Are you interested in getting started in the stock market but have no idea where to start? In this article you’ll learn how to get started from zero to making money in the stock market.
JUST STARTING OUT WITH STOCK PICKING I WOULD BEGIN WITH 5% OF YOUR INCOME. THAT IS A GOOD STARTING POINT AND CAN BE ADJUSTED IN THE FUTURE.
Picking Your Investments
HERE ARE 6 KEY THINGS TO LOOK AT WHEN PICKING WINNING STOCKS.
#1 – Stick to Companies You Know
A common recommendation is to diversify, which is good advice. However, not knowing anything about the companies you diversify into eliminates the benefit.
List out 5 companies that you KNOW have great products from you’re hands on experience and knowledge of that area. Look to your professional experience and life experiences. These are companies you would love to own for the long term because you know they have staying power and are well regarded by the community in which they sell.
#2 – Look for Growth
You know what makes a stock value go up?
It’s simply goes up when there are more people buying the stock than selling. That’s all there is to it.
But the question is what makes people buy the stock.
Generally it is good news about the company, and the main news that drives prices up is solid earnings growth.
Basically earnings are: Income – Expenses = Earnings
It’s also known as net income.
#3 – Find Companies with a Unique Product or Niche Domination
Think about a type or niche of business. Who is dominating. Who is so unique they don’t have much competition.
#4 – Early Momentum
Momentum can be good or bad. It is a steady increase in the price of the stock over a period of time. The bad side of momentum is when everyone is jumping on a stock because the price is going higher but there is no good data backing it up. At this point it becomes a fools game of who is the greater fool. Eventually you run out of fools and there isn’t anyone left to buy and drive the price up and the stock crashes.
Obviously, we don’t want to jump on bad momentum, but want we want to find is good momentum.
SOME STOCKS JUST STAGNATE EVEN THOUGH THEY HAVE SOLID FUNDAMENTALS. WHEN THE PUBLIC NOTICES IT’S POTENTIAL AND STARTS BUYING IT BEGINS TO RISE. NOW THE PRICE IS MOVING UPWARDS AT A STEADY RATE.
THIS IS WHERE YOU WANT TO BUY IN.
If you’ve found a company with all the previous criteria and has suddenly been increasing in price over a 3 month period that is a good sign off the potential continued increase in price.
The final key to momentum knows when to jump off momentum train. The best strategy is to continue to monitor the previous criteria and the upcoming fine print in the next section. If any of the key criteria you used to choose the stocks changes for the worse. That’s a good indicator the momentum is coming to an end and it is time to sell the stock.
#5 – Checking the Fine Print
The final criteria is digging into the details and reading the fine print. This section is a little technical but it’s great to know this information. It’s kind of like the vitals or health of the company’s stock.
Revenue – This is the total amount of money the company has earned during the time frame you selected. Revenue should be rising over the past 3 years.
Earnings – This is the money the company actually kept during the time frame you selected. As I explained in #2 you want to find a company in which the earnings have been growing over at least the past 3 years.
Debt – Just like personal debt it can be bad and you don’t want the company you buy to have too much. You’ll see below how to determine how much is too much in the debt to asset ratio.
Equity – This is calculated by taking assets – liabilities. Equity is always good. You’ll see how to measure the company’s use of equity in the Return on Equity ratio below.
Price to Earnings Ratio (P/E) – This is basically the current stock price divided by the earnings per share. This gives you an idea of how much you are paying for the stock versus what they are actually earning. This gives you a comparison number versus other stocks and how expensive they are. By itself I would not put too much stock in it, but when comparing stocks to other stocks and using all the other data I’ve given you in this guide you can get an idea how expensive the stock is. The average is 15 – 25. So, if a company’s P/E is below that, it tells you that company may be undervalued and is inexpensive compared to other stocks. However, if it is above that it may be a bit overpriced and has too much momentum. I would use this as a guide incorporated with all your other data and not P/E alone.
Return on Equity (ROE) – ROE is how much of a return the company is getting on the equity. This means how much money they are making with the money they have. In other words it shows how well the company is using its equity. It is calculated by the formula Net Income/Equity. This is a great tool to compare stocks. Obviously the more return on equity the better. It’s also great to see this ratio growing over time as well.
Debt to Asset Ratio – This ratio tells you how much debt they have in comparison to their assets (cash + property). Ideally the less debt the better. This is another great comparison tool to compare companies.
If you haven’t already, pick some stocks. Preferably invest in at least 5 companies so you have some diversification in companies in case one or two are not performing as well as you liked. Once you’ve bought your stocks celebrate! Congratulations you are now officially a stock investor! Now let’s learn how to monitor those investments.
#6 – Monitoring Your Investments
One thing you have to realize with stocks is that they go and up and down every day. You can’t look a stock chart every day and determine to sell based on a dip in stock price. There are days when the entire stock market is down and sometimes for even months during a down turn. You have to look at the long term with stocks. I recommend only looking at your stocks on a weekly basis if ups and downs make you nervous.
Emotions are your worst enemy in investing. If you stare at the charts day in and day out and the stock is not doing well you may panic. You’re gut will tell you sell, sell, sell! Don’t listen to your emotions!
STICK TO YOUR NUMBERS. WATCH THE CRITERIA THAT MADE YOU INVEST IN THE FIRST PLACE. THIS IS A LONG GAME. BUY STOCKS YOU BELIEVE IN AND HAVE GOOD RATIOS. AS LONG AS THE NUMBER STILL ADD UP, MOST LIKELY THE STOCK WILL BOUNCE BACK AND CONTINUE TO PERFORM WELL.
IF THE RATIOS ARE DECLINING THE COMPANY NO LONGER FITS YOUR INITIAL CRITERIA FOR SELECTING IT. SELL IT. NO EMOTIONS. JUST NUMBERS. THAT HOW STOCK INVESTING WORKS.
Don’t procrastinate. Get out there, open your account if you haven’t already and start investing!
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