Investing in stocks brings a good profit, and many people are interested in this way of earning money. But most of them are deterred from investing by the fact that there is a lot of negative information about this, and this is completely unfair. This method of earning is real and such that in the future it can bring good interest.
Many newcomers do not dare to invest in stocks, and if they do, they invest minimally to avoid risks. Professionals who have been working in this market for many years have managed to make a decent capital by investing in stocks and calculating all possible losses in advance, developing strategies.
- What is an investment in stocks?
- How to invest in stocks
- Investing in stocks for beginners
- How to choose a strategy
- How to invest correctly — the basic rules
- Types of shares for investment
- Ordinary
- Privileged
- Which type to choose
- What to pay attention to when investing
- Financial condition
- Dividends
- Liquidity
- Stock growth potential
- Multipliers
- How to buy shares for investment
- Buying shares through a broker
- DRIPs & DIPs
- Pros and cons of investing in stocks
What is an investment in stocks?
An investment in shares is the purchase of securities for the purpose of obtaining dividends or profits as a result of their sale. Investments are part of the economy of any country in modern realities. The easiest way to invest money is to invest in the assets of a well — known enterprise at the time of a significant decrease in their value.
Shares are equity securities, and those who have acquired assets are called shareholders.
They approve the right to own a part of the company and receive profit in the form of dividends.
Shareholders (owners of shares) take part in the management of the joint-stock company and, in the event of the closure of the enterprise, claim a part of its property, which will be equal to the share of the securities held from the total number of shares of the company.
Before buying shares, it is necessary to clearly understand why this is done, and take into account all existing risks. It is necessary to analyze how profitable the purchase of shares is, and how quickly they will justify themselves, bring profit. At the same time, external factors are taken into account — the economic, political situation, demand for the company's products, its reliability, developments and other important points.
Beginners start with a few stocks that bring small dividends at first, but over time, when they begin to understand strategies better, the number of investments increases, and then the accruals turn into the main, considerable income.
Read more: Dividends: what is it and how to get them
How to invest in stocks
How to invest in stocks:
- Get knowledge on the topic of stock trading.
- Choose a broker, open an account with him and deposit funds.
- Study the market for the search for promising stocks.
- Conduct a transaction through the tools provided by the broker.
Investing money in stocks seems to many to be a complex process involving great risks, and this is indeed the case. First, you need to be patient and have the necessary knowledge, analyze the market and identify the most suitable assets for investing money. To do this, the above steps should be considered in more detail.
Investing in stocks for beginners
Considering investing in stocks as a means of earning money, novice investors are wondering where to start? Many people are afraid of the possibility of losing their invested funds or being deceived by an unscrupulous broker.
Getting started with securities is based on studying the market, collecting information and analyzing it. The success of future trading will depend on the collection of these statistics.
To begin with, you can choose a stock exchange as one of the options. Working on it has some nuances, for example, when performing monetary transactions, a commission is charged in the prescribed amount, and brokers do not provide consultations by default.
Each platform has a demo account where you can try yourself in trading without investing your own funds. To begin with, you should pay attention to the shares of large companies - they offer more different tariffs, among which there are many interesting offers for beginners.
The second investment option is to buy shares from the owners. The advantage of this method is the absence of intermediaries. The future owner of securities can only carefully study the proposals of the owner companies on their official websites and then independently carry out a transaction to purchase assets directly from the owners.
A beginner can avoid most of the risk by choosing a mutual investment method. In this case, the shares are managed by specialists. An additional guarantee is provided by the fact that auditors and the state carefully monitor the company's activities, and in case of bankruptcy, oblige its management to transfer shares to another mutual fund.
In general, the first steps of a novice investor should look something like this:
- Make a clear action plan, determine the amount for which investments will be made. In order to start acting, you should study the market, get acquainted with the current trends in the development of the stock market. This is the minimum set of knowledge required to get started.
- Choose a reliable platform and trusted brokers with a good reputation. All work will be carried out online via a terminal on a PC or a mobile application. To register on the broker's website, personal data, phone number and e-mail are entered. Opening a brokerage account also involves the provision of identity documents.
- Choose a direction (there are three classes of promotions). The choice will depend on the strategy and techniques. This item includes an analysis of the shares of various enterprises, the demand for them. It is better to give preference to highly liquid securities. This can be determined by information on the network or on television about their growth or decline. It may not be possible to get a high profit as a result of the choice, but such securities will not bring big losses if they fall, especially if we are talking about long-term investments.
- The purchase of assets is considered the simplest stage, since it is performed in the broker's terminal in just a few clicks. In this case, you will need to specify the number of shares, as well as the desired price or choose a purchase by market.
Read more: How to determine the trend: features and rules
How to choose a strategy
There are quite a lot of strategies for investing in securities that increase the chance of a profitable investment of funds. We will highlight the three most successful methods used by experienced investors:
- Buy and Hold is a long-term investment in securities. This method of investing money is often used by novice investors. Its essence is to buy shares and receive dividends from them. The shares are held and are not sold for a long time (even in a crisis). The owner can increase their number over time. The constant increase in the portfolio allows you to reach a large profit;
- Graham's strategy - the essence of the strategy is to find shares of undervalued companies and buy them. The money is invested in 15-20 different companies at once. At the same time, you need to carefully and constantly monitor the situation on the market, and when stock prices increase by 30-50%, sell them. Then the whole cycle of purchase and sale is repeated;
- Buffett's strategy is based on the choice of stable enterprises with a good reputation. Even in a crisis, their shares will not fall critically in price, and their goods will be sold regardless of the economic and political situation. For investment, it is best to choose the area of the company's work that the investor is well aware of.
The direct choice of one of the listed strategies will depend on the investor's ability to study the market, apply technical analysis tools and hold shares during periods of manipulative decline in their value.
Read more: What is Technical Analysis and why does an investor need it
How to invest correctly — the basic rules
There are several golden rules, both for a beginner and an experienced investor, which he must adhere to in order to achieve his goal:
- The creation of investment capital should occur only with the use of free funds, which in case of failure can be allowed to lose;
- The investment of funds should be systematic, and the profit should be fixed and withdrawn. When receiving dividends, newcomers often have a desire to immediately invest the entire amount earned in the purchase of new equity securities, which is not recommended to do;
- The designation of the size of your salary — there should be a reward for each job. From the amount of interest received, you need to allocate part of it for personal expenses, and the rest of the money can be invested in other profitable businesses;
- Controlling the spending of earnings — you should not waste all the earned money. The higher the income, the higher the needs of a person become, and this sometimes drives them into a situation where they start spending more than they can afford. It would be wiser to regularly set aside part of the funds;
- To invest only your own capital in shares — an unprofitable investment can cause a loss, and if the money was borrowed from creditors, there is a high chance that you will have to pay not only the borrowed amount, but also the interest that has accumulated during the delays;
- Engage in diversification — investing money in shares of several enterprises at once will protect the investor from losing funds if one of them turns out to be fraudulent, suffers heavy losses or goes bankrupt. Funds will be lost only on the purchase of shares of this company, but not the entire portfolio at once;
- Remember that there is no 100% reliable investment. In each case, there is a risk.
Compliance with these rules will save you from many risks and bring you a long-awaited profit.
Types of shares for investment
There are several types of shares in which you can invest investment funds. Completely different strategies are applied to each type. To avoid unnecessary risks, you can purchase both options at once.
Common
The ownership of ordinary (or ordinary) shares provides for the receipt of income from the accrual of dividends or the sale of securities.
When the issuer of securities receives a profit, it is divided among the shareholders, if such a decision was made at the general meeting. Shareholders holding at least 1% of the shares may participate in the voting.
Read more: Issuer of securities: definition, types and features
Preferred shares
Despite the fact that preferred shares do not give the right to vote at shareholders' meetings, they are still in demand among investors.
The main reason is that the ownership of these assets allows you to receive income in the form of accrual of fixed dividends, which cannot be less than for ordinary ones.
In addition, in the event of bankruptcy, the debt to the owners of preferred shares is primarily repaid. The company may issue no more than 25% of the total number of assets of such securities.
In situations where the company cannot pay dividends on preferred shares, their holders are granted the same rights as holders of ordinary shares — the right to vote at meetings. The reverse procedure occurs after the full payment of debts.
Read more: Preferred shares: advantages and disadvantages
Which type to choose
Both types of securities can be attractive for investment. As a rule, preferred shares are cheaper than ordinary shares and the demand for them is not as high as for ordinary shares, mainly due to the lack of voting rights and lower liquidity.
Therefore, those who plan to participate in the life of the company whose assets they are buying, of course, need to choose ordinary shares. In addition, their exchange rate, as a rule, grows faster, and the absence of problems with liquidity allows you to quickly fix the profit from the sale.
At the same time, if you are not interested in the impact on the company's activities, it is better to buy cheaper preferred shares that will provide a stable income in the form of regular dividends. Over long distances, they will be much more profitable, especially if the received payments are used for reinvestment and increasing the number of securities held.
For beginners who have not yet encountered asset trading, the option of buying preferred shares of "blue chips" may be suitable — these are securities of stable and reliable companies with promoted products. Their asset prices are high, but the risks of remaining without dividends are relatively small.
Read more: "Blue chips" of the US market
What to pay attention to when investing
Having postponed the initial capital for the purchase of securities, you need to decide on the direction in which it will be preferable to invest money. Here, attention is drawn to the categories with which you are familiar. This can be the energy sector, IT technologies, metallurgy, construction.
To insure against unforeseen situations, it is recommended to choose several industries at once for future investments. At the same time, it is worth paying attention to several of the most important parameters of the securities under consideration.
Financial condition
Each company whose shares are listed on stock exchanges keeps records and introduces it to shareholders. Most often, on the websites of these enterprises, you can study the reports for the last three months or for a year.
Special attention should be paid to the lines with net profit, revenue, capital and EBITDA.
These indicators should constantly grow, which will indicate the success of the enterprise.
Dividends
Information about the payment of dividends is an indicator of the reliability of the company, its solvency. On the website of each company there is a section "Dividend policy". It stores information about the interest paid to shareholders. You can calculate your future income by getting acquainted with the dividend yield. In this section, the earnings for one share and its price will be displayed.
The amount of interest is derived from several coefficients — the total dividend per security for 12 months is divided by the share price and multiplied by 100.
The higher this percentage ratio, the more profitable it is for the future depositor. On average, the rate of dividend payments ranges from 2-12%.
Liquidity
The liquidity indicator is determined based on the statistical data of sales and purchase of securities, in particular, at what speed the process takes place. There are high, medium and low liquidity. The higher these indicators are, the more attractive the securities are for investors. Stocks with high liquidity are quickly sold and bought. If the indicator is low, there is a possibility of losing funds when selling assets at a low price due to the lack of the necessary number of buyers.
Read more: How to invest in stocks and what you need to know
The category of low-liquid equity securities includes shares of small enterprises that are rarely bought by investors.
The "blue chips" are distinguished by the highest liquidity. They are included in the stock indexes.
Stock growth potential
A full-fledged income on securities is not only receiving dividends from them, but also selling assets. When studying this item, the growth of the share price is analyzed and a forecast is made. Information is monitored by analysts and investment houses.
The estimated rate at which it will be possible to sell the equity paper is called the target or target price.
As an example, we can give the current value of Tesla's securities, which is $2,000 (before the split). According to the forecasts of the Jefferies analyst, the price of these shares may fall to $1200 in the coming months. As a percentage, this will be equal to 42%. And since this is not a profit, but a loss, buying Tesla securities is now not the best investment (except for a long time).
For forecasting, you can take into account volatility. The parameter takes into account the price fluctuation over a certain time period. The indicator of high volatility for the year suggests that the share price has been systematically falling and increasing. When acquiring assets for a long time, these indicators can be ignored. But, if the securities are bought for a short period, for the purpose of selling, you should pay close attention to this parameter.
Read more: Volatility: types, how to track and how to use
Multipliers
You can compare various financial indicators using multipliers that reflect the efficiency of the company and the objectivity of the price of its shares on the stock exchange.
In addition, multipliers are an effective tool when searching for shares of undervalued companies. Such securities usually have a low price, and the companies that issued them have promising indicators, but at the moment their shares have not yet been noticed by investors.
There are quite a lot of multipliers, but most often investors pay attention to:
- EV/EBITDA is the ratio of the company's debt loads and the share price, subtract liquid securities, to the profit received before taxes, dividends, etc. It is more profitable to invest in shares of companies where this multiplier is of low value;
- P/E — the ratio of the capitalization of the issuer of shares to the profit received by it for the reporting period. It is considered one of the most important multipliers, because it allows you to judge how much the stock price is undervalued or overvalued (at a value of about 10, the price is fair);
- P/S — the ratio of the market value of the issuing company to the received and revenue;
- P/CF — the ratio of the company's capitalization to free cash flow. The lower the indicator, the more funds the issuer has to pay dividends.
Read more: P/E Ratio: what it is needed for and how it is calculated
How to buy shares for investment
How to buy shares for investment:
- Decide on the method of purchase.
- Select the type of shares.
- Deposit funds.
- Make a purchase request.
The last two points may go in a different sequence-it all depends on the chosen method of buying shares, which we will now consider in more detail.
Buying shares through a broker
Acquiring assets through a broker is the most common method. Previously, brokers' services were not cheap, but now, in the era of the Internet and increased competition in this industry, everyone can choose suitable prices for themselves. There are a lot of brokerage companies that offer both a full range of services, including expert advice, and standard service, where you will have to figure out a lot yourself (it costs less).
To make a purchase, you need to register on a brokerage resource, create an account and deposit funds. In most cases, investors choose the opportunity to make transactions independently by sending a trading order to the broker to buy or sell shares. In this case, the broker will charge only a small commission for intermediary services between the client and the exchange.
If you transfer your funds to trust management, the chances of making a profit from investing in shares will be much higher, but you will also have to pay the broker much more.
Read more: Stock market Broker: how to choose it and how to work with it
DRIPs & DIPs
Purchase of shares directly from the company. This method is considered more risky, but its advantage is that securities are purchased at a cheaper price than through a broker.
Many enterprises allocate a minimum package of equity securities for this type of sale. For example, these can be assets worth $20,000. Some companies meet the investor halfway and provide for a gradual purchase. In this case, a certain amount of money will be debited from the investor's bank account on a monthly basis.
To find out the course and all the nuances of the purchase, you should contact the company's representatives and request the information necessary for familiarization. In most cases, it is possible to buy blocks of shares from $50.
Buying shares directly allows you to reinvest the earned dividends in new shares. Moreover, these operations can be carried out automatically. In addition, some companies give investors a discount of up to 5% on the reinvestment of dividends.
Pros and cons of investing in stocks
As with all other types of financial activity, there are advantages and disadvantages to investing money in stocks.
The main advantages can be defined as:
- The possibility of participating in the management of the company (if you own ordinary shares).
- Receiving dividends, and regular ones, if we are talking about the purchase of preferred shares.
- You can invest in stocks without leaving your home, through online tools and mobile applications provided by brokers.
- There are several types of earnings — passive (dividends) and active (sale of shares after their rise in price).
- Detailed legal regulation of the entire process of buying and selling securities — the investor is protected from problems with the law.
There are not so many disadvantages when buying shares, but they still exist:
- The inability to accurately predict the change in the exchange rate and, as a result, the risk of losses.
- Restrictions in management — only holders of ordinary shares, whose share in order to participate in voting must be greater than the value prescribed in the regulations, can influence the policy of companies by default.
- Holders of ordinary shares may be left without dividends in the event of financial problems or bankruptcy of the company.
- There is a high entry threshold-shares of many companies are sold in lots of 1,000 or more pieces, so an initial deposit of several thousand dollars is required for their purchase (but there are also cheaper options — from $20-50).
- The need to study the basics of fundamental and technical analysis — without this, investing in stocks is unlikely to be profitable.