Steps to Successful Investing in the Stock Market

How to Build a Winning Stock Portfolio: Work at It

Making the right investment decisions can help your profits grow. Getty Images

You must expend some effort to be a successful investor in the stock market - there's no getting around that fact.

Investors who buy or sell on their "gut or feeling" about a security may be right once in awhile, but most of the time they will be wrong. Being right once in awhile is not a winning stock investment strategy.

What is required to be a success investor in the stock market? You can find lots of answers to that question and many of them involve paying money for a seminar, software or some other product.

The steps to successful investing in the stock market are simple - it's the execution that is not so easy. In this article and coming articles, I will explore more of these steps in upcoming. Here are two of the top-level steps to being a better investor in the stock market:

Set Some Financial Goals

It's a cliché, but it is true - you must know where you are going so you will know you are there when you arrive. The goals should be specific and focused. For example, "I want to retire in about 20 years or so and have a nice, fat nest egg" is not a good goal.

A better goal might be: "I am 40 years-old and want to retire by age 65. At age 50, I will have built my nest-egg (not including 401(k)) to $250,000. At age 55, it will be $350,000. At age 60, it will be $500,000 and at retirement, it will be $600,000."

These numbers may be off for you and you probably have other goals, such as a college fund, but the point is you need to focus on specific goals with specific deadlines if you are going to be successful.

Pick an Investing Strategy

There are three basic investing strategies: value, growth and blended. You will hear others mentioned, but these three are the basis for all others.

Value investing may be the most difficult, but may also offer the best return over the long term. Value investors find companies that are trading at prices significantly below their true value.

The companies may out of favor with the stock market because they are not in the currently hot stock sector or they are in an unglamorous business that investors find dull.

The difficult part of value investing is identifying and analyzing candidates. Value investing requires some deep diving into the company's financials to find out what the true or intrinsic value is and why this value is at odds with the stock's price.

However, the payoff can be significant when the stock market discovers the stock and bids up its price from the low point when you purchased to a much truer level. This may require you to hold the stock for a long period and require you to update your assessment on a regular basis.

Growth investing is the sexy part of the stock market. It involves finding companies with strong future growth potential. You want to avoid the shooting stars that shine brightly in the market for a short period, then disappear. You are looking for solid companies poised for continued growth.

Growth investing can involve more risk if you focus too heavily on small-cap stocks that have the potential for rapid growth, but also face tremendous odds for long-term success. There are large-cap stocks that are in strong growth positions.

Your job is to find those that match your strategy, goals, and risk tolerance.

Blended investing - also called balanced investing - is a combination of growth and value investing strategies. By combining the two and practicing good asset allocation, investors in the stock market can hit the best of both. You can adjust the mix to increase or decrease potential return (and risk) to fit your particular goals and timeframe.