Warren Buffet defines investing as “…the process of laying out money now to receive more money in the future.”
Investing is an art of earning money from money. The prime goal of investing is to put your money to work in one or more places with the expectation that it grows with time. In this article, we will cover all about investing in stock market.
“Stock” if you ever had a thought of investing, the word stock must have crossed your mind. A stock is an investment that represents a share in company’s earnings and assets. What is a ‘share’ then? (Shares) indicates the smallest portion of ownership in a particular company, they are a subset of stocks. When you purchase a stock, you are essentially purchasing a small fraction of that company.
Why do people purchase stocks?
Stocks are an investment, when you purchase a stock you are hoping for the prospect that whichever companies stock you are buying the value of that company goes up i.e. it grows. This is because when value of a company goes up, the value of their stocks also goes up. Now, you can sell these stocks for a higher price than you actually paid when you bought them in the first place and hence making a profit. Stocks are primarily of two types: Common stock and Preferred stock.
The key difference between common and preferred stock is that the common stock comes with voting rights in contrast to preferred stock where you don’t have voting rights whatsoever. These voting rights are used to elect the Board of directors or to decide corporate policies.
When you hear people say they purchased stocks of ‘X’ company, they are probably referring to common stocks. In fact, most of the stocks a company issues are common stocks.
There are two ways to make money from stocks.
First is you purchase a stock which is expected to grow in upcoming time and when its value grows, you sell it for a higher price and make a profit in short term.
Second, you purchase stocks to hold for long term and are paid by dividends. Dividends are distribution of companies earnings to their stockholders. You can purchase stocks of a company which is expected to do well in the future and can get paid on a regular basis through dividends.
Why do company issues stocks? Mostly, companies issue shares out of financial needs. To finance and grow the business, they issue shares for investors who tend to invest their money. So, if a company grows it is beneficial for both the parties: company and stockholders.
Now, when you have a basic idea of stocks, let’s move forward.
Should I Invest in stocks?
In today’s modern era investing has become a must rather than a choice and this is because of inflation. Inflation is the increase in price of goods and services over time and hence atrophy in the value of money.
So, in order to outpace inflation you have to invest your money because if you keep it in your home or in your bank, value of your money is decreasing constantly. Outpacing inflation is not the only reason you should invest your money, but also to have a secure and sound future. You need money for unforeseen difficulties that might be waiting for you in the future.
What about the risks?
Yes, it is true that here are some risks involved in investing money. First, if you make a proper plan and invest your money smartly, chances are that you would not lose your money. Second, the consequences of not investing money are far worse than not investing. The long term benefits of investing certainly outweighs the risk of investing your money.
If you wish to have as secure future, investing your money in stocks can be a smart decision while being wary of the risk factor involved.
This might be astounding to you that if you had made an investment of $10,000 in S&P index 50 years ago, you would had been the owner of approximately $1.2 million. An intelligent investment in stocks can be a life changer and it had been a life changer for many, but only if you make a mindful investment.
Before you invest your money, there are some points you should consider.
1) While stocks being a great strategy for you to invest your money, stocks are proven to give handsome results mostly in the long term. So, if you want to make quick money or you have a desire to invest for short term, stock market may not be the best choice for you.
2) Decide how much you want to invest, don’t invest the money you are going to need in the next few years. It is a better idea to keep investing small portions of your regular income, while having the money you might need in the upcoming rainy days.
3) We do understand that the risk factoring of investing in stocks can be daunting for you, to minimize the risk you should invest your money in different stocks rather than going all in in a single stock.
4) It can be tempting to invest all your money in one stock and day dream of huge returns but it is always advisable to diversify your investments.
5) If you have the desire to research and invest in individual stocks, you can go for it. Although risk factor is greater, the rewards are also greater. It is perfectly possible for a smart and patient investor to beat the market by investing in a single stock.
6) If you want to reduce the risk further, you can invest in mutual funds. I am sure you must have heard about this. These mutual funds let you purchase small portions of many different stocks in a single transaction. Mutual funds are also known as equity mutual funds.
7) While stocks are one of the most popular ways of investing money, remember these are far from being the only option. There are numerous other options you can take advantage of. Purchasing real estate or investing in bonds can be a smart strategy as well. Some other investing strategies can be buying precious metals and foreign currency. All of these investments have different risk to reward ratio, so make sure to research each one thoroughly before investing in any.
Final thoughts
If you wish to have a secure future in the next 10 or 20 years, you should definitely invest in stock market. Stock market is full of ups and down, so if you have the patience and courage to go through these phases and you can see the bigger picture you can go for it whereas if you want returns in near future stock market might not be the best option for you.
What are the best stocks to buy for beginners?
So, if you have made up your mind to invest in stock market, Congratulations! You can now start your research on stock market. One piece advice for you would be to go-slow and steady and not to rush.
As we know by now those stocks are a great way to build wealth over time, but not all stocks are beginner’s cup of tea. Before we move on to what are the stocks a beginner should opt for, let us tell you what stocks you should avoid, Rapidly growing companies, penny stocks and IPOs (Initial public offerings). These stocks can be good for a professional or experiences investor but for mere beginners these are not recommended at all.
Now, lets move to the stocks a beginner can opt for.
• Amazon.com (NASDAQ:AMZN)- Amazon being in the forefront of the biggest companies on the planet. It is a great beginner friendly stock for some obvious reasons. Firstly, as I mentioned it’s one of the largest companies in its field. Amazon’s continuous growth and development have been amazing and it is expected to grow with same pace. Amazon’s attitude to trying new segments like amazon web services, amazon prime and even whole foods market makes it a real killer.
• 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.
• 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.
• 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.
• 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 payout.
How do I begin to invest in the Stock market?
By now, you must be thinking “ OK, now I know a lot about stocks, but how do I actually begin to invest in stock market”. Well, now we will tell you just this.
Step 1. Define your goals
Before you step into the investing world you must be absolutely sure in your needs.
• Ask yourself, can your current financial condition facilitate a new activity like investing? Your financial condition includes all of your earnings, debts and even the money you may need in the near future.
• Firstly, Make sure you have a stable source of income. And no big credit waiting to be paid.
• Try to ask yourself, can you put some money side for rainy days and still have some to invest?
• And is there any event about taking place in the near future? like a new family member arriving or a marriage. Can you handle those and still invest?
If answer to these questions is positive, let’s move to the next step.
Step 2. Research on stocks
If you have decided to invest in stock, there is an endless ocean to lean from. Read as many books as you can, some books you can read are “The intelligent investor”, “one up on the wall street” or “The little book that beats the market”. Dive in and learn about stock market, learn about all the risks and challenges. Spend a lot of time researching and understanding stocks so no one can take advantage of you.
Step 3. Open an investing account
You can open you investing or brokerage account through a robo adviser or if you want to go with a more traditional method you can contact a broker, both will charge you a little fee.
If you want a little help you can go with the robo adviser or if you want to go with the broker, there are two types of brokers: Full service brokers, discount brokers. Full service brokers provide trading, research and advisory for stocks and currencies whereas discount brokers just provide the trading facility. Note that Full service brokers charge a higher fee in contrast to discount brokers.
Step 4. Set a budget and start investing
The question of how much you should spend on the stock? Depends on the stock you are opting for. If, you have a low budget you can either go for ETF (exchange trade fund) or you can just go for mutual funds.
Choose the ideal one for you and start investing, making your portfolio diversified should be your goal. If, you are going for mutual funds this is already taken care of.
Step 5. Track you Stocks
Use a simple excel or spreadsheet to track your stocks and keep updating yourself.
As your stocks slowly grow and you become comfortable with market, you can gradually start investing in individual stocks.
Step 6. Be patient
Investing in stocks won’t make you a millionaire overnight, so be patient and enjoy the journey.