Simple Tips for Stock Market Picks

Following some easy tips can help lead to stock market success.

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It is true that making money in the stock market is easier said than done. If it were truly easy, then there would probably be a lot more millionaires out there. However, degree of difficulty should not serve as a deterrent for any investor. After all, the fact of the matter is the stock market has served as one of the primary wealth builders in the U.S. for generations, and that is likely to remain the case. Investors can get their fair slice of the stock market pie by following a few simple tips.

Buy Dividend Stocks

There have been times, the go-go days of the 1990s being a prime example, when dividend stocks were overlooked by both professional and retail investors. Arguably, that should never be the case, because dividends play an integral role in the overall performance of investors’ portfolios. Compare the returns of the S&P 500 over long time frames using reinvested dividends and then just capital appreciation. The differences are not even close. Hypothetically, an investor who put $100 into the S&P 500 in 1929 would have had just less than $6,600 at the end of 2012 when accounting for price appreciation. When accounting for dividends, that number jumped to almost $163,000. That is a massive difference.

Buy Cash-Rich Companies

This point is somewhat related to the point about dividends, and while it may seem like common sense to embrace those companies with strong balance sheets, it is surprising how many investors do not heed this advice. There are several metrics, including cash per share, that investors want to look at regarding just how good a company is at generating operating cash and, most importantly, free cash flow. Through these metrics, investors can get an accurate feel for how well-run the company is and its ability to pay existing debt and invest in the business, along with the company's ability to reward shareholders through dividends and share repurchases.

Know Your Risk Tolerance

Every investor is different. Conventional wisdom holds that when it comes to stocks, a 25-year-old investor is going to have a higher tolerance for risk than his or 50-year-old parents or 75-year-old grandparents. Still, that does not mean all younger investors should only invest in the riskiest stocks and sectors. Nor does it mean all older investors should be out of stocks and entirely invested in low-yielding bonds. What is critical is that all investors know what they are comfortable with. There is no shame in being a young investor who prefers slower-moving sectors such as consumer staples. Actually, lower-volatility stocks outperform their higher-risk counterparts over time.

Look For The Best Deals

This tip does not pertain so much to stock selection as it does to selecting exchange-traded funds and mutual funds. Fund investors can save themselves thousands of dollars over the years by studying prospectuses to know exactly what fees they have to pay. If two funds are exactly the same except for a 50-basis-point difference in fees, the lower fee option will be better over time. Remember, if a fund charges 1 percent per year, that means you pay $100 per $10,000 invested. If a comparable fund charges 0.5 percent per year, that means you save $50 every year.