The original idea for this post started with a rant I wrote about women not investing enough. I am now continuing in my series of Learning to Invest.
Incase you missed the first 2 parts, here they are:
Learning to invest involves a lot more than someone simply telling you which shares are most likely to end in good and bad investments. After you move past using a mock portfolio, you will quickly find that while it seems pretty straight forward in theory, actually learning how to predict the direction the market will predominantly move in is considerably more difficult than it sounds.
Before you continue any further, here is a brief list of some very important terms you should become familiar with:
- Buy, Sell and Hold: These are exactly what they sound like – you will start off buying shares or mutual funds, monitoring them over a period of time, and then deciding whether you would like to sell or hold onto them. During the course of your investing career, you will slowly start to learn how to identify when it’s the appropriate time to execute each action. The only way you can learn how to do this is through trial and error; no one can accurately make these predictions for you.
- Balance Sheet: This is an important part of your market research, and it’s where you will learn more about the company as a whole. For instance, in a company’s balance sheet, you will find how much debt they owe, their behavior of their inventory, and of course their cash flow, as well.
- Earnings Growth: The earnings growth is also a pretty straightforward term – it’s simply a measurement of net income. Oftentimes, investors will look at the earnings growth over a period of several years to predict the future numbers.
- Mutual funds: In the simplest terms, a mutual fund is a collection of assets in which you, as the investor, have the ability to withdraw from at any time. As a beginner to investing, you will most likely do better putting your money into mutual funds than you will single stocks. While there is still fluctuation in a group of shares, they are less likely to experience the extreme up-and-downs that single stocks can.
- Single stock: Again, this is exactly what it sounds like – an individual stock that you are investing in – which is often very difficult in terms of predicting its behavior. In general, it’s usually advisable to avoid single stocks when you’re first learning to invest with a real portfolio. However, it is a good idea to keep practicing with them in your mock portfolio so that you get the hang of predicting their behavior over the course of 52 weeks.
- Price-to-Earnings Ratio (P/E): To determine the P/E of an entire company, or even a single share, you will need to first find out what it’s earned over a 12 month period after taxes. Once you have this number, you will then need to divide the market capitalization by the after-tax figure that you determined. This is an equation that you will need to learn how to use in order to determine the overall expense of a stock or investment. As a general rule of thumb, try to avoid stocks that have a high P/E when you’re first entering the stock market; the higher the ratio is, the more likely you are to lose money on it. Of course, this isn’t always true, and some people experience an enviable rate of success with so-called “risky” investments. However, until you are comfortable predicting market behavior, this is a poor choice for your first investment.
Important Tips about Choosing Your First Stocks
- Don’t base your decisions on the price. Similar to many other aspects of life, a cheap price doesn’t always translate into a sound decision. On the other hand, an expensive price tag isn’t the best way to determine value, either. The only way you can determine whether or not you should invest your money into a share is by crunching the numbers yourself, and taking the time to dig deeper in the history of the company.
- Take the time to do your own market research. Although you shouldn’t be afraid to ask for advice, don’t forget that relying solely on other people’s recommendations will only lead to failure. No one can accurately predict the stock market; you can only try to make sound judgments based on past behavior.
- Remember to check the highs and lows. Speaking of making decisions based on past trends, make sure you always take the time to analyze the full picture. For individual stocks, you should at least go back one full year because they fluctuate a lot.
On a final note, when you’re learning to invest, it’s important to fully assess your risk. You should never go into an investment assuming that you’re going to walk out with fuller pockets – even though you will be purposely weeding out the bad investments for the ones that have a higher potential for being profitable. Instead, choose the amount of investment capitol that you start with by examining how much money you are prepared to lose.