Learn How to Invest In The Stock Market
It’s no secret that if you want to build wealth that will last ages, you have to invest in the stock market. And there are plenty of books to learn how to trade stocks. But what if you just want to learn the basics to see it for yourself how the stock market looks after you have the basics covered?
That’s where I come in.
In this in-depth guide, you will learn everything about the stock market; what stocks are, the best ways to make money from them, etc.
So, tell your kids to go play outside, and your wife to watch that Netflix show with headphones because you are about to read something that will possibly make you very rich in the near future.
Without any further ado, here we go.
What Is a Share of a Stock?
In simple terms, a stock represents a business. And a share of that stock represents a legal ownership of part of that business, which is also known as equity. Most corporations offer stocks that are called preferred stocks and common stocks. We will get into their meaning in a minute.
Stocks are also considered as “securities”. Because by definition, they mean that they are equities in a business. So do not be surprised to hear if someone pays their debts by transferring their shares.
Common Stocks: The basic meaning of a common stock is that it is entitled to its proportionate share of a company’s profits or losses. These are the stocks that people are usually referring to when they are talking about investing.
So if you buy a share in a company, you are now the stockholder of that company. But you have bought a common stock.
The stockholders then vote to elect the Board of Directors for that company who can decide whether they want to retain the profits, share all of them with their stockholders, or send a portion of them in the form of cash (also known as Dividend). The Board of Directors can also hire or fire the company’s CEO.
Preferred Stocks: People who hold preferred stocks are entitled to a couple of perks that the holders of common stocks are not. For instance, one of the perks of the shareholder of a preferred stock is that there are predetermined dates when he or she is entitled to receive dividends.
This dividend also has to be paid first, before any of the holders of common stock receive their dividends.
And in the case of the company going bankrupt, the preferred stockholders are entitled to recouping their investment from the sales/recoveries of the company before the common stockholders.
Dividend: This is essentially a physical check that is mailed to your address. Or an electronic deposit that is either sent to the broker or the account that holds the stock.
Now that we have covered the basics a little bit. Let’s move on to the exciting part. About how you can make money by buying a stock.
How To Make Money In the Stock Market For Beginners
Most people give the wrong impression of what it means to make money from the stock market. You might think that it is all about being stuck to the computer screen for 8+ hours, frantically thinking about what the S&P 500 did recently, or what is the Dow Jones Industrial Average.
That’s certainly not the truth.
Here’s an unpopular secret about making long-term wealth from the stock market – Do not buy and sell the stocks, but hold securities. Receive interest and dividends and wait for them to increase their value in the long term.
In other words, if you are going to pick a stock, be absolutely certain that you are willing to keep that stock for a minimum of 5 years. This means that you will have to only select companies that are well run and have a solid financial background. Not to mention that they should also have a management that is shareholder friendly.
That’s the real secret of how wealth is amassed by the passive investor (the investor who isn’t actively trading stocks on a daily basis).
If you ask Warren Buffett, he too will say the same thing to you. You will be shocked to know that most of their wealth comes from owning stocks and businesses for more than 3 or 4 decades.
We are just getting started with this topic. So, sit back, take another sip of that delicious orange juice and let me now walk you through how everything fits into the stock market earning picture.
You Start by Purchasing Stocks, aka, Ownership in a Real Operating Business
Let’s say you want to buy a share of the stock, aka, buying a piece of the company. Let’s assume that Samuel Lawrence Industries is a company (a fictional company). This company has annual sales of $20,000,000 and their net income is $2,000,000.
They are now looking to raise money to expand their business. So the founders of the company approached an investment bank and asked them to sell their stock to the public. When a company wants to sell their stock to the public for the first time, it is called an Initial Public Offering, or IPO.
After seeing their sales and their net income, the investment bankers said that their growth rate is not that great. So they will price their shares so that the investors will earn 11% on their investment, plus whatever growth that they generate.
By that calculation, it works out to $22,000,000 valuation for the whole company.
How did I come to the 11% ROI you might ask?
Here’s how $22million divided by $2million net income = 11% return on their initial investment.
Assuming that everyone agrees on that, the underwriters might want to make the shares affordable to the public. So they decided to cut the company into 440,000 pieces, selling each piece for $50. (440,000 shares X $50 = $22,000,000).
This also means that the owner of each piece is entitled to $4.54 of the profit.
$1,000,000 profit ÷ 440,000 shares = $4.54 per share.
The $4.54 profit per share is also known as the Basic EPS, aka, the Basic Earnings Per Share.
In other words, if you buy 1 share of the Samuel Lawrence Company, you will be entitled to $4.54 of the profit from their annual sales.
But let’s say that you buy 100 shares of this company for $5,000. You will basically be buying $454 in annual profit including whatever their future growth might look like, or if there would be any losses. If you think that the new management can cause the sales to skyrocket in the coming years and your profits would easily turn out to be 5x, then it would mean that this is a very attractive investment.
Now that you know what you will be entitled to when you own the stock, and why you should hold on to it for years. It’s time to show you how to find the right companies to invest into.
This just keeps getting more exciting doesn’t it.
How to Find the Best Stocks to Invest In
It doesn’t matter whether you are a new investor or a stock market veteran. When it comes to choosing a great company to invest into, no one is sure where to start.
People might tell you that you should invest in Penny Stocks (article coming up very soon) because they are volatile and you can make a lot of money. And while that might be correct, you should also know that because of their volatile nature, the risk is high too.
On the other hand, you can also choose to invest in dividend stocks, which basically pay a good amount of dividends. But those stocks will also be expensive. So it depends on what kind of budget you are working with and how much risk you can handle.
To help you get started, I have compiled some tips to get your creative juices flowing. These tips will help you in picking out the best companies to invest into. Who knows, they might just be right in front of your eyes. You just needed to look at it.
Read the Standard and Poor's Guides
Every year the Standard and Poor's releases 3 financial guides that include the historical data of the selected companies. These companies are segregated into Small Cap, Mid Cap, and Large Cap. These are also the indices of Standard and Poor's.
The report includes the company’s full name, industry, ticker symbol, contact information, officer listing, dividend records, and the business summary.
It also includes the sell or hold recommendation that S&P attaches to each report, but you can choose to ignore that. You are mainly interested in knowing the company’s earnings, return on equity and the debt levels for the past couple of years.
Now might be a good time to take out your notepad and start taking notes about those companies. You first want to make a list of the companies that you might be interested in, and then start digging into the earnings reports and so on.
Based on the company list that you make, it will tell a lot about your investment approach and the area of expertise.
If you want more data on a company, you can call them up and request for more information, or you can order their annual report online. The S&P provides information on 1,500 companies in their guides. So you will be busy for quite a while.
The Value Line Investment Survey
One of the more convenient ways to access company data and their historical figures is through Value Line Investment Survey.
The website requires you to subscribe to access that data. So if the $500+ subscription price isn’t for you, you can always go to your nearest library. Chances are that they maintain a subscription. You can use the reports for free and only check out the companies that you are interested in.
Go to the Mall
This tip is not just specific to the mall, you can go anywhere where you can shop.
Once you are there, start making a list of the brand names of the products that you come across. Products like Coca-Cola, Hershey’s Chocolate, Energizer batteries, etc.
Every company that you’ve made a list of can be a great investment idea. Now, pick up the item and try to find the name and address of the manufacturer. Once you have that information, you can now search the internet to find out if the company is traded publicly (meaning you can purchase shares of stock in it). Or you can call the number provided and ask the manufacturer for it.
If the company is traded publicly, then you can request an annual report. All they will ask is your Name and Address. And they will mail you a copy of their report for free.
And that’s how you find amazing companies to invest your money into. Make sure you have all the data you need to make your decision. It is okay to take your time. Remember, taking your time is always better than making a bad investment.
How To Choose a Good Stock Broker
A stock broker is someone who is going to trade stocks on your behalf. This broker has a trading license and is usually associated with a brokerage firm. And based on your instructions, he/she will buy or sell stocks for you in return for a commission.
Once you have decided to get into the stock market, your first door to entry will be your broker. Your primary relationship will be with your broker and the brokerage firm. With this guide, we will help you choose the right broker.
Here you will not only get to know the things to look out for in a brokerage firm. You will also learn which fees to avoid, how to read your brokerage account statements and trade confirmations, etc.
Now I know what most of you are thinking, Can you buy Stock without a Broker?
How to Buy Stocks Online Without a Broker?
Most new investors ask me this question before getting started. And it is a completely valid question.
While there is no requirement for you to have a broker to invest in stocks, but just like everything in life, there are some advantages and disadvantages by going for it on your own. And you will need to weigh them on your own to make the decision.
Usually, blue-chip companies offer a special type of program that is called Direct Stock Purchase Plan, or DSPP for short. These types of plans were put into place ages ago for smaller investors who don’t want to go through a broker.
We will be covering this topic in-depth in a different article at a later date. So watch out for that.
Choosing a Full-Service Broker or a Discount Broker
What Is a Full-Service Stock Broker?
This is also known as the traditional broker. This broker is almost the same as the one you see in the movies.
A traditional or a full-service broker will take your calls and place trades for you. This person might also recommend investments for you. Most of the time, this broker will help you with almost anything related to stock market.
And for this service, you will be charged commissions.
But this type of broker might only appeal to people with a big account. Because let’s say you want to purchase a blue chip stock that is valued at $700,000 and you are not planning on selling it for generations to come. Then you might not notice a huge difference between a $9.90 commission and a $350 commission.
But if you have a smaller account, it can cut into your returns big time.
What Is a Discount Broker?
Unlike the traditional broker, a discount broker provides you with all the tools you will need to trade for yourself.
This means that you will be handling your trades yourself. There is no one standing between you and your money. That means if you want to purchase a certain stock, you just go do it. You do not need to call anyone to do that for you.
But this also means that if you will be making any dumb decisions, there is no one stopping you from that. Or advising you to choose the other option.
The discount broker option is perfect for investors who like managing their own money and do not want to pay for services that they do not need.
What Investment Tools, Research, Services, and Perks are Available Once You Have Opened a Brokerage Account?
That depends on which type of brokerage account you have opened.
If you have opened a full-service brokerage account, that question is less important because you will have direct access to the broker himself or herself. So they can essentially work with you to research almost anything.
But when it comes to discount brokers, the offerings are quite different. They can give you free access to certain mutual fund and equity research data from Thomson Reuters, Credit Suisse, Morningstar, Standard and Poor's, and other institutions. But it completely depends on them.
So based on your choosing, you will have to decide which type of brokerage account will be best for you.
Some Book Recommendations to Learn How to Trade Stocks
I know this is a cliche thing but books are really one of the best ways you can quickly learn how to trade stocks, besides doing them of course.
So, here are a couple of recommendations for you:
The Intelligent Investor by Benjamin Graham and Jason Zweig
How to Make Money in Stocks by William O’Neil
When to Sell by Justin Mamis
Stock Investing for Dummies by Paul Mladjenovic
A Random Walk Down Wall Street by Burton G. Malkiel
Stocks for the Long Run 5/E by Jeremy J. Siegel
And that is it, my folks. Now you have all the information you need to gather a list of all the companies that you would like to invest in, get a broker account and start buying stocks. But remember, you want to make moves for the long-term. Don’t listen to the media. Do your own research and make calculated decisions.
Only take risks that you can handle. And do not make panic decisions because that’s how most people burn their money in the stock market.