I won't be telling you "10 tips to get rich on the stock market" or "guaranteed ways to success", I'm just going to talk about things I've observed in the markets and give them context. If you're a professional investor I would recommend turning around and running as fast as you can because I will be dumb-ing your world down to it's most basic ideas. So, with that out of the way, lets get started!
The Basics
What is the market?
Kind of a nasty question, but a simple answer is it's the place where people can go to buy and sell almost anything. Shares of companies, precious metals, corn, oil, even pork, all for sale on the market. The three big areas of the market that most of us interact with are the Stock Exchange, the Commodities market, and the Precious Metals Market.
Stock Exchange
The stock exchange is where people buy and sell shares. Shares are fractions of ownership of a company. In simple terms, the more shares of a company you own, the more of the company you own.
Commodities Market
Pork, Oil, Corrn, Coffee, Coca, if it is a basic consumable material that people use then it's traded here. I do not know much about this market so I tend to shy away from it.
Precious Metals Exchange
Gold, Silver, Copper, Platinum, Palladium, measures of precious metals are traded every day, their prices move at a different, slower pace compared to the hustle and bustle of stock and commodities.
Dividends
This is a great source of steady, safe income for the skiddish investor. Dividends are essentially a cut of the profit. Every year the company gives its investors a percentage of the value of its shares. So if I owned a share of a company that gave me 5% in dividends, I would get $0.50. Normally companies divide this amount across the four financial quarters in the year, so every three months I would get 12.5 cents for my one share. The great strength of these stocks is that they do not fluctuate very often and will generally slowly increase value to match the rate of inflation. This means that if you invest $10k today and sell them 40 years from now, you'll get that future's "10k" equivalent back. There is a well known name for these stable stocks: Blue Chip Stocks. In large volumes, these stocks offer a nice additional stipend to your general income.
Risk
As a refresher from high school economics, your interactions on the market fall under three risk categories.
Low Risk
These interactions have little chance of failure, you'll either make a profit or come close to breaking even. The drawback is that profits are tiny. You may gain money, but the profit margin will be so small that large quantities are required to overcome the transaction fees.
Medium risk
These interactions carry the potential for larger profits. They carry a higher risk of failure. You'll loose a respectable percentage of your initial investment if you choose poorly or don't keep an eye on things. If you are prudent and work hard, you can reap a respectable profit from these transactions.
High Risk
Beware, there be windingo out there. High risk stocks often yield three possible results: great loss, great profit, or you barely made it out of there with what you put in. Some companies take a large gamble on whether or not their good or service will be accepted and to raise funds the owner takes the company public by selling a chunk of it off to individuals on the stock market. This brings in extra money for the company to continue development with. Because the success of this company is unsure, speculation takes over and the prices fluxuate wildly. Success brings profits and stability to stock holders and wealth to the company, failure can bring ruin.
To make a profit on the market, you need to get out more money than you put in. The golden phrase investors live by is "buy low, sell high" meaning buy something at a low price, then when its time, sell it for a higher price.
How do I get started?
There's a few avenues available to you, but the two that I know and trust are brokers and websites.
A professional stock broker will buy and sell for you, you can instruct your broker to buy certain stocks/metals/comoddities/etc for you and sell them at a higher price. This method generally yields some reasonable gains, but there is a catch; the broker will charge a fee for doing this work. They make good money off of this, your profit will be reduced so they can take their cut. To set up an account with a broker, just google the term and find professional companies, review their services, compare them, and find what meets your needs. Remember to think of short, medium, AND long term when addressing your needs.
Websites: places like etrade allow you to do the trading yourself, the great news is most of them only charge you a flat fee for doing a transaction rather than take a percentage of the total profit. Gaining profit here is tricky, there's no one to tell you what to do and there's thousands of investment websites telling you to invest in some obscure company because they're gonna be the next big thing. Self investing is frightening, but is doable if you do the research and have the patience. To set up one of these online accounts, you need a few hundred dollars, your bank account information, and about 30 minutes. Like the professional broker info listed above, compare and review each service. What worked for me may not work for you.
How much money do I need?
Well, when asking that question remember this phrase: You get what you give. If you only put $300 in your account, then that's all you have to work with. Even inexpensive stocks will be hard to purchase in reasonable quantities with little to work with.
I made that mistake when I first started and was getting nowhere, then I added extra funds until I hit $800 then I was able to start doing a few things.
*BEWARE* when trading your own stocks, it's important to take into account the transaction fees. My fee is $10 per transaction, so when I trade, I have to make sure the profit exceeds $30. $10 to buy, $10 to sell, then $10 to cover the cost of my next purchase.
The more money you can put into your account, the better. That doesn't mean you invest it all, but it gives you wiggle room if you find an opportunity. It also keeps it out of your regular bank account where you may be tempted to use it on things you don't need.
Are there any other markets I should know about?
Yes...ish. There are a few other markets, but I try to avoid them because I perceive either high risk or bad returns on my investment. One such market is the Bond Market. A bond is like a loan. You loan a business or a government entity money for a set amount of time, then you can cash the bond in to get that money back plus some interest.
Time to Start Investing
Who do I invest in?
Short answer: dunno
Long answer: across the different sectors, various businesses have their strengths and weaknesses. It is up to you to determine which companies have the potential to turn a profit. How well a business will perform is based on many factors, some of which are beyond my ability account for.
Then how do I choose what to invest in?
To do that you need to understand a few basic ideas:
The market moves in cycles
There will never be a permanent growth phase in the markets, it's not possible. The growth of a company is based on how long it can increase its capacity to provide goods and services and how many people can afford that good/service. If no one can buy it, the company will not grow, meaning they won't be making a profit, which will make them loose value as a company.
A general inverse relationship I have noticed is that when the stock market does well, precious metals cost less. When the market is doing poorly, precious metals become expensive. What does that mean? In the long term (10-20 years), if you buy precious metals while they're weak and wait for a market collapse, you can make a large profit off of them when their prices go up.
A general inverse relationship I have noticed is that when the stock market does well, precious metals cost less. When the market is doing poorly, precious metals become expensive. What does that mean? In the long term (10-20 years), if you buy precious metals while they're weak and wait for a market collapse, you can make a large profit off of them when their prices go up.
Word of advice from Warren Buffet
Think what you want of the wealthy, Warren Buffet is a billionaire for a reason. Over the years he's offered a few nuggets of wisdom that will go a long way to helping you succeed.
- "The Lottery is a tax on the stupid"
Yep, he's got a point. It's exciting to know that you just may win that $400 million jackpot, but the odds are stacked so highly against you that you've a better chance of being struck by lightning, attacked by a shark, then killed by killer bees, than winning the lotto. Its a waste of your money, don't play it.
- "Don't invest in something you don't understand"
Personal Experience: In all the trades I have made, all of my losses stemmed from failing to adhere to that rule. I jump in before understanding what the company really does and its place in the world and I lost money. A prime example of this in action; in 2012 I invested a few hundred dollars into low cost shares of a mining company. At the time I thought it was brilliant, the cost of the shares were so low that the bulk quantity guaranteed a minimum return of 50% just for a 1 cent raise int he stock. I failed to take into account two important factors:
- The number of shares available to the public
- The strengthening of the stock market meant the metals market was going down
These two factors meant I didn't understand what this company was and what its place was in the world so I paid the price and sold the stock at a considerable loss.
Small things to keep an eye on
When you're researching a company, there's all sorts of things you need to do, I'm going to try and make a list of what I think are the most important things to keep in mind.
- Company profits: A company that shows no steady growth is dangerous, its hard to predict where it will go. Some companies behave strangely by posing losses all the time, but the losses decrease. Tesla Motors (TSLA) is one such company. They regularly post losses every 3 months, but every month the losses become smaller. This means their model of business is slowly, but surely working and given time they will begin reaping respectable returns.
- Volume of stock: This is the total number of shares available on the market. The size of the company will generally dictate the number of shares that are available. Sometimes this is not true though. Again, Tesla Motors provides a good example. The CEO knows that the company is doing well, so he limited the number of shares available. The result: the demand for the shares far exceeded the supply, causing the meteoric rise in share value on the market.
- Dividends: Blue chip stocks are not worth purchasing in small quantities. The return will be so low that it will take you months, if not years to get enough dividend returns to buy another share. Not all companies offer dividends, the ones that don't tend to be in the higher risk categories.
- 6 month, 1 year, 3 year, and 5 year histories: watch how the company has done over these time frames, they will give you insights into how they have performed. In a 6 month view look at any major hits to the value of the shares then search for articles from that time frame. What caused those hits? Was it management related? Was it because of poor quality control? What happened after this event? In a 1 year view you can see a bigger picture, when did the company do well, when did it do poorly. Did those times line up with major world events? Did the good times line up with certain holidays/seasons/calendar events? In the 3 year view did you see a pattern? Were there cycles of growth and shrinking? In the five year view, did you see a general growth after taking into account major market events (like the great recession)?
- News articles: did they make the front page of your preferred news website? Why? Checking the front page of your preferred news source, that site's market pages, and that site's specific page for the company you want to invest in is a good way to see how often the company is in the news and why. A company that is doing well and creating lots of jobs will be in the news around once or twice a week. A company that has made a huge mistake and is in legal trouble will show up just as much. Don't just skim the headlines, read the article and see what's happening.
Company profits versus world events
From time to time things happen in the world that affect a company's capacity to earn a profit. This can negatively affect the prices of stocks in certain situations. For example; You own stocks in a plant that makes car parts and their biggest customer is Toyota. Japan is struck by an earth quake and Toyota's main engine plant is severely damaged. This means Toyota can't make new vehicles until the engine plant is restored to operations. With a sudden decrease in their capacity to sell cars, Toyota will post a loss until the situation is rectified. This problem doesn't just affect Toyota or that factory, it also affects the trans-pacific shipping company that owns the boat that brings the engines across the ocean, the trucking companies that bring the engines to the assembly plants. The companies that are manufacturing the other parts now have to slow down operations meaning they have to cut their employees' hours which means those people have less money to spend.
During these times, you have two options: If you're fast enough (like quantum fast), you can sell your stocks and not suffer any major losses. Or, you can hold those stocks, weather the bad times and wait for prices to go back up.
Regrets
Regret is a powerful creature, its normal to feel it when trading, but you can not let it influence your decision making process. If you buy 200 shares of stock at $1 a share, the price goes up to $2 and you sell it, then two day later you find out it just rocketed up to $15, you're naturally going to be unhappy that you missed out on the gravy train. Yes, it was a missed opportunity, but unless you have solid evidence that it's going to continue to rise, then you should not buy it back. Your regret over missing that massive increase will be big, but you must not let it make your choices for you.
How to counter regret
Set specific growth goals for your stock then once it's done, walk away. Buy a stock, set a sale price at a level you believe the stock can achieve in the time frame you desire, then once the trade is done move on to something else. Re-buying and reselling the same stocks over and over again to earn a profit is possible, but that method is only effective when you have hundreds of shares (250+) and the margin is large enough that you could increase your profit by ~15% of your total investment.
I'm done
This is all I can writ out for now. there's lots more, but I'm going to let this develop naturally based on the feed back and questions I get. For now, enjoy and have fun!
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