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Warren Buffet, a well-known and successful investor defines Investing as “ The process of laying out money now to receive more money in the future.” The goal to start investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.
With rising inflation, the money earned (the only source of income is salary) may not match the rise in general prices over the time to sustain and maintain the lifestyle. Also, there will be a time to retire and you will need money for the sunset years. Many invests for their housing loan, children’s education, and so on.
Therefore, investing your hard earned money is important to gain a future higher value on it. The compounding of your investments made will help you to achieve the financial goals to lead a comfortable life.
Now the question arises, how to invest and where? You can invest anywhere that gives returns:
|a. Financial Instruments||b.Non-financial instruments|
|Mutual Funds, and ETFs||Vintage Cars, Technology|
You need to make wise investments where over the time your returns are high and easy to convert in the need of the hour. The stock market (equities) is a lucrative option over cash and bonds for the medium or long term.
How to Start Investing?
Investing for beginners can be daunting but if basics learned then it is not difficult. You need patience, risk appetite and informed decisions to invest in the stock market.
Let’s learn the basics of how to start investing in stocks:
What are Stocks and Stock market?
The term shares, stock or equity means the same and are used interchangeably. Equity is a share in the ownership of the company’s assets and earnings. Higher the number of stock, higher is your stake of ownership.
For example, you own 100 shares of Microsoft (MSFT) on NASDAQ and the outstanding shares are over 7 billion. Therefore, you own a very small percentage of ownership.
However, the ownership doesn’t matter as far as you are able to make profits on the stock purchased.
Stock Market is a marketplace where buying and selling of stocks happen through a licensed brokerage that deals with exchanges and executes the trades on your behalf. It works on demand and supply formula and the fluctuation in the price of a stock is directly related to it.
How does the Buying and Selling of Stocks Work?
As the market works on the logic of demand and supply, it is simple to understand that you buy shares from someone in the secondary market who owns it and is ready to sell it.
In order to carry out these transactions, you need a licensed broker who is registered with the exchanges like the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ).
Select a Broker
There is a cost attached to investing and therefore you have to carefully choose a broker if you have limited funds as the cost of investing shouldn’t be higher than returns.
The best option to invest for beginners is to select an online platform with a minimal expense and no advice offered but the clients buy and sell independently. Examples are Folio Investing, NVSTR, Ally Invest to name a few.
There are other bespoke brokerages like Fidelity Investments, TD Ameritrade, Charles Schwab, Betterment or Future Advisor that offers a wide range of services and tailored advice but it can be a costly affair.
How to open an online account with the broker.
Many brokers do not set minimum account balance, so you can start with a small amount.
- Phone Number
- Social security Number
- Bank account details
Mechanics of stock trade:
- You instruct your broker to purchase a share at a specific price.
- The broker will send the transaction to the exchange floor representative.
- The floor trader will find another trader to sell the share to you.
- Both trader and you agree at a price and the transaction happens.
- The broker will charge his fees for the transaction carried out.
The regular trading sessions on NYSE and NASDAQ are 9.30 a.m to 4.00 p.m from Monday to Friday.
Understanding the Indexes and Exchanges:
The stock market is made up of exchanges like NYSE and NASDAQ whereas there are currently 13 registered stock exchanges operating in the United States.
The New York Stock Exchange is the largest stock exchange in the world by market capitalization. Previously, the trades were mainly done face-to-face on the trading floor.
However, now it involves a hybrid model using people and technology. It lists more established companies mainly blue-chip companies like General Motors, Coco-Cola, International Business Machines (IBM)
It is the second largest stock exchange in the world by market capitalization. All trades are electronically done. It lists all the small cap to large cap and tech companies such as Apple, Microsoft, Dell. Smaller growth-oriented companies and IPO’s are generally found on NASDAQ.
Market indices measure the value of stocks together listed on the exchange. The movement in the market is basically the movement of the index. If the index moves 1% up means the stocks of the index has moved up too.
The market index represents either the whole market or sector-specific like technology or retail. The Dow Jones Industrial Average(DIJA), S&P 500 and NASDAQ Composite are well-known indices.
- Dow Jones Industrial Average(DIJA) – It indicates the value of 30 stocks traded on NYSE and NASDAQ.
- S&P 500 – It measures the value of 500 large cap stocks in one index having common stocks listed on NYSE and NASDAQ.
- NASDAQ Composite: It measures stocks listed on NASDAQ only.
The movement in the market index value is in points. Example, the Dow Jones is up by 100 points today, this implies that the value has increased from the previous day closing to current day’s opening and the value of stocks of the index has also increased.
With the basic understanding of stock market operations and parameters, beginners can start investing.
How is the Pricing set up?
The prices of the stock are derived by the demand and supply rule. If the no. of buyers are more then sell it as the price will go up. If the no. of sellers are more, the price will go down as the seller will be ready to sell at a discounted price for someone to buy.
There are many other factors that contribute to the price fluctuation. If the company shows strong growth and future prospects and is in line with the expected earnings, then people will find the stock attractive and want to buy leading to rise in price.
If the company reports less than the expected earnings, then few people will be attracted to buy the stock and the price drops.
Other factors that can influence the price of a stock are:
- Government policies and political situations
- Future prospects of the company
- Investors and holding pattern
- Economic conditions
If you understand the fundamentals of price change, you can eventually learn the trends in stock price. One cannot time the market but can understand the mechanics behind it.
Stock Quote: Few financial jargons are required to know for better understanding. A stock quote is the current price of a stock. However, when you use an online broker account, you are likely to get a slightly delayed quote. If you are a trader, real-time quotes matters and to get a real-time quote, you need to upgrade your account.
How to choose Stocks and Start investing?
As you have opened your broker account, you can begin buying stocks. Choosing individual stock is not easy, so how to invest as a beginner? The answer is you need to learn and research about the company, growth and future prospects. You shouldn’t follow the herd mentality but take informed investing decisions.
Past performance is not the basis for future success but understanding about company’s past history gives you an idea about the company’s business, growth, and future prospects. If the company has grown and will grow over the period of time, it can be considered as a good long term investment.
Company’s management and holding pattern also is an important factor to consider. Is the management capabilities to lead the company and make good decisions for the benefit of the company?
Check the net gains of the company. The earnings and profit margins should be in trend with the sector earnings and other companies in the same field. The company’s stable growth and consistent earnings is a positive sign.
P/ E ratio:
As the name of the ratio says relation of the price to its earnings. This ratio is considered an important ratio in fundamental analysis. The ratio looks at the company’s current price to per-share earnings of the company.
For example, the current market price of company XYZ is $50 and earnings per share is $2.50, so the P/E ratio is 20. Higher the P/E ratio, better is the future growth prospects.
This is not the ultimate ratio to rely on but can give a better picture with peer comparisons.
- Dividends: A company paying dividend reflects steady earnings. A company should modestly but regularly pay dividends to their investors and also reinvest in the business.
The stock market is a gamble where you lose some and win some and sometimes lose completely. Therefore, experts say, ‘ Never lay all your eggs in one basket.’
Always diversify and invest from long term perspective. If you have short term goals, say 2 years to pay your child’s tuition fees or 5 years for paying the loan then there is no certainty that you will gain the required amount.
But with long term perspective and patience, there are higher chances to earn better returns.
Warren Buffet says, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. The money is made in investments by investing, and by owning good companies for long periods of time.” So start investing in stocks and more importantly, learn about your options.
Diversification of Portfolio
When your portfolio consists of different stocks of different sectors, then you protect your portfolio overall value against the loss of ay particular stock.
If you are investing as a beginner or a small investor who might not have sufficient funds to diversify and invest in multiple stocks then consider the below options:
Invest in Funds and ETF’s:
Markets are unpredictable, so unless you are well-versed with the buying and selling, investing in funds is a safe option.
A stock fund is a collection of stocks from different sectors or high growth stocks or dividend-paying stocks or stocks of the same index. Instead of individual stock investment, you invest in the collection of stocks.
With stock funds, you can have a piece of everything and is a good strategy for new investors.
ETF’s are exchange-traded funds and are traded like stocks on the exchange and tracks the stock index. They own underlying assets (bonds, stocks, gold etc)and divide their ownership into shares.
If you’re looking to start investing, Index funds are also a way to go. A low cost and low-risk way to invest for beginners. It is the easiest way to diversify and spread your risk.
Say, for example, S&P 500, is a fund that holds 500 largest companies in the U.S which includes Coca-Cola, Pepsico, Johnson & Johnson, Apple and many more.
The rate of return on each index fund is based on the performance of the companies in it. Say the index has 4 companies, two goes up 6% and two goes down 5%. Still the overall value of the fund is up. You need to leverage it with each other’s performance.
An index fund is considered a form of passive investment where you don’t require any recommendation from an analyst. You can buy the index the way it is. It is low cost because no buying, selling or following a particular share is necessary.
Quoting the investment genius Warren Buffett again, “Costs really matter in investments. If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement.“
So be ready to start investing as it is never too late. “The best time to plant a tree was 20 years ago. The second best time is now.”
Good research, long term commitment, and thorough decisions and discipline in investment are key ingredients to start investing.
- 1 How to Start Investing?
- 2 What are Stocks and Stock market?
- 3 How does the Buying and Selling of Stocks Work?
- 4 How to choose Stocks and Start investing?
- 5 Final Words