As an investment, buying FTSE 100 stocks can be a smart move. However, like many different types of investments, I need to be aware of the risks associated with it. Only when I’ve got a good grasp of what the potential outcomes are can I make well informed choices. With that in mind, here are my top points to think about when I’m looking to make money from FTSE 100 stocks this year.
Leaving the unrealised gains
Firstly, I need to be aware that I’m unlikely to make large amounts of real money from FTSE 100 stocks in the short term. There is a key difference between realised and unrealised gains. If I buy a stock today for £1,000 and it rallies 10%, the unrealised gain is £100. This only becomes tangible when I sell the stock and get the cash into my bank account.
Why is this important? Well the best way in my opinion to make money from stocks is to actually leave the funds invested for a long period. In effect, I need to be happy with letting my gains remain unrealised in the short run. This will allow my shares to hopefully appreciate further in value if the long-run trend is higher.
This principle also helps me on the flipside. If I buy a stock and the value falls by 10%, I haven’t realised a loss. I’ll only receive less money back if I choose to sell at this point. If I hold the stock for the long term, then this could allow me to reduce my losses and give time for the share price to recover. In itself, this should allow me to make more money overall by not panic-selling.
Trying to make money by diversifying my stocks
Clearly, a quick disclaimer here is needed. There is no guarantee that all stocks will only go up in value, even in the long run. There will be times when I think that selling the stock is the best plan.
This leads me on to another key point I believe in when trying to make money from FTSE 100 stocks. It’s simply the case that I don’t have to be right all the time. It’s actually impossible to make correct stock picks every time. Yet to be successful at investing in stocks, all that matters is that I am right more than 50% of the time.
Added to this is trying to be sensible with the way I invest. Ideally, I want to try and spread my money over several different stocks. This will help me to have a better probability of being successful. For example, if I invested in just one stock, I’m either going to make or lose money 100%. If I invest in 10 stocks, then each stock accounts for 10% of the overall portfolio value. So if one stock loses me money, I can still be profitable from the other nine.
Overall, FTSE 100 stocks do offer me an attractive way to make money this year and beyond. By following the above points, it should help me to be better prepared.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.