforts toward developing the transportation, energy, or technology sectors. It is then reasonable to assume higher long-term growth for these sectors relative to others.
Once you’ve identified the sectors likely to outperform the broader market, you can consider diversifying your investments within those sectors & among them. This means you can invest in several companies within the energy sector, diversify across the sectors you’ve identified & expect to outperform or buy an exchange-traded fund to do the diversification work for you.
In fact, investing in industry-specific ETFs is one of the safest ways to diversify within an industry.
Picking the right stocks
Now if you’re seeking higher returns than the average ETF can provide, then you might want to pick out individual stocks.
Not because an industry is outperforming the market that all stocks in it are. When you look at stocks, look at their performance over the last few years. Those on the rise are the ones you want.
Your profit targets must be based on the stock price chart patterns that you’ve identified.
Important considerations
It’s important to note that there are other factors to consider when buying stocks such as:
Liquidity
Liquidity refers to how many shares of a stock are in circulation (free float), by which you can quickly find a buyer or a seller for it. Stocks with low liquidity are more difficult to sell at the desired price if you are looking to execute quick trades. So unless you’re a long-term investor (5 years or more), then make sure to invest in stocks with high liquidity.
Price
A lot of investors stay away from high-price stocks & lean toward lower-price stocks.
This is wrong. Especially if you’re a long-term investor, as you should try to find stocks that are expected to outperform regardless of their price.
Exchange-traded Funds (ETFs)
ETFs are considered safe investments over longer periods.
If you’re not sure about picking out individual stocks, look for ETFs that invest in the industries that you find attractive. ETFs will likely give you returns close to that of the broader industry.
Exit & Recycle
You must make sure you monitor your investments & other investment opportunities.
From time to time, check that your investments are meeting your expected performance, & if not, consider other industries to invest in.
For example, if your stocks are in a downfall & have reached the point where you set their stop-loss, then it’s time to start looking elsewhere. You must always take into account the stock’s support & resistance levels to avoid big losses.
* This article was not written by Thndr and does not constitute investment advice. You should do your own research before making investment decisions.
