If you are starting out in investing, how can you stack the odds more in your favour? Here are some simple ways to build up your stock picking experience and create wealth for your future.
1) Start early. The best time to start is now. You may think you need thousands and thousands of dollars to begin. That's not true. At first, it is more about gaining experience, so saving a few hundred dollars each month and slowly building a portfolio is a good way to start.
2) Have a plan. Before you buy any stock, you need to write out why you should buy it and what you expect from it. Later, if the stock's situation goes sour, you'll know when to sell. If it improves, then let your profits bloom.
3) Reinvest. To truly maximise the power of compounding, you should invest any share gains and dividends back into your portfolio. It could be for new stocks or the old ones, but keep your money generating more money. You'll thank yourself later!
4) Stick with quality companies. Don't be tempted to follow hot stocks just because they've already gone up a great amount already. Also, don't look for quick ways to make a big profit. Invest in successful, financially sound businesses that will keep on earning money for you over the next decade.
For example, here are two companies that have big profit margins, a high return on equity and good earnings growth. Three indicators of quality stocks you can follow.
Macquarie Group Ltd (ASX: MQG) is the biggest investment bank in Australia. The US stock market and the S&P 500 seem to be climbing upwards. Increased corporate activity like mergers & acquisitions and capital raisings should also continue. This is a good environment for Macquarie to make its management fees and investment returns in. I would expect the company to be earning more from residential loans as it expands into the mortgage market as well since the housing market is still growing.
Slater & Gordon Limited (ASX: SGH) operates under the brands Slater & Gordon, Trilby Misso Lawyers and Conveyancing Works in Australia, and in the UK it has Russell Jones & Walker and Claims Direct. It has more than doubled its net profits since 2011 as it expands its network of law firms across Australia. It has profit margins around 14% and has raised dividends annually over the past five years. The legal services industry is still made up of many privately owned companies, so Slater & Gordon still has a lot of room to acquire competitors and expand its business network.
There is also another stock that could have market-beating potential. Our top analyst, Scott Phillips, recently identified one cheap but growing ASX stock with a 6.6% grossed-up dividend yield which could be a buying opportunity.
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