As a follow up to my rant a few weeks ago about women not investing, I figured I should put my blog with mouth is and at least have some simple instructions on how to get started.
I am not a financial planner by any stretch of the imagination, but I have common sense and a somewhat informed sense of the basics. So please don’t sue and do your own research before you hand over your money to anyone. I am not promising that you will learn how to pick stocks or learn how to invest by reading this series.
I am promising that it will give you the basic overview if you have never thought about going at it alone. Learning to invest isn’t difficult, it just requires patience and a bit of time to sit down and research.
But before you start picking stocks, you should figure out your financial situation. I am hoping that if you are reading a personal finance blog, you have some inclination to either assess, or fix your financial situation. I am sure everyone knows that already. Today we are going to focus on picking stocks.
Although many people are aware that investing a portion of their savings is one of the best ways to achieve financial freedom, they don’t know how to get started. The first step to investing is learning how to perform due diligence when it comes to picking out companies and stocks to invest in.
After all, the point isn’t to lose money before you even get started. While this isn’t a fast, easy task, the process can be sped up by doing market research through your TD E-series account, which offers full access to independent research reports. As you can tell, I really believe that the E-Series is a great beginner tool.
That being said, it’s important to remember that nothing is guaranteed in investing – and there’s always the potential to lose a lot more than you started with. This is why it’s vital to learn how to research stock companies and make your own predictions.
What to Look for in a Potential Investment
In a nutshell, you will be using the following criteria to drill the list down into a smaller pool of stocks to choose from:
- Price-to-earnings ratio
- Overall earnings growth
Remember, there’s more to investing than just comparing the above three figures – you’re going to want to take a look at the overall picture once you’ve narrowed your choices down, including, but not limited to, the market cap, relative strength and the company’s return on equity, as well.
Additionally, you will also be looking for the following:
- Are the stocks private or public? Before going any further in your research, make sure you determine if the company’s shares are public or privately owned. The difference between the two is huge, and you most likely won’t find very many private shares to invest in. In order for a person to purchase private shares, they have to be invited by the company. On the other hand, a public share is one that anyone can invest in without invitation. Hershey’s Chocolate is a good example of a company with public shares.
- Is the company buying back shares? A company that buys back shares, and thus reduces the pool of investors, is showing a sign that it cares about its shareholder. Think of it this way: the fewer shareholders there are, the more money you get back on your investment because there are less people to share with.
In order to narrow down your choices even further, you will then need to pick apart the company’s cash flow statement, income statement, and balance sheet – all of which are available through an online TD E-series account.
These will give you a better picture of their stability, like their earnings and revenue growth, as well as any outstanding debt that they have incurred.
Characteristics of a Bad Investment
While investing in stocks should always be looked at strategically, and definitely not as a guarantee, there are a few signs that immediately point to a poor investment choice.
As a general rule, you should try to stay away from a company that doesn’t work toward increasing the amount of money each share holder receives.
Additionally, if they don’t have a long track record, then you should probably sit back and watch to see how they do before dumping a lot of money into shares.
Is there an evergreen market demand for the company?
The worst type of investment that many beginning investors fall into the trap of making is referred to as a “passion investment.” This means that are solely choosing to buy stocks from a company because they know or like the brand. Although there’s nothing wrong with being a loyal customer, this is definitely not the way you want to throw around your investment capitol.
You should always make sure that the company you are looking into has products or services that are something that people will always be in need of. Or in other words, their products are considered evergreen.
Additionally, does the company have future plans for more useful product or service lines? RIM would be a great example of this. Consumers lose confidence in a company when they notice that the level of innovation is stagnant, thus the share prices drop.
The most important thing to remember about investing is that it isn’t a means to instant riches. Instead, by investing your money smartly, you are slowly building up an investment portfolio that will hopefully be able to carry you through retirement.
However, before you jump in and start picking out stocks for your newly opened TD E-series account, it’s a good idea to learn more about investing through something called a mock portfolio – which we’ll talk about in the next article.