Personal Finance

Just a Guessing Game: Should You Be Picking Stocks?

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Is there a science to picking stocks? It depends on who you ask. Indeed, almost anyone would tell you that there is a science, but another way to answer that question would be conditional. Yes, there’s a science, but you need to have a certain amount of money to begin considering it. The stock market’s tough territory to conquer, and it’s worth taking a close look at whether it’s the best field of investment for you.

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Know Your Alternatives

When people hear the word “investing,” usually one of two things comes to mind: savings accounts or stocks. The first is perhaps a more passive way of investing – a safe bet that’ll keep your money on-hand for when you need it, very slowly gaining value, but gaining nonetheless. The second option is our more complicated subject of consideration, but these two answers don’t constitute the whole of what it means to invest.

No, as Scott Trench at BiggerPockets points out, there are other options about which you should be thinking. For Trench, in fact, if you’re worth less than a full million dollars, you can forget about playing the market. Instead, you’d be better off investing in real estate or small businesses.

Many have never considered these possibilities as major modes of investment. Others may think that it takes more money to invest in real estate than in stocks. But unless you're doing the legwork to see what's available, you haven't fully considered your alternatives.

Related: Why Warren Buffett’s Stock Picking Methodology is Outdated (& Real Estate is the Best Investment)

Assess Your Knowledge

You probably shouldn’t be playing the market if you can’t answer a few basic questions about the process. At the end of the day, this is about the money that’ll keep you afloat in your old age, the money that makes up your livelihood, and you can’t risk that.

The key questions, in terms of investing, are different according to different experts, but ultimately, they’re about your foundational knowledge of how investment works. For Joshua Kennon, the most important question you need to be able to answer before diving in to the investment process is, “How much is a fair price?” As he puts it, “A great company is a terrible investment if you pay too much for it.”

Consider Strategies

Even if you can answer fundamental questions about investment, you may still have a difficult time choosing the right stocks. One way to approach the process is through specific strategies. One market expert at Amigobulls recommends a strategy based on social media. This is obviously a newfangled strategy in terms of playing the market, but is there anything to it?

As it turns out, there does seem to be some proof to the process. One study linked Facebook “like” rates to stock price changes, while another used Twitter data and charted trends more reliably than the Dow Jones. These strategies, however, take a lot of time and energy, and at the end of the day, they may not be worth the effort poured into them, especially if you don’t have much money to put toward the resulting conclusions. You may just be better off going by instinct, as Joel Johnson at Forbes recommends; all of this effort just tends to miss the easy buys.

Don’t Forget About Index Funds

All of the considerations that go into buying stocks can quickly start to feel excessive, particularly if investing isn’t your life’s passion. But if you still want to play the stocks, don’t forget about index funds. These funds follow larger market trends and don’t require the kind of detailed consideration that individual stocks require. However, index funds tend to grow slowly and may be no better than sticking your money in the bank – and, in fact, the results can be worse.

Related: 9 Reasons Why Investing in Real Estate is Awesome (And Better Than Stocks!)

At the end of the day, there’ll always be a risk to any investing that goes beyond sticking your money in a savings account. For some, that’s part of the thrill. Unless you’re willing to accept the risk, you probably shouldn’t be picking your own stocks, but if you know your options, then it’s clear that there’re other ways to make money by investing. It’s all about using a combination of wit and wisdom to drive your decisions.

Investors: What do you think? Do you invest in the stock market?

Leave a comment below!

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include
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    Aleksandar P. Investor from Chicago, Illinois
    Replied about 5 years ago
    Larry, an interesting prospective. Anyway, I have to notice something. You keep saying that people who are invested in stocks that they are “playing the market”. This is wrong in so many ways and statements like this keep ordinary people from investing in public companies. Let’s define what investing, in sense of buying shares of public companies, means: Investing is the methodical accumulation of capital through a disciplined and sensible plan that recognizes that shares are not little numbers that jump around in the paper every day. They represent a partnership interest in a real and ongoing business, a business that earns a decent profit, shares that profit with you, and grows the amount of profit shared on an annual basis. Investing is about being a partial owner of a real business. If you understand investing like this, that you are the partial owner of the real business and not a speculator, than investing is everything but “playing the market”. Most successful investors are people who buy great companies at a good price, hold them and collect and reinvest dividends. You can see than what is the power of compounding. I am talking from my experience as well. This is also the reason why many people rush into Real Estate investing without even try to invest in stocks. They accepted the notion that “stocks are risky”. However, RE investing turns out to be way more riskier for them.