In this guide for dummies, we will cover topics: how to invest and where to invest in stock market.
The defining feature of investing is to put your money at work and expecting it grows with time. When you invest your money, you are not expecting it to get doubled overnight, investing is a slow and gradual process. Investing is like trading your money now for more money in the future. In this article, we will be discussing stock investing. So, let’s see what stock investing means.
The stocks represent an ownership share in a company. When you own stocks of a company, you basically own a small portion of that company called a ‘share’. The words stock and share can be used interchangeably, but the latter word is a subset of the former one.
The person who owns the share of a company is called a shareholder.
Why a company issues shares? A company issues shares out of financial needs to raise funds for the maintenance and growth of the company. This is a easy way for companies to generate cheap capital. These stocks are purchased by investors who seek to make profit out of the company’s net profits. So, when they invest in a particular stock, they are investing their money in a particular company.
Depending on the type of stock in a company you get paid. Generally there are two ways you can earn through stocks.
1. You purchase stocks of the company which is expected to grow because when a company’s value increases, value of its shares also increases. So, you can sell those shares for a higher price you paid for them and hence earn a profit.
2. You purchase stocks of a company and get paid through dividends, dividends are the distribution on company’s profit to their shareholders. You get dividends on a regular basis, and they can become a great source of passive income.
Stocks are of two types: Common stocks and Preferred stocks.
The key difference between common and preferred stocks is that common stock comes with voting rights. These voting rights are used to vote the board of directors and corporate policies, whereas you don’t have any voting rights in preferred stocks whatsoever.
Stockholders of preferred stocks are paid regular and calculated dividends in contrast to common stocks where you may or may not get dividends. In case of liquidation of a company, preferred stockholders have a priority over common stockholders, which means they will be paid before common stockholders and common stockholders will be paid only if there is something left.
It is observed that beginners are often afraid of investing their money in stock markets. This is because of the risk factor involved in stock market. But, once you understand stock market, it can do wonders for you.
Stock market is a place where buyers and sellers meet to trade stocks, bonds and other financial equipment.
What are the best stocks to buy for beginners?
Before you know the best stocks to buy for beginners, you must know the stocks a beginner should not purchase. Stocks a beginner should not opt for are-
- Penny stocks
- Cyclical stocks
- New rapidly growing companies
- Investing everything in a single company
All these above mentioned stocks might work for a professional but for beginners these are too risky, so these should be avoided at all costs.
Now, lets discuss which stocks a beginner should buy and why?
1. AMAZON (NASDAQ:AMZN)- Do we even need to explain why this company. Amazon is the clear leader in its field and it does not stop there. With its new segments like Amazon prime, web services and even in the whole foods market. Amazon alone covers nearly half of all U.S. e-commerce sales, and amazon is expected to remain in the forefront of e-commerce. Amazon has grown to become a multi-industry with its roots expanding across the internet.
2. Visa (V)- Stability and growth potential of this stock makes it beginner friendly, even though it has a strong primary competitor Master card (NYSE:MA). With high profit margins, this company is a no joke.
3. Microsoft (NASDAQ:MSFT)- Just like amazon, Microsoft has very few competitors in the market. Its strong business model can withstand the test of time. This company’s brand name, efficient scale and patents are enough to discourage competitors.
4. Berkshire Highway (BRK.A, BRK.B)- Berkshire highway is a multi-industry company with its roots in more than 60 wholly owned businesses. This company’s management team includes Warren Buffet, who is one of the greatest investors of all time.
5. Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG)- If you haven’t heard this name before, it is alright but you must have the name of its main subsidiary that is Google. One of the dominant leaders in its field, likelihood of google being replaced by some other company is almost unimaginable. According to Forbes, Google has an estimated value of more than $130 billion.
6. Procter and Gamble (PG)- With a strong dividend track record you can’t go wrong with this company and now they have even announced an increase in the payout.
7. Apple (NASDAQ:AAPL)- This stock has proven to be one of the best, if you check its balance sheet. With its sustainable business model and an entire ecosystem of products available, Apple has become people’s choice.
8. AT&T (NYSE:T)- AT&T is one of the leaders in wireless communications, this company has an amazing track record when it comes to dividends. The prospect of upcoming roll out of 5G is only expected to be positive for this company. The dividend AT&T distributes to its stockholders is well-above average and from the past 34 consecutive years, the payout has been on the rise.
9. Intuitive Surgical (NASDAQ:ISRG)- One of the leaders in healthcare, Intuitive Surgical develops, manufactures, and markets surgical robots. This company is famous for their da Vinci surgical system, as more and more applications are found for this technology, company’s value is only expected to grow.
10. Johnson & Johnson (NYSE:JNJ)- Johnson & Johnson’s family of consumer companies offers the world’s largest range of consumer healthcare products. They are also one of the leaders in their field.
Even though all these stocks are beginner friendly and are expected to perform well especially in the long term, it is still advisable to research on each before you invest any money in these.
Most Important Points about Stock Investing
Here, we have listed the most important points you should remember before making an investment in stocks.
• While stocks can be extremely beneficial in the long term, the risk factor can not be ignored. Volatility of the stock market in short term can be disastrous, so if you are expecting great returns in short term, stocks might not be the best option for you.
• We just can not emphasize enough how important it is to diversify your portfolio. Although there is no fixed number, a portfolio of 10 or 11 different stocks is considered strong.
• Before making any decision make sure you are confident about it. Do your research, take your time and only then come to a conclusion.
• It is always advisable to invest in different stocks rather than investing everything in a single stock. Even if you are sure about a stock don’t go all in because future is uncertain.
• One mistake beginners make is that they will invest in a stock they don’t understand, this is generally done because of someone’s raw advice. So, this is a fundamental rule to only invest in the stocks you truly understand because if you can’t understand the stock you will not be able to track it.
• Always make realistic goals and expectations, do not daydream of becoming a millionaire in months. Stay prepared even for losses because even professional investors don’t always make profits.
• If you purchase a stock when the company is not making a profit, you are not investing, you are only playing a financial gamble.
• Even when you buy a stock and hold it for long term, don’t put it aside, keep monitoring it regularly. You can even consider selling them if the general economic conditions have changed.
• When you invest in a stock for long term benefits, be patient . Don’t exit just because the market goes down, this is the general rule of market “the harder it falls, the higher it bounces”
• Avoid penny stocks, you are not supposed to become rich by purchasing a $5 stock. When you see market rumours or WhatsApp forwards remember they have no credibility attached to them.
• Avoid making decisions based on your emotions or don’t make s decisions because everyone else is making the same. Use your intelligence, don’t reach conclusions either early.
• If you have a big debt to pay or you are thinking investing borrowed money, think again this might be disastrous. Your financial condition should be stable and you should invest only a portion of your earnings.
• While stocks are a great way to invest your money and build your wealth, remember stocks are not the only option. Investing in real estate or bonds are similar options as well. Even buying precious metals and foreign currencies can be a viable option, so consider them as well.
Checking Important Company Fundamentals before Investing in a stock
Before you invest in a stock make sure to check the fundamentals of the company because as we mentioned earlier, you should not invest in stocks you don’t understand, when you don’t understand the industry, when you don’t understand the stock, you will not be able to track it and hence you may fail to exit on time and make a loss.
So, you should do a fundamental analysis of the stock you are about to invest in. The term Fundamental analysis means to view any data which is expected to impact the price or
perceived value of stock. This includes return of assets, company’s growth, cash flow and conservative gearing.
This is why before investing in a company you should check below mentioned fundamentals of a company.
➢ First step is to do the initial screening of stocks
With the initial screening of stocks, you should first find out the company you should invest in. After finding the company that is appealing to you, look at some of its financial ratios.
- Liquidity Ratios
- Profitability Ratios
- Leverage Ratios
- Price-to-earnings (P/E) Ratio
- Return to Equity (ROE) Ratio
- Debt to Equity (DTE) Ratio
- Price-to-Earnings-growth (PEG) Ratio
- Payout Ratio
- Second step is understanding the company’s overall approach towards business, their decisions, their policies, who is the CEO of the company, all these factors should be under your concern.
- Check the Network effects of the company, it said that “your network is your net worth”, more the number of people using a product or service, the more valuable products and services become.
- Your next step should be to study the track records of the company, check how the company performed in the last 10 or 20 years. Determine how they will perform in the future based on their past performance.
- Look for the sector leaders because they are the ones which makes beginner friendly stocks. Most beginner friendly stocks are either company leaders or close to the leaders.
- We earlier mentioned, that you should not invest if you have a big debt to pay, this same aspect applies to company as well. Check whether the company is under a big debt or not because in the future if company becomes unable to repay the loan, it would be liquidated and you might face a loss there.
- Take a look at the direct competitors of the company, how they are performing, how their performance is going to impact your selected company.
- Analyse the future aspect of company, current condition of the company is important but you are only going to benefit from its growth in the future. Therefore, invest in a company with strong future prospects.