Be Thankful for Your Options
When I entered the workforce in the 1970s, buying stock was a rich man’s game. You had to buy at least 100 shares of stock through a commissioned broker. The transaction could cost you 5% or more. That meant you had to realize a 5% gain just to break even.
Now, you can set up an account to buy stocks, as an individual, with no commission or transaction fee. For that you should be very thankful and very cautious.
That also means the research on any stock and its potential growth is up to you!
Why Buy Stock?
There are several philosophies related to why you should buy stocks. Some are based on ways to drive short-term gains. Some are structured to buy and hold longer-term. However, there are many strategies that fall in between these opposing concepts.
With the ebb and flow of business success and failure, often referred to as the business cycle, the value of company stock will vary. Managers make decisions in the hope of helping their company grow. Some plans go well, and some plans do not, depending on how well the assumptions worked out.
All those factors can make investing in stocks a risky consideration. However, you can modify risk by doing some research on stocks for companies of interest.
Lots of Baskets
The adage, “Never have all your eggs in one basket”, applies to investing. Most brokers will advise you to diversify your holdings. In other words, you should allocate your stock purchases between different industries and various company sizes.
There are numerous examples of folks who invested in just one company because it was so successful only to lose it all when the company failed to meet expectations or bad decisions led to bankruptcy and a dramatic loss in stock value. I knew a guy who had all his retirement fund in one stock, which filed for bankruptcy, causing him to lose it all!
Vary your investments to limit your risks of loss. However, always allow for a small percentage with some risk with greater potential for growth.
Pay Attention to Numbers
There are certain numbers which can help you see when a stock may be a good buy as an investment. Realizing that an investment is made with the hope for a return on the money you gave the company to use.
Remember, your stock purchase adds to the Asset balance of that company and shows your investment as part owner in the Equity portion of the Balance Sheet. That is my accounting background coming out, but that is a fact. You become part owner, although often a very small part.
The health of a company is reflected in various numbers. The risk of loss is much lower when a company has a good cash position and a good cash flow.
Like personal finance, we are much better off when we have more assets than debt. One number often referred to in financial analysis is the Current Ratio, the Current Assets, like Cash and Inventory, compared to Current Debt which is due in the current year.
A Current Ratio of 2 to 1 is considered good. More is even better. Though few investors look at the balance sheet, this is a good way to observe the health of a company.
A second number to be aware of is the Cash Flow Statement. This report shows if the Sales will more than cover the expenses. And the key feature is to see if the Sales on credit will be collected in time to pay the expenses incurred, when due, including paying for the inventory sold.
Like you and I, the company needs to cover its operating expenses. And you need to be sure the company is not incurring expenses faster than their sales can raise funds to pay for them.
That sounds like my concern over you using that credit card!
Facts Before You Act
If you have learned to save enough to invest, then you are beginning to build a better mindset for money. I commend you for that!
However, you need to value the effort it took to get there and that you can learn to do even better. It will be your responsibility to learn all you can to protect your assets, your savings and investments, so they can provide you a better future.
Your education will include research on who to listen to, who to read about, and the simple facts surrounding wise investing. And please note, fast growth is rarely secure growth. So, be cautious, experiment with small investing amounts to add hard knocks to your learning experiences.
Your confidence to invest more will come with greater understanding of the process to qualify your investments.
Put Some Money at Risk
Early in your learning process, you will have very little to work with. However, the good news is that you can buy in small quantities, as in the number of shares. And there are plenty of stocks which sell at a low price. I started with stocks selling for $30 or less and rarely bought more than 5 shares.
The key point to remember in trying to build a good mindset for investing is to be willing to lose it all for the understanding you can gain from the experience. The market shifts a lot due to emotional decisions with investments. You must learn to separate your money from your emotions, even if you get a large return!
Build a Strategic Plan
By using some reasoning based on observations, reading up on the financial markets to gain some confidence in potential growth, and listening to advisors who make a living trading stock, you can put much of what you hear through a filter to gain what will apply to you as a novice investor.
Most advisors are trying to sell a service to clients with large amounts to invest. The cost of their service will be more than you are able to invest. Although a short-term subscription to a service might give you some insightful information. However, unless you do some outside reading and study their website, you may be wasting your money.
My own conclusion is to build a way to follow your investments and learn how to follow your investments and learn how to use your broker site, such as E*Trade, Fidelity, Charles Schwab, Robinhood, and many others, as noted in “Best Brokerage Accounts for Stock Trading”, a blog post on Nerdwallet.com.
There are thousands of stocks for sale on the New York Stock Exchange and NASDAQ, alone. There are stocks and bonds, along with various ways to trade. My advice is to keep it very simple to start.
Decide on an industry and look for companies in that industry. Never buy stock in more than two companies in any one industry as you begin your journey in investing. Once you have stock in at least 25 companies, hopefully across 12 to 15 industries, then, you can stop to reflect on what you have learned.
The accumulation of many stock purchases will take some time, especially if some of them appeared to be a mistake and you had to sell the stock. That is the voice of my own experience.
A Format to Evaluate Buying Decisions
You may not have a lot of information on a company’s stock trade or the time to do a lot of research. So, before you rush to buy stock, I would suggest you review some information which should be available to you.
I would suggest you structure a spreadsheet or, if you prefer manual records, put some columns on a sheet of paper with as much of the following data as you can find:
- The stock ticker initials
- The company name.
- The industry.
- The current stock price.
- Look at the price history chart to see if the trend is up or down. Compare that to the market moves.
- Do they pay dividends? That usually means they make enough to share as goodwill to investors.
- What are the EPS—Earnings per Share? Another indication of stability, if the number is high. New technology companies can take a long time to build profits. That makes them a high risk early on with high potential later. Those stocks should be a low percentage of your portfolio.
- What is the volatility index, known as Beta? That indicates how the stock price follows the daily market trends.
- Any significant news items, such as a new product launch, lawsuits, etc.
Particularly if you are a little hesitant to put your hard-earned savings into the stock market, I would suggest you start this list to follow any stocks that sound interesting to you. Pretending to have money at risk will have less emotion attached to the mental transactions for buying and selling. The observations will be just as valid as real experience and may give you the confidence to make your first purchase. Start small. Pay attention to the numbers. Learn by observing how the market works on a micro level.
A Format for Selling Decisions
Not all buys are good buys. Some buys are good today but may go bad later. So, you need a process to know when to sell. This can be difficult since we buy some stocks because they appeal to us emotionally. But this is your money, and you must make reason rule over emotion.
When you buy a stock, you need to assess the value you are willing to risk if the stock drops in price. There is an option you can choose to help you limit any loss due to a dramatic drop in price. This is referred to as a Trailing Stop or a Stop Loss, where you can set an automatic sell price. That amounts to an order to sell once the stock reaches a certain price.
If you use this feature, you will learn that some stocks you wanted to keep will be sold earlier than you wanted, due to the wild swings in the market in recent years. That will be part of your learning experience.
Make Notes
Why did you buy the stock? Why did you sell?
Making notes for yourself will add to your trading experience.
With the right mindset for money, you can invest to grow your retirement options!