When it comes to building wealth, there are many potential ways to see your wealth grow. While some people look at investing in real estate or maybe starting their own business, the reality is that investing in the stock market is still one of the easiest and most proven ways to build your wealth over time. Whether you manage your own portfolio or invest in managed funds, over time investing in the market is a proven place to stash your money and watch it grow as you reach your older years.
Right Tools and Proper Research
While mutual and index funds are great tools that will eliminate a lot of research on your part, the reality is that with the right tools and proper research, you can actually match or even outperform some of these funds. A lot of these funds have requirements to remain diversified and usually have caps in how weighted they can be with one particular company. However, if you are to do enough research on your own you can invest either in one or several companies that can outperform the overall market quite well, coupled with finding the right times to buy stocks.
What Are the Tools You Can Use?
So what are some of these tools you can use? For starters, you may find that there may be a great company to buy, but it might be too expensive. When that’s the case, you either have to wait for the price to come down, or move onto another company to invest in.
The best way to time this buy is to look at employee insider trading of a company to understand what trends may be forthcoming. A lot of publicly traded companies have shares owned by either employees themselves or management, or members of the executive board. These members have a better pulse on the companies financial health and are first to be able to react to that health and decide if they want to buy or sell more of the stock. While the SEC requires that they file before making these transactions, they usually still get the first crack before the overall market reaction.
After studying some insider behavior, you should do your own research on the company fundamentals. Ultimately you want to see that the company and seeing significant revenue growth year over year as well as a growing profit margin or net income. You also want to make sure that the company is leveraging debt appropriately.
It is important to draw a clear path as to why they borrowed money and it properly being allocated for a specific purpose. Any company that carries more liabilities than assets is a red flag and should be avoided. You’ll also want to see a path towards free cash flow, a sign that a companies revenue stream and profit margin are sustainable moving forward. You should look for these trends over a few years to see consistent year over year growth in these categories.
Look For Growth Stories
Most importantly, what gets overlooked is making sure that your investment into a company with a clear disruptive long-term business model. Investing in companies that work today may not necessarily work well in the future, and so it is important to look for disruptive innovation stories or better known as growth stories.
Is the Company a Clear Leader?
While many of these companies may not have great balance sheets and are speculative, it is important to learn what the business is trying to accomplish and assess its ability to solve a current problem today. More importantly, if it is competing for market share in its path to innovation, it is important to understand whether or not it is the clear leader or what steps it might need to take to become the leader.
Understand the Technical Analysis
Finally, it is important to learn a little bit about the technical analysis of stock price. A lot of the short term volatility of a stock price is driven by patterns of behavior, and there are usually indicators to look at on a chart when to point these out. In fact, it’s been discovered that when there is a lot of volatility in the market, that technical analysis may be a more proven strategy for stock buying than fundamentals. Overall, understanding fundamentals, behaviors, and industry sentiment are the few tools you need to build a lot of wealth.