Want a better future by Investing in the Stock Market, but youdon't know where to start or what to buy?
You're off to a great start to changing your financial situation,but investing is like learning how to swim. You'll end up losing all your hardearned money by cannonballing right into the deep end. You want to avoid this at all costs and for you to do this, there are 3 fundamental points to keep in mind, to help you avoid the most common beginner investor mistakes.
Every successful investor who didn't have the right guidance madethese exact same mistakes. By knowing this, you'll be saving your hard earnedmoney and your valuable time.
The first mistake is jumping right into the game. The whole pointof investing money is to make money, so it's counterproductive for you to beplacing your money into something that's going to make you lose it. This is always the case scenario when you invest blindly.
Just because your favorite YouTuber or a group chat says youshould buy or sell something OR it's made them tons of money, doesn't meanit'll make you money too. If you really want to make money in the stock market, you have to know exactly what you're doing which brings me to the next point.
The next thing you want to nail down is doing some In-DepthResearch to Understand the Company as a whole. This includes its competitors,it's finances and it's position within its industry.
There are plenty of things that you could look at when it comesdown to researching a company and ultimately, you'll have to create your ownstrategy, which is not something that will happen overnight.
Some good starting points for your research could be; how thecompany makes it profits, comparing this with competitors that are in the sameindustry with similar market cap’s and the choice between Value Metrics and Financial Metrics.
Profits
Specifically, you want to find out how the company makes it'sprofits and its likeliness to sustain this in the long term. You can see thisusing their financial documents - accessible by SEDAR for Canadian companies or EDGAR for American companies. A quick Google search for these 2 sources will bless your soul.
Comparison
Making a comparison between it's close competitors, which arecompanies that have similar Market Capitalizations and are within the sameIndustry. You can find these 2 out by looking up their ticker symbol on Yahoo Finance under 'Summary' and 'Profile' respectively.
Also, to put in simple terms, the Market Capitalization is just anindicator of the company’s value.
Value Metrics VS Financial Metrics
Value Metrics
Value Metrics are derived from the financial documents that acompany releases and are really just a bunch of numbers, usually expressed indecimals. Common Value Metrics that you've likely heard of before include the PE Ratio or the EPS.
PE = Stock Price / Earnings
EPS aka Earnings Per Share = Earnings / SharesOutstanding
Earnings = Profits that a company has made
Using the PE is one of many ways to tell you if the company isovervalued or undervalued. Personally for me, if I find that the PE is lessthan 15, I consider it to be a very undervalued company. If it's between 15-35, I'd say it would be fairly valued. Anything over 35 is too overpriced for my liking.
The EPS is another value metric that is a ratio of how much profitthe company made for each share that is available to the public. A lot ofpeople like to use this metric as a sign of profitability and how consistent the company's profits are every 3 months
To put this simply, if You and 5 other people including myselfwere invested in my company and it made $100 of profits this quarter, ourearnings per share would be $100/5 = $20. There’s obviously more to this but this is extremely simplified, so be sure to do further research on what exactly the EPS is.
These are only 2 types of value metrics and there's a lot more. Isuggest you do further research into more value metrics and come up with yourown little strategy!
Financial Metrics
Financial Metrics are the numbers you would find on a company'sfinancial documents and are for those who want to get to the nitty gritty withtheir research being done on a company.
Because these include a bunch of different numbers, what Ipersonally do to make it easier is write these numbers down on an excel sheetand convert them onto a graph to make things easier to read. If you want to avoid that spreadsheet work, you can even check out macrotrends.net which does this for you!
There are too many financial metrics to consider, so I suggestlearning about them all and then coming up with your own decision criteria forwhat makes up a sustainable financial statement for a company. After that, I suggest opening a demo to put your knowledge to the test.
These types of demo accounts are widely offered by all theCanadian Brokers including Questrade, Interactive Brokers or any platformoffered by the big 6 Canadian Banks (RBC DI, TD Waterhouse, CIBC InvestorEdge, BMO Investorline, Scotia iTrade and National Bank Direct Brokerage). The largest benefit of using a demo account is that you’ll be to use “fake money” to invest which is the perfect way for beginners to test out the markets or even for experienced investors who want to test out new strategies.
Lastly, the topic that is not getting the attention it deserves:your emotions. You heard right, for you to control your money-making abilitiesin the stock market, you need to control your emotions, which means, controlling yourself
As human beings, it's natural that most of our decisions are madeby emotion, but you need to eliminate that when it comes down to investing ortrading because this is where you lose the big bucks.
Imagine you invest $10,000 in a stock and in just a couple ofdays, you've lost money and now you’re at $874. Your emotional instincts kickin, telling you that since you've already lost money, you should just sell for a loss. A few days later, the stock skyrockets and that initial $10,000 could've been $11,745.
Everybody goes through these cycles and it's a matter of timebefore one quits managing their own investments and just gives it to the bankto make you a safe 1% per year on your investments - not ideal.
I've found that the most effective way to control your emotions isto have a plan and stick with it. Some pointers to help you formulate includethe following:
Before you press that buy button, ask yourself why you are buying This specific investment and why there is a distinct opportunity
- Ask yourself what your target price would be for you to exit to make profits
- Define what your maximum loss is going to be, meaning, what's the exact price this stock would have to go down to, for you to sell at a loss?
- Once you've figured these 3 out, then you're free to enter andready to follow your plan accordingly. You shouldn't lose more than what youdefined and you shouldn't gain more than you defined either because the ultimate truth of the stock market is that you’ll inevitably lose money, but you can control how much you lose.
I suggest aiming for a minimum of 2:1 win to loss ratio. Thiswould mean if you're aiming to profit $500, your maximum loss should only be$250. Conversely, if you're aiming for a 2% profit, you should only tolerate a loss of 1%
A 2:1 Win-to-Loss ratio is the bare minimum but I always like toaim for anything higher than a 3:1 ratio. Just to make sure that there’ssignificant progress being made that aligns with my specific strategy.
Keep in mind that these are just the basics - yet, not a lot ofpeople are aware of these when they first start off in the investingworld.
For more underrated tips for a smooth transition into the markets,access to Easy and free resources, or just want Strategies for eliminatingemotions while investing, be sure to follow me on Instagram: @azizz.finance or subscribe to my YouTube Channel @ Azizz Finance - ZCommunity.
See you there!
