Investing in the stock market and building a portfolio isn’t as intimidating as you think it is. Lucky for you, I’m here to help you understand the beauty behind investing (along with the financial jargon we’ve all heard but barely comprehend), in addition to providing you with the knowledge to turn your money into even more money.
1. Create a budget and highlight your objectives
If your investment plan consists solely of stock-buying, do yourself a favor and trash that plan right now. Like we learned earlier, stocks are high-risk, and building your entire portfolio out of company stocks will probably result in lots of tears and wasted money, which is all bad. Thankfully, we can compromise. I was told that keeping individual stocks as 10% or less of your portfolio is the way to go. Why? Earning returns via partial ownership of companies has high-risk concentration since investment values can drastically change anytime.
2. Don’t shy away from what you love and do your research
One of my favorite parts about investing is that you aren’t limited to investing in companies that you don’t care about. Invest in a company that you are familiar with. Take me, for example: I absolutely adore shopping, and one of my most favorite stores to shop at is Nordstrom. I love the customer service and I know that everything I purchase in the store is of some of the highest quality in the market. Thus, Nordstrom makes for a perfect candidate for me to invest in, not only because I trust it, but also because I understand the business.
You want to choose companies that you strongly believe have a competitive advantage over a long period of time. Do you trust the company’s leadership team? How much of the industry does it compromise? Is it exploring new markets, and if so, how successful is it? You can’t become a smart investor without educating yourself first.
3. Deepen your research
Clearly, research is of great importance in the investment process. Once you’ve selected your industries or companies, you’re must delve into and navigate through various financial statements in order to make sure you maximize your returns. Keep an eye out for several terms that you can identify between companies that will help you better understand its performance as a whole. Here are a couple terms you should familiarize yourself with to start you off:
- Revenue growth: This illustrates a company’s sale increases and decreases over time. It is typically used to measure how fast a company is growing, and whether or not it has the potential to continue earning revenue on a positive slope. This is different than profit since it doesn’t account for expenses, debts, additional income streams and operating costs.
- P/E Ratio: This is short for price earnings ratio which can be calculated by dividing the price per share by earnings per share. It helps investors see how much they pay for each dollar earned by the company. The lower this value is, the “cheaper” the stock, but that isn’t necessarily a good thing. A low P/E can be indicative of a lack of credit a company is receiving from investors or simply that the company lacks better management.
4. Gather up your investment tools
Once you’ve found your stocks and done your research, it’s time to invest, but not without your investment tools. Your biggest tool is probably going to be a broker. They are well-versed individuals that will execute trades and buy and sell your orders for stocks and other securities, all for a price, of course. However, if paying a hefty price for a broker is not in your comfort zone, don’t you worry because that’s what the discount brokers are there for. They are typically individuals or firms that charge reduced commissions or fees for making trades; however, they typically do not provide personalized investment advice, hence why they are discounted. Charles Schwab is a great example of a discount broker. Full-service firms like Morgan Stanley may require you to pay more from your pocket, but you can be sure to get top-notch advice and recommendations to fit your level of knowledge and expertise.
5. Be prepared to sell
Like I have said a million times already, investing in stocks is risky business. You have to make sure you know what’s happening within the market at all times, that way you sell your shares when you need to. The prospect of not knowing whether or not you will regain the money you’ve invested is quite terrifying, but the knowledge you will gain during this process is priceless.
So there you have it: a condensed explanation and guide to investing. As long as you understand these basics, you are good to create your diversified portfolio and grow your financial expertise along with your wallet.
Happy Investing!
