For the growth of wealth, it is essential that you invest your money. One of the best ways of investing it is by investing in stocks. You put your money in companies that you think will do well in the future. If your research is sound and the said company does do well, the price of your stock automatically soars, leading to a soaring in your wealth too.
Stock Investing Basics
When you buy a stock of a listed company, you essentially buy a small share of ownership in it. Companies ‘go public’ when they sell the private ownership through a ‘Initial Public Offering (IPO)’ of shares to raise capital. The managerial board handles day-to-day affairs of the company. The stock holders benefit from the raise in stock prices which accompanies a good quarterly performance of a company.
To make profit in stock market, the basic idea is to ‘Buy Cheap and Sell Dear’. Sounds simple but it takes a lot more than just quarterly profits to decide which stocks to buy. For buying stocks online you need a stock trading account to operate in the stock exchange. You may go for buying stocks without a broker, on your own, or with a broker. You may directly buy stocks or go for mutual fund investment institutions that pool in funds from millions of investors, to buy stock collectively and share the profits. However, if you want to really learn stock investing, it is best to buy and sell on your own.
Points to Remember
Buying stocks for beginners can be pretty exciting; but there is a need for caution and discretion. Don’t expect that you will make profits right at the start. When buying stocks for the first time, go in with an attitude to learn, rather than aiming at immediately making profits. Value your own analysis of company performance rather than speculation or hearsay. Here are some things to remember.
Don’t Put All Your Eggs in One Basket
It is not advisable that you invest all your savings into stocks. Invest only a fraction of it at the start. The more share of savings you invest, more is the risk. Take calculated risks and allocate only fractional funds at the start. That way you eliminate the possibility of large losses and invest while keeping yourself financially secure.
Start Out Small
One good piece of advice for beginner investors is to start out small and test their own judgment in the small cap stocks. There is a gradation of stocks according to value ranging from small cap, mid cap to large cap. Beginners should first test their strength in small cap as they require even more judgment. Of course, the large cap stocks are more stable as they belong to multinational behemoths and they cost more. One must buy stocks that are proportional with one’s buying capacity.
Avoid Buying on Margin
There is a facility of buying on margin, that lets you buy stocks using borrowed money from a stock broker. When investing in stocks for the first time, don’t start out on a loan. Buying on margin does give you an opportunity to maximize profits but it comes with high risk, which is best taken by experienced investors with a large capital base. It’s not recommended for beginner investors. You need to understand how to play the stock market, rather than letting the market play you.
Single Out Best Performing Stocks
Study history of stocks available on the market and single out the bullish stocks that have been performing consistently. Also note emerging stocks of new companies on the scene that are still starting out. The best stocks to invest can only be decided after thorough research.
Study Balance Sheet and Company Performance
Out of this selected stock list, before you go for buying, you must separate the ones that have a good performance potential. Get information about company performance and study the balance sheets of these companies. Study the sales revenue history, company earning record, debt to income ratio and liquidity of the company and price/earnings ratio of the company stock. Understand the businesses that they are running and the potential it has. Stock research and company research is the most crucial part of stock investing homework.
Don’t Invest In What You Don’t Understand
Back up the stocks whose business you understand and you think has potential. Invest in stocks that you think are undervalued. Buy such stocks and hold them till they attain their ‘true value’. This is the gist of ‘value investing’ strategy, as opposed to speculation based investing.
I would personally suggest you to study stock investing thoroughly before making a move in the stock exchange. A good place to start is Benjamin Graham’s ‘Intelligent Investor’, that teaches a sound investment strategy, based on analysis of company performance and balance sheets, rather than speculation. Learn from wise and highly successful master investors like Warren Buffett about how wealth is created through investment. There is no substitute to experience when it comes to stock investing. Chances are that you won’t make a killing in the stock market with your first venture and it may be a lot of time before you are consistently successful. However, if you make sound decisions based on facts, rather than speculation, you are bound to emerge richer eventually. It’s all about deep analysis, timing and an abundance of patience.