In this post, I will be going through the basics of investing in the stock market.Well what is a Stock? A stock which can also be called an equity represents you owning a small fraction of a company. So If I own 100 Apple Shares then I own 0.000000006 of Apple or 0.0000006% of Apple. So this is the basic idea of what a stock is.
- How To Buy Stocks
To buy a stock, you need to do so through a brokerage, in the olden ages before the internet you would had to call a physical stock broker who would help you to buy stocks. But now there are many online brokerages from which you can buy stocks instantly when the stock market opens. You can just do a quick google search to find out which brokerages are best based on where you live. There are many applications that you can download where you can just buy and sell stocks from your phone anywhere.
Types of Brokerage Accounts
Some examples of online brokerages that you might have heard of are Robinhood, TD Ameritrade, Interactive Brokers, Webull etc. When buying a stock, you might have to pay a commision fee to the online trading platform as they are actually buying the stock for you if you are using a platform that does not have commission free trading like Robinhood.
So if you are to choose go with the platform with the lowest commission fee as much as possible
Mutual Funds, ETFs, Index Funds
So what are the different investing terms? What are mutual funds, ETFs and Index funds and what is the difference between them and stocks?
First we are going to be focusing on mutual funds.
If you have searched around about investing, you have likely came across this term called A mutual fund. In simple words, it is is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, whicxh represent a part of these holdings. So for the company invests 10% of the people money in Google stocks, the person has 10% of their money in Google stocks but what they did was only to give their money to the company, thus out of the profits the company usually takes 1 - 2% of the profit as commission for helping people to invest.
If you are someone who prefers lower investment minimums, an ETF might be a better option than mutual funds. ETF is similar to mutual funds in the regard that they are both are professionally managed collections of stocks and individual bonds. Also, ETF provide real-time pricing which allow you to give you more control price. An additional fact is that most ETFs are index funds or known as passive investments
Next up, index funds, what are they, index funds. An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index. Index funds have lower expenses and fees than actively managed funds. Index funds follow a passive investment strategy. Commonly known Index funds are s and p 500, which is the top 500 companies in the US and if you are thinking that the top 500 companies wont change, you are incorrect, the companies that dont do well will be removed from the index, so you can be ensured that if you put your money in a trusted index fund your money wont be lost and only increase unless there is a financial crash, but according to data it will always increase even after a crash so if you investing in index funds dont take out your money fearing that it is going to crash as you it is recommended that you keep it as an long term investment. Also, all index funds are mutual funds but not all mutual funds are index funds.
Passive vs Active Investing
As for active vs passive investing, as the name suggests active investing involves the participant to manage their portfolio by their own which involves a lot of hands-on buying and selling. Mostly, active investing involves high risk which means you get high rewards. However, another approach is passive investings which involves less time to be spent and has lower risk which mean the rewards you are to get is lesser too. Passive investing usually is investing in index funds and other bonds managed by a company and professional and is in most cases long term investments.
If there’s one thing that you are going to take away from this post, it’s definately got to be the power of compound interest. Here’s how compound interest works. We are going to be using this calculator from, moneychimp.com, here we are going to put $1000 as the amount of money we want to invest initially with $100 added every month so that’s $1200 per year. The s&p 500 Index returned an average of around 10% since its inception in 1926 to 2018, so we are going to put interest rate at a nice round number of 10%. Let’s assume the average viewer is 20 years old.
Compounded annually with 10% return on an orginal investment of $1000 with an additional $100 per month in 40 years, you can have $630,000 dollars with you putting in only $49,000 dollars. But if you had delayed your investment just by 5 years, you would only get a return of $385,000 with you putting in $43,000. There’s not much difference between the amount you put in, but just because of compound interest and missing out on 5 years, you get 60% of the money while putting in 87% of the money.
For fun, lets say that you want to put in the same amount of money, you have to put in 1370 per year into the index fund. Now, while you have put in the same amount of money, you have only earned 436,536 when you could have gotten higher results by starting 5 years earlier. If you only have 10 years to grow your money, while putting in the same amount of money, you would only get $86,743.34. That’s the power of compound interest. In fact, a fun fact is that Warren Buffet became a millionaire at age 26, but became a billionaire at age 60. Warren Buffet Made more money in the 5 months between April 2020 and September 2020 than he did during the first 60+ years of his life. But the old chinese proverb remains true, the “The best time to plant a tree was 20 years ago. The second best time is now.”
Stock Research - Where To Gather Information (Yahoo, InsiderMonkey)
Now that you have hopefully understand the superpower that is compound interest, how exactly should you research before buying a stock
You can easily get information about the companies that you want to invest in free website like Yahoo, Gurufocus, MarketWatch and other websites. So I am just going to show you yahoo finance and what the basic stuff there means. I am going to be looking at Tesla Stock which is quite a weird one as it has 8x its valuation this year alone and people are buying into electric vehicle companies more than ever. I will just type in TSLA because that is the stock ticker and it is unique for each stock. For example apple has AAPL, Amazon AMZN, AliBaba has BABA, PayPal has PYPL, AMD has AMD etc. When you look at TSLA, you can see that the current share price is in big font at the top and it also shows you how the share price has changed in the previous trading day. Down here you can also view the market cap, previous close, open price of the stock market etc. The US Stock Market opens at 9.30am to 4pm et on weekdays except for holidays. You can aslo look at the financial summary of a company. For TSLA, you can see that it has been consistently beating the analyst target which makes the stock go up as the earnings that quarter have been amazing.
You can also look at the latest TSLA news to see what the market sentiment on the tesla price or company is. For TSLA its also dependent on whatever Elon tweets. For example a few months ago, he tweeted “TSLA Stock is too high imo” and caused it to fall…
Now here’s the fun part, you can go into the chart section and view the trading price of TSLA, you can add all diffferent types of customisations and stuff to better understand the patterns. You can aslo compare how much Tesla has increased over the past year with any other company you want, using the comparision button.
So that’s the basics of how you do your research when buying a stock.
Bull vs Bear Markets
You might have heard terms like bull market and bear markets when looking at investment stuff, A bull market basically means the market is going up and a bear market is when the market is going down.
What are dividends, Dividends are basically when a company distributes some of its earnings to its shareholders. Only some stocks offer dividends so it might be a factor to consider if you are holding a large number of stocks. For example apple pays dividends to its shareholders. Apple has given out around $.70 for each share recently every couple couple of months, so that’s something to consider.
When Should You Invest?
A common investing rule of thumb is that before investing make sure you pay off all your debts and make sure to have emergency funds, the basic would be 3-6 months of your salary
So that’s the complete beginners guide to investing in the stock market, if you found this useful consider sharing this post and subscribing to my youtube channel!