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By Sia Hasan
Special to the Financial Independence Hub
Continuously adding to your savings account is a responsible and astute financial step towards a comfortable retirement. Unfortunately interest rates offered by banks on standard savings accounts make for really slow growth, which is barely enough to keep up with inflation. Fortunately, there are other investment options out there that can increase your money at a more decent pace, one of which is stocks. Here are five techniques to turning your spare cash into a portfolio that grows both in capital gains and dividend income.
1.) Start Small
You don’t need to pour all of your savings into stocks right away. Going about it slowly can minimize risk. For example, if you have $10,000 as your savings, start buying 10 to 20 shares of stocks per month. Consider increasing your order size or frequency of purchase as you gain more experience or as you get more data about specific companies. If company XYZ’s stock price has solid momentum, consider buying more of it.
2.) Dollar Cost Averaging
You can also do dollar cost averaging, which basically involves setting a budget to buy stock each month. For example, if you have $1,000 to invest per month and company XYZ’s stock costs $50 for this month, you buy 20 shares of it. The next month, it costs $40 per share, so you buy 25 shares. The month after that, it actually increase to $100, so you buy 10 shares for that month and so on.
3.) Strategize according to your Lifestyle
A methodical approach to investing is key to growing your investment portfolio consistently. Strategy removes emotions from the equation, which for an investor can be a detrimental quality or set of qualities to bring in the stock market. Figure out what strategy best fits you. Someone who is saving money month after month is probably occupied with a full-time job; hence there are limited hours in the day for monitoring prices and current positions.
For this type of investor, you can either pick a swing trading or a value investing approach. The former involves riding out the highs and lows of higher time frame charts, like the 4-hour or daily charts. The longer the time frame, the higher quality and probability signals generated. For value investing, you simply choose companies to invest in based on company fundamentals. Look at their product/service and what perceived value it brings to its target market. Furthermore, look at the company’s financials and management team.
4.) Broaden your Asset Selection
Stocks are an incredibly popular investment vehicle, both for average Joes and the elite of society. The simplicity and perceived value in stocks are only few of the qualities that entice people to invest in them. However, keep in mind that there are many other options out there for those who are looking for shorter-term and more active assets to buy and sell.
Option spreads, for instance, are a good example of derivatives you can invest in. They are the fundamental building blocks of many trading strategies. It involves the purchase and sale of an equal amount of options of the same class on the same underlying asset but with distinct strike prices and expiration dates. Of course, this requires a more solid grasp of underlying concepts governing investing and options trading. Be sure to identify the right option spread strategies that suit your experience level and financial goals.
Final thoughts
Turning your savings into a passive-income-generating portfolio will take time. Investing isn’t a get-rich-quick scheme that can turn you into a millionaire overnight. It requires effort and patience to filter dozens of companies and look at various data points and parameters to determine which stock/s has the potential to increase in price over the next few months or years. Use the three tips above, namely to start with small increments of stock, find and refine a strategy that best fits your individual lifestyle and investor profile, and broaden your investment options.
Sia Hasan is a tech entrepreneur by day, and a freelance writer by night. Her passion lies in business technology, efficient and sleek programming, and customer relationship management. When she doesn’t have her nose pressed against her computer screen, you can find her spending time with the loves of her life, her two dogs, Pixel and Vector.
Options? Credit Spreads? Good grief! I suppose there might be some people who have an interest in options, but they require such close attention and entail so much speculative risk that I am convinced that most people should not use them (I’ve been trading options for customers via a discount brokerage since 2005 – I’ve seen the messes people have gotten into).