When you try to invest in stocks, most probably you want to figure out how a stock price goes up and down, so that you can make money from trading. However, the price of the stock is hard to estimate, even for Warren Buffet. So how do you invest in stocks as a beginner?
Table of Contents
- 1. You’re Buy Companies Instead of Only Stocks
- 2. Learn Why a Stock Price Goes Up and Goes Down
- 3. Start with Index Funds
- 4. Determine How Much Risk You’re Willing to Take
- 5. Pay Attention to the Cash Flow instead of Only the Profit
- 6. Find Companies With Healthy Balance Sheets
- 7. Look for Companies With Strong Competitive Advantages
- 8. Not Do Leverage
- 9. Diversify Your Investment Portfolio
- 10. Learn Accounting to Analysis the Financial Reports
- 11. Which Books to See
- 12. How Much Money Should You Invest at the Beginning?
- 13. Focus on the Long Term
- 14. Learn Value Investing
- 15. Decide Where to Open an Account
- Final Thought
1. You’re Buy Companies Instead of Only Stocks
The first thing you should know about stocks is that you’re not buying pieces of paper that go up and down in value. You’re actually buying partial ownership of a company. As a shareholder, you have a claim on the company’s assets and earnings.
2. Learn Why a Stock Price Goes Up and Goes Down
There are many aspects that can affect the stock price in a short period. It can be the overall market, company-specific news, earnings announcement, interest rate, etc. It is hard to know the price goes up and down in a short time as the market can always give you a reason after the price changes.
But from the long-term perspective (at least 3 years), it is the cash flow that drives the value of a company, and stock prices are just a representation of the value of a company.
3. Start with Index Funds
Index funds are simple and they offer two major advantages for beginner investors. First, index funds have low risk and low expense. Second, they provide you with instant diversification, which is impossible to achieve if you’re buying individual stocks.
Index funds are mutual funds that aim to track the performance of a specific market index, such as the S&P 500. They offer investors a simple way to invest in the stock market by giving them exposure to a broad range of companies with one purchase.
If you’re just getting started in the investing world, index funds are a great place to start. Once you have a handle on how the market works, you can begin to add individual stocks to your portfolio.
4. Determine How Much Risk You’re Willing to Take
Investing in stocks is not for everyone. It involves risk, which is the chance that you could lose money. The stock market can go up and down, and there’s no guarantee that you’ll make money from your investment.
Before you invest in stocks, it’s important to understand your risk tolerance. This will help you determine how much money you’re willing to invest, and what types of investments are right for you.
There are two main types of risk: systematic and unsystematic. Systematic risk is the risk that’s inherent in the stock market. It’s the risk that you can’t diversify away, and it includes factors such as inflation, interest rates, and political instability. Unsystematic risk is specific to a company or industry. It includes factors such as financial stability, management, and competition.
To get an idea of how much risk you’re willing to take, consider your investment goals. Are you investing for the short term or the long term? Are you looking for income or growth? How much money are you willing to lose?
Once you know your goals and your risk tolerance, you can start to build a portfolio that meets your needs.
5. Pay Attention to the Cash Flow instead of Only the Profit
When a company releases its earnings report, there are two closely watched numbers: net income and operating cash flow. Net income is what’s left of the revenue after all the expenses are paid. Operating cash flow is the amount of cash generated by the company’s normal business operations.
Investors should pay more attention to operating cash flow than net income. That’s because a company can manipulate its net income by using accounting tricks, but it’s harder to fake the cash flow.
A company that consistently generates more cash than it needs to pay its bills and expand its business is probably a good investment. A company that doesn’t have enough cash flow might have to take on debt or sell assets to stay afloat.
6. Find Companies With Healthy Balance Sheets
When you’re considering an investment, take a look at the company’s balance sheet. This is a snapshot of the company’s financial health, and it will give you an idea of how much debt the company has and how much cash it has on hand.
You can find the balance sheet in the company’s quarterly or annual report, which is filed with the Securities and Exchange Commission (SEC).
A company with a lot of debt might have trouble making its interest payments, which could hurt its ability to grow. A company with a lot of cash, on the other hand, might be sitting on a pile of money that it’s not using to its full potential.
A company with a healthy balance sheet is usually a good investment, but there are exceptions. For example, a young company might have a lot of debt because it’s investing heavily in its future growth.
7. Look for Companies With Strong Competitive Advantages
A competitive advantage is something that gives a company an edge over its rivals. For example, a company might have a patent that protects its products from being copied. Or it might have a loyal customer base that keeps coming back.
Competitive advantages are important because they can help a company grow and make money even in tough economic times, for example, during COVID-19. Companies with strong competitive advantages are usually good investments.
8. Not Do Leverage
Leverage is when you use debt to buy more shares of stock. For example, if you have $10,000 to invest, you could buy 100 shares of a stock that costs $100 per share. Or you could buy 200 shares of a stock that costs $50 per share and borrow $5,000 to do it.
Leverage can help you make more money if the stock price goes up. But it can also amplify your losses if the stock price goes down. That’s why leverage is a risky strategy, and most investors should avoid it.
You cannot sleep well at night if your investments are highly leveraged.
9. Diversify Your Investment Portfolio
Diversification is a technique that can help you reduce the risk of your investment portfolio. When you diversify, you spread your money across different investments. That way, you’re not putting all your eggs in one basket.
For example, let’s say you invest $10,000 in stock. If the stock goes down in value, you lose money. But if you invest $10,000 in 10 different stocks, you’re less likely to lose all your money if one of the stocks goes down.
Diversification is not a guarantee that you will make money, but it can help reduce the risk of your investment portfolio.
From my observation, Warren Buffett has been a big advocate of diversification. He has said, “Diversification is protection against ignorance. It makes very little sense for those who know what they’re doing.”
I believe that true investors should not diversify their investment portfolios too much. They should focus on finding a few good investments and holding them for the long term.
10. Learn Accounting to Analysis the Financial Reports
If you really want to go deep and make money in stock investing, you need to understand accounting. I’m not saying you need to be an accountant, but you should at least know the basics of financial statements.
The income statement, balance sheet, and cash flow statement are the three most important financial statements for investors.
The income statement shows how much money a company made or lost over a period of time. The balance sheet shows the company’s assets, liabilities, and equity at a specific point in time. The cash flow statement shows how much cash a company has generated or used over a period of time.
You can use these financial statements to find out a lot about a company. For example, you can use the income statement to see if a company is consistently profitable. You can use the balance sheet to see if a company has a lot of debt. And you can use the cash flow statement to see if a company is generating enough cash to pay its bills.
11. Which Books to See
You can find a lot of information about stock investing online. But there’s nothing like reading a good book to get started.
I recommend three authors: Benjamin Graham, Warren Buffett, and Charlie Munger.
Benjamin Graham has considered the father of value investing. He wrote “The Intelligent Investor,” which is a classic book on stock investing.
Warren Buffett is the most successful investor in history. He has written several books, but my favorite is “The Essentials of Investing.”
Charlie Munger is Warren Buffett’s right-hand man. He has co-authored a book with Buffett called “Poor Charlie’s Almanack.”
These are three of the best books on stock investing. I highly recommend them to anyone who wants to learn more about this subject.
12. How Much Money Should You Invest at the Beginning?
This is a difficult question to answer because it depends on your individual circumstances.
If you have a lot of money to invest, you can afford to take more risks. If you have a small amount of money to invest, you should take less risk.
In general, I recommend that people invest 10% of their income in stocks. So if you make $50,000 per year, you can invest $5,000 per year in stocks.
Of course, this is just a general guideline. You should always consult with a financial advisor to figure out the best investment strategy for your individual circumstances.
13. Focus on the Long Term
Investing is a long-term game. You’re not going to make a fortune overnight. It takes time to find good investments and to see them grow in value.
The best way to make money in stocks is to focus on the long term. That means you should hold your investments for at least five years, and preferably 10 years or more.
Of course, you can sell your investments sooner if you need to. But if you can, it’s best to hold on for the long term.
In the long term, the stock market has always gone up. Over the last 100 years, the stock market has returned an average of 10% per year. That means if you invest $10,000 in stocks today, you can expect it to be worth $100,000 in 20 years.
Of course, there will be ups and downs along the way. The key is to stay invested through the ups and downs.
14. Learn Value Investing
Value investing is an investment strategy that involves picking stocks that are currently undervalued by the market and holding onto them until they reach their full potential. Value investors look for stocks with strong fundamentals that the market has overlooked.
There are a few things you need to look for when finding value stocks:
- A company’s share price that is trading below its intrinsic value
- A company with a low price-to-earnings (P/E) ratio
- A company with a high dividend yield
To find these stocks, you’ll need to do your own research or hire a financial advisor who specializes in value investing.
15. Decide Where to Open an Account
If you’re ready to start investing in stocks, the next step is to open an account with a broker. A broker is a company that buys and sells securities on behalf of its clients.
There are two main types of brokers: full-service and discount. Full-service brokers offer a wide range of services, including investment advice, retirement planning, and tax advice. Discount brokers offer limited services at a lower cost.
To choose a broker, you need to consider your investment goals and your level of experience. If you’re a beginner, you might want to choose a discount broker so that you can get started without paying too much in fees. If you’re more experienced, you might want to choose a full-service broker so that you can get advice and guidance from a professional.
Once you’ve chosen a broker, you’ll need to open an account. Most brokers will require you to fund your account with cash or a securities transfer.
Investing in stocks can be a great way to build your wealth. But it’s not without risk. Before you start investing, make sure you understand the risks involved.
Meanwhile, it’s important to remember that investing is a long-term game. You’re not going to make a fortune overnight. It takes time to find good investments and to see them grow in value.