Investing in the stock market is one of the best ways to develop a passive stream of income if done right. You can build your net worth over time and pass your wealth down to the next generation. However, you can't just pick any stock without doing the correct research. Here's what you should consider before building your portfolio.
First, what is your risk tolerance? How much are you willing to lose? Remember, with the wrong pick, you stand to take a massive loss, hurting your investment. That's why it's imperative to know how much you're making and what you're willing to risk. Otherwise, you'll go broke in a matter of moments.
Once you know your risk tolerance, you must know how much you're willing to put in. Just don't put your entire week's paycheck into your investments. Otherwise, you won't be able to pay your rent and utilities. Instead, put a small amount in, like 10%. That way, you can build your portfolio over time instead of making a large investment in one fell swoop.
Now, what are you going to pick? It should balance out to be set up like this:
20% Blue Chip
Now, you don't have to follow the percentages to the tee. However, it should be a guideline for a healthy balance of growth and stability.
It's crucial to do your research before picking your stocks. Otherwise, you'll end up with a loser that'll weigh your portfolio down. Here's a breakdown of every type of stock (keep in mind that some stocks fall in more than one category, offering flexibility):
Blue Chip: These are your proven companies that are guaranteed winners. I'm talking about Disney, Apple, and Microsoft. You can't go wrong with these stocks to steadily grow your portfolio. These stocks also have other benefits, such as promising five-year forecasts and dividend growth, making these the logical picks for your portfolio.
Dividend: These companies PAY YOU to hold onto their stocks. That's right. You get paid by some companies just for keeping them in your portfolio. That way, you can use that dividend money to get yourself dinner, gas, or can even put it back in your portfolio. Stocks such as Altria, Realty Income, and Coca-Cola are proven winners in this sector.
Growth: These are the stocks that are set to explode in the future. Whether it's a strong grip in a growing industry or they have a desirable product, these companies are ready to go to the moon. Companies such as SoFi, Meta, and Square are set to be big players in the stock market in the future.
Defensive: These stocks are reliable in an emergency. Whenever the market crashes, you can trust these companies to give you a strong fort. Whether it's their massive moats or trusted products, these stocks have strong returns and are nearly recession-proof. Companies such as Captial One, Bank of America, and General Electric are strong barriers to the bad times. Dividend stocks are also good defensive stocks due to the payouts they offer.
Tech: No explanation needed. These are the companies that are set to take our society into a new age. You know the names: Meta, Apple, Microsoft... These are reliable companies that have the... er... technology to improve the way we live.
Keeping these factors in mind is important. However, you must also consider other elements such as a company's P/E ratio, how much their dividends are growing, and what their balance sheet looks like. Know the company first and what its operations are like before putting your money in. You should even lookup the CEO and learn about how they operate.
Investing in the stock market can be a tricky endeavor. There are so many options to pick with so little money. However, that shouldn't deter you from getting started. The long-term outlook will be worth it if you put in the work.