How to Get You Started on the Stock Market.
We’ve seen again and again how people that invest in stock markets are not as informed as they tend to be in other matters. As Concoda points out, we tend to assume that we’re protected by different entities when we invest (e.g. bank, government, stockbroker) but there’s no such thing as a risk-free investment. So we don’t take time to get properly informed.
When we buy a car we do a lot of research, right? We compare prices, look at reviews, talk to people, etc. And as we get informed we have a better understanding of what is a good fit for us.
Well, that doesn’t happen with stock investment. So let’s look at 3 tips that can help us learn more before, while, and after investing.
Tip 1: Get an Online Tracker
Different websites/apps let you build your stocks, bonds, and ETFs portfolio. They help you set your holdings one by one and trace both the market’s and your own stock movements. You’ll get an idea of your positions and compare them to the markets’ development.
These trackers should be easy to navigate, able to update prices with no more than a 15-minute delay, and help you track individual assets. Also, you should start with a free version of this software. Most of these trackers have the essential tools you need for free, so there’s no need to waste money here. At least at the beginning.
These are some of the trackers that might come in hand:
- Sharesight: you can track stocks from over 30 global markets. Plus you can track assets such as currency (cryptocurrency as well), private equity, bonds, etc.
- M1 Finance: it’s based on pie charts. You see your holdings as slices of a pie. It’s easy to navigate and you can try the free version and see if it fits your needs.
- Betterment: you can download the app and do the usual things like any other platform. Plus you can sync your outside accounts too (e.g. bank account) so you can keep an eye on things from just one place.
- Status Money: it’s based on peer comparison. They act as your benchmark and you can make comparisons while maintaining your anonymity. It’s more of a social media for finance which is interesting if you’re into community sharing.
You can work with it before you buy assets. If you’re not sure which stocks to buy you should search for industries you’re familiar with. When you understand how the business works and are passionate about it, you’ll be more inclined to learn and keep updated.
For instance, I like to search for firms in the renewable energy industry. I believe they do good for the environment and want to invest in a future that has all kinds of green energy sources worldwide. I want them to be all over the place!
To get well informed, I would recommend you to search on Simply Wall Street both for already owned stocks and future possibilities. It’s visually appealing. The information is presented very clearly with a variety of insightful graphs. You’ll digest the data much better than with those endless texts, numbers, and formulas from other websites that don’t really appeal to you (unless you’re a nerd for this stuff). You can also compare two or more firms and easily look at different metrics. It gives you a good idea of how that particular industry works and what you can expect from it.
Also look at if these portfolio trackers let you set automatic alerts. These alerts can be sent as an email or a text message. They’ll tell you if one or more of your stock options drops below a certain threshold you established earlier.
Tip 2: Follow Market Trends
Whenever you try to predict the future you’ll most probably fail. Stockbrokers and experts fail too. So be cautious with the information you learn out there. That doesn’t mean you shouldn’t be aware of what is going on both in national and international markets.
Now, what do you look for? You’ll hear plenty of rumors, grand news titles, and experts’ opinions, all of which will make you more anxious than you need to be. Just don’t succumb to it and keep your calm.
For all the busy people out there, you should focus on 4 things:
- Interest rates: if they’re high you’ll tend to see that stock prices decline. Money costs more so when companies take loans it’s more expensive which in turn decreases their earnings. Lower earnings, lower the stock price. On the other hand, if rates are lower companies reduce their costs (less interest to pay) changing the cost/earnings ratio. Higher earnings translate into higher equity prices broadly speaking.
- Commodities: track how prices of raw materials change over time. Look for fuel (think of transport), raw food like grain or meat (basic for survival), mining products (for instance copper is very important for the Chilean economy), and other basic resources that could influence the industry where you’ll put your money (or already have).
- General News: you have to be aware of what’s going on out there. For instance the coronavirus situation and the governments approach to it. Think of how this situation influences your portfolio. Zoom flourished while Avianca declared bankruptcy. The same situation can have a very different toll on companies. Connect some dots along the way.
- Financial Statements: this applies to the firm’s quarterly news and annual reports. Go to the “investor section” on the company’s website and you’ll find the information you need. You could follow the firm’s quarter conference report too. Maybe not when it’s live but you can then go to their webpage and download the so-called “Conference call” (or the name they’ve assigned for it) for that quarter. Or get the PDF version. Here’s an example of Grenergy if you want to get the idea.
Search for the following things in those reports: if there’s a potential large acquisition or asset sale, the impact of their credit on future growth, and how they plan to increase earnings. You’ll see where the firm stands and what you’re to expect from now on.
Tip 3: Learn Basic Stock Information
The last thing to take into account is to know what to look for when choosing a stock. How can you digest it in a way that makes sense and helps you decide? Let’s look at a few things that can give you a better perspective of what kind of stock you’re getting into:
- Stock volatility: how does the price vary over time? You can look at the short term variability when you compare the highest and lowest price of a stock in a trading day, throughout a week and/or month. A big gap means a big opportunity but a big risk too. If there’s a narrow range, it’s a safer bet (and lesser gains likewise). See how the price range varies compared to the market and its specific industry.
In what end does the stock stand compared to the average volatility of that market? High end (big gain, big risk) or low end (low gain, low risk)?
- P/E ratio: the price to earnings ratio tells you the value of a company and lets you find out if it’s overvalued or undervalued.
1. One way to think about it: You could see at how much am I willing to pay for $1 of the current earnings. If the P/E is 4, I’d be paying $4 for $1 annual earning. This one might be undervalued. If it’s 20, then I’d have to put more money to get that $1. Maybe it’s not worthwhile the trouble, it might be overvalued.
2. Another way to think about it: look at it as how many years will it take to recoup the share price if earnings stayed constant. If the P/E is 6, it will take me 6 years to get my money back given that this fictitious share is at $18 with an annual earning of $3 per share. Or the stock price could be 12 and the annual earning $2. Or any other combination that gives you that P/E of 6.
Note: compare the P/E to the average P/E of the industry in which the company operates. Always put it in context.
- Dividends: the company rewards shareholders by paying them to hold shares of its stock in their company. It’s grounded on the company’s last annual net profit and it’s usually paid every quarter. Typically, firms don’t hand out all the net profits to their shareholders, so you’ll need to see what percentage is being given out. Look for the dividend payout ratio. For instance, Coca-Cola had a payout ratio of 76.67% for 2019.
There are many other stock information that can help you to better surf through the stock market. If you work with any broker company, they’ll give you plenty of information, graphs, and news for a good overview of your portfolio. You’ll sometimes get more information than you can chew, so you could consider having your own summary Excel sheet too. Here’s an example of how might that look like:
This is a nice couple that writes a comprehensive blog on financial independence through long-term stock investment. They lay out what they do so you get a first-hand experience on the matter. If you know Spanish, I’d recommend checking it out.
Here they’ve put some stock measures such as P/E (PER in Spanish), dividend yield (RPD in Spanish), dividend payout, and so on. It’s color-coded so you can easily track it and you can look at each stock on its own. I would’ve organized them by industry so you get a better comparison and overview of that particular market. But anyone can do it whatever way they like really. The important thing is that it has to be relevant to you, otherwise you’re never going to look at it (or keep it updated!).
There are plenty of opportunities in the stock market but it won’t matter if you don’t make informed decisions. Risk is always there, but you can significantly reduce it by learning your way around the stock market.
These 3 tips can help you in this quest, and once you start using them you’ll feel more comfortable with your decisions. Let’s review them:
- Get an Online Tracker: when constructing your portfolio, you’ll want to have a good notion of the ups and downs of your assets. An online or app can do that work for you, and there are plenty of good options to help you out.
- Follow Market Trends: any stock is part of a larger picture so you have to keep in mind how these national and international events influence the stock market. Learn where and what to look for.
- Learn Basic Stock Information: once you learn how to track stocks, what influences their price, you have to be able to know what kind of stocks you have. Here’s where different ratios and formulas come in hand, and you’ll get a better sense your stock’s main features.
It’ll take time to grasp all these things but this will get you a good start.
And remember, smart practice makes perfect.
You might want to check out how your mind can also trick you into poor decision making. I’d recommend you check this article for that matter:
By Pavle Marinkovic on March 24, 2020
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