Investing in stocks can be a risky prospect. Stock values can fluctuate a lot, and that means that on a day-to-day or week-to-week basis, you could end up seeing your fair share of on-screen losses in your portfolio.
But investing in stocks also has a lot of upside -- namely, that stocks tend to generate high returns that could make you very wealthy. That assumes, of course, that you're willing to take a buy-and-hold approach to investing -- buy stocks and hang on to them for many years so they can gain value. But all told, loading up on stocks is a great way to build a lot of wealth for retirement, and it could be your ticket to meeting other major goals as well.
But if you're going to buy stocks, it's important that you do so strategically. And so the next time you're tempted to add shares of a given stock to your IRA or brokerage account, be sure to ask yourself this important question.
Image source: Getty Images.
Why am I investing in this company?
There are different factors that may be motivating you to invest in a given company. Maybe you like the way that company has expanded its product line without taking on too much debt. Maybe you're a fan of the company's management team and think it will take the business to a very profitable place. Or maybe you're looking to diversify your portfolio, and so you've landed on a company whose market sector you're currently light on.
All of these are valid reasons for buying a stock. But one thing you don't want to do is choose a stock at random without there being a specific thought pattern behind it.
Along these lines, it's generally not a good idea to invest in a specific company simply because it tends to be in the news a lot. Sometimes, companies gain publicity for reasons that aren't ideal (think executive scandals or speculative products). And so hearing a company name mentioned a lot isn't automatically a good reason to buy it.
Have a specific plan
It's always a good idea to establish an investment strategy based on your goals and risk tolerance. Whenever you're tempted to buy a stock, you should really make sure the company in question fits into your strategy to some degree.
If part of your strategy is to load up on a certain number of growth stocks, and you come across a company that you think has solid growth potential, then you should feel comfortable moving forward with that investment. But you definitely shouldn't just pick stocks out of a hat, or buy the same stocks your friends are buying and hope for the best.
The more strategic you are in the course of building your portfolio, the more success you're likely to have as an investor. So digging into the "why" is a good bet before moving forward with any investment choice, even if it's a company whose shares you've purchased many times before.
