For the past several months, the stock market has been at an all-time high. What does that even mean? It means that the many companies publicly listed have stock prices at an all-time high. The Dow Jones Industrial Average (Dow) is a measurement of a section in the stock market. The Dow has 30 companies in it. Between July 2020 and end of July 2021, the index has gone up about 13,000 points or 31% just in a year. So what can one do to take advantage of this situation?
One can argue that the rise in the market can be attributable to many reasons: anticipation of future growth as the pandemic (hopefully) winds down, surge of younger investors entering into the market, high real-estate prices therefore investors are turning to the stock market for returns and overall inflation.
Warren Buffett’s timeless quote is to “buy low, sell high”. He has a lot of other sayings as well and it’s important to read advice and opinions from experienced investors like Mr. Buffet who have done well for themselves in the investment world. Now, since the market is high now we should sell stock that we own right? Well yes and no.
Define Your Investment Goals
Different people have different goals when it comes to stock market. Some people are in it to make a quick buck. Others are in it for long-term growth. For short-term traders, now may be a good time to sell some of your stocks, given you purchased them even a month or two ago. I’ve learned from engaging in some short-term trading that it’s better mentally to set an entry AND an exit point to reduce anxiety and looking at stock prices frequently. For example, you can place a buy order for Pinterest (PINS) at 65 for 46 shares totaling $2,990. That’s your initial investment. Then set a profit margin for yourself of 6% where you’d set a sell order for $68.90 for $3,169.40. Your gross profit would be $179.40 ($3,169.40 – $2,990) or 6%.
This is a realistic example as I love Pinterest as a short-term holding stock. One thing to remember is that if you own a stock for less than only 2 years and sell it for a gain, then you have to pay Capital Gains tax on your tax return. This table is a simple illustration I pulled from Investopedia.com along with a simple explanation of how Uncle Sam gets his piece of the profit: http://www.investopedia.com/articles/00/102300.asp
| Bought 100 shares @ $20 | $2000 |
| Sold 100 shares @ $50 | $5000 |
| Capital gain | $3000 |
| Capital gain taxed @ 15% | $450 |
| Profit after tax | $2,550 |
Generally I like to hold onto a stock because my larger goals do not involve making a making a quick buck. Rather I’d prefer to have my investment portfolio slowly grow over time. I might sell a few holdings right now since the stock market is so high and also volatile. Once I sell the stocks, I may just let the cash from the sale sit my account or in a Certificate of Deposit (may talk more about how this works in a different post) and wait for the market to come down to buy some other stock – remember, buy low, sell high!
Dip Your Toes Into The Market
You might be wondering so how do I even get started in investing? The first thing to do is to open a brokerage account. This is an account you need to buy and sell stocks. Many companies offer one like TD Ameritrade (this is the one I use), E-trade, Ameritrade, Fidelity, a bunch more. In the past, brokerage firms would charge a commission (small fee) for you to buy and sell stocks, but as far as I know those fees have gone away. But make sure whichever brokerage company you go with does not charge these fees!
Once you open an account with your basic personal information you need to fund your account. This involves connecting your bank account to your newly-opened brokerage account. It may or may not take a few days for the verification process to go through. Once your account is connected your can transfer money from your bank account to your brokerage. And once the money arrives, boom you’re ready to buy some stock!
These brokerages make it super-easy to buy and sell stock, research companies, set up alerts and watchlist so your account stays organized and informative.
Make sure to have only a cash brokerage account and NOT a margin account. A margin account is one where you borrow money from your brokerage to buy stock. It comes with risk and I would not advise newbies to open this type of account.
Manage Risk And Keep A Balance
The volume of information and analysis on when and how to buy and sell stocks on the internet is ridiculous. One thing to always remember is that no one has a crystal ball and can predict what will happen in the future. This is why due diligence is so important.
If you’re investing in individual stocks, it’s important to understand the business, the financial data, the basic products and services offered, the management team. The more you invest into an individual company, the more upside there may be as individual companies can perform better than a fund, however those come with greater risk due to lack of diversification. And that’s why it’s important to stay on top of news related to those companies. All of this continued research takes time and energy.
If you don’t have a lot of time, like me, you should consider investing into an Exchange-Traded Fund (ETF). This will reduce the risk of investing into one single company. ETFs invest in a bunch of companies and come in all shapes in sizes, from technology to healthcare, to capturing the overall S&P 500.
When you invest in the stock market, you are taking a risk, period. The amount of risk you take depends on the amount of money you invest, what stocks you buy, how long you buy them for, and how long you plan to hold onto them. Last but not least, it is important to keep some general principles in mind: make sure your investment goals align with your age and risk tolerance, you are properly diversified, you keep tax implications in mind.
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