A lot of people think of trading as a fast-paced world where trades are completed in a matter of hours in order to bring home large-scale profits. While there is a lot of trading of this ilk carried out, it’s not the only way that trading can be completed. There are also traders out there that look to build a long-term portfolio. These are usually a number of different factors that you have to look for when trying to choose a long-term investment prospect. We’ve gone over some of the best tips that you can take on board to increase your success when choosing long-term stock investments.
Look for regular dividend payouts
Regular dividend payouts across a sustained period are definitely one of the good signs to look for in long-term investments. If a company has been paying out regular dividends over a long time, then it means two things. Firstly, it’s a profitable company so has developed good levels of success. It means that it’s not just a flash in the pan and is likely to be around for a long time to come. If you’re buying a stock that you want to hold in the long term, then something that is likely to remain around for a long time is definitely a positive choice.
Secondly, it will pay back returns on your investment for the lifespan of your stock holding. So if you invested $10,000 and got back dividends of $800 per year, you would be getting an 8% return on your investment each year without accounting for any value increase on the stock you hold. You can then use this money as disposable income, to put into a savings fund or to reinvest in new stocks. If you’re planning on holding a stock for a long time, then making sure some of your portfolio pays out regular dividends is definitely a strong starting point. Use financial education platforms like the real world to stay informed and make strategic investment choices.
Look towards the future as well as the past
A lot of traders only focus on past performance when analyzing if they should invest in a long-term hold. Of course, the actions of a business in the past will show some information that could be applicable to what is happening now. However, it’s not the only metric to look for. Even if a stock has significantly increased in price over the last five years, that doesn’t mean it’s not worth investing in.
If the business plan is strong, there are solid IPs within the company and it is operating within a market that has the potential for growth, then there is still an opportunity for you to get value from a long-term investment. A great example of this would be Tesla.
Between September 2016 and February 2020, the stock price of Tesla increased by around 4.5 times. Many people felt that this could be the upper limit and the price had peaked. However, by January 2021, the price had increased by another five times. This shows that even if there have been large increases in the past, if the future of the company is strong, then there is still the potential for further price rises to take place.
This means that you will need to take a deep dive into what the company has planned in the future before you invest. Of course, you should be doing this type of research before investing anyway, but if you’re banking on there being a significant price rise at some point, then it’s even more important.
Know when to walk away
All too often, people will hold onto dead stocks just on the off chance that they will turn things around and offer a profit. This is wasted money. If you’re able to get some kind of return on your investments, even if it’s a negative return, it can still be turned around into a positive.
A great example of this would be a $1,000 investment that got turned into $500. From here, you may feel as though it’s best to leave it and hope that it will rise back up and give you a profit. However, if your research is showing that this is unlikely, then you would be better off getting the $500 back and investing it into stocks that have a better chance of giving a positive return.
If you were to take that $500 and turn it into $5,000, then you will have a five times return from your original investment. If you kept the original stocks and they never turned around, that will just be wasted money that you will never get back. Of course, some long-term holds will lose money for a short period of holding them, so it’s important to carry out the right research so you can make the right decisions when it comes to selling negative return stocks.
Be careful with very low-priced stocks
Stocks that have very low prices attached to them can often be extremely tempting. The potential for significant profits will always set off signals in your brain trying to persuade you that these are the right choice; however, it’s important to view them in context. Low priced stocks have a much higher chance of plummeting to a value of zero than higher-priced stocks. This means that while you can obviously purchase more of them, there is an increased risk of these stocks being worth nothing in two years –
unlike stocks in an established company such as Apple.
That is why you should only look to invest in lower-priced stocks if you have done the requisite research. Make sure that you’re fully aware of their business plan and what they have in store for the future. Keep an eye on how they behave and be wary when investing. Of course, if your research provides positive feedback, then investing in a lower price stock can be a very savvy decision. But make sure you don’t sink everything into it because if it goes wrong, it can lead to you losing everything overnight.