11 Point Plan On How To Start Investing In The Stock Market.
Table of Contents
The sad bit is most never go beyond that question as they begin to immediately discount the thought, believing it is such a difficult area that is better left to the “experts”. Today my main aim is to encourage you to become the best version of you by taking all the opportunities that life brings you as you transform your finances and those of your family.
I do appreciate and understand why you may not have taken the next step into investing as this could be a really confusing subject.
You have got people telling where you should invest and where you shouldn’t invest and it’s hard to know who’s legit and who’s just trying to sell you an online course.
Today I will give you the information I wish I had when I was young and cut through all the fluff that is online.
I am going to condense this right down to an 11 point plan so hopefully, you can turn your thousand dollars into ten thousand dollars.
We will conclude with one of the most common mistakes you must avoid.
I am a businessman, not a financial advisor, so I am recommending you do your own research as well.
Let’s dive straight into how you can start investing in the stock market.
1. Build A Back-Up Fund or Emergency Fund
Before you invest in the stock market you need to have your backup fund sorted out. This is an important step in financial planning. It takes care of the unforeseen risks in life.
The three most important risks you need to try and hedge before investments are health insurance, life insurance and having an emergency back-up fund.
The emergency fund is to meet any other financial risk and emergencies.
Until you have a good emergency fund in place, starting to invest for long-term goals may be futile.
You have got to ensure that you have a bit of a backup fund behind you.
My advice normally is saving around about four to six months worth of salary once you have that behind you, then you can start the investment route in the stock market.
Let’s see why and how to create such an emergency fund to start investing.
As the name suggests, emergency situations happen without warning and also need immediate action.
There could be job-loss running into a few months or there could be temporary disability resulting in your inability to work.
A medical emergency may crop up at a time which needs time to make claims or settlement or the ailment itself may have a waiting period.
In all such cases, you will need readily available funds to see you through this patch of life.
Whether it’s meeting the household expenses or car repayments, such payments mostly have to still be made.
The emergency fund is not for meeting your planned goals, the emergency fund is only to provide a safety net in those times.
If you don’t have an emergency fund, you have very few options left.
You will probably as most do call upon any investments they have which jeopardizes the long -term goal for having these investments.
It also prevents you from enjoying the benefits of compounding which is magic 😉
2. Three Main Investment Strategies
Some may be wondering, what do you suggest I invest in or what stocks do i pick? Well before you decide to invest you need a strategy and there are three main investment strategies.Technical analysis
Technical analysis is more of a day trader sort of way of doing stocks and shares. These analytics look at statistical trends based on trading activities. For example, they may analyze historical fluctuations in a stock’s trading price or the volume at which a stock is traded. Technical analysis focuses on discovering patterns with price data and trading signals and tries to predict price movements by examining historical data, mainly price and volume. It helps also you navigate the gap between intrinsic value and market price by leveraging techniques like statistical analysis and behavioral economics. It is important for the day trader and investor as it helps guide you to what is most likely to happen given past information. You analyse all the peaks and through on a day-to-day basis. Most investors use both technical and fundamental analysis to make decisions.Fundamental analysis
Fundamental analysis is the second strategy where you look into the whole of the business before you start investing. It is the estimation of the value of a company with a view to arriving at a “fair value” for its shares. As shares trade in the stock market, their “market price” fluctuates up and down depending on supply and demand.
Comparing a share’s fair value to the current market price helps you to decide whether or not to invest in a share.
When purchasing shares on the stock market, you are actually acquiring a small part of a company. At the end of the day you got to know if that company is going to be a good stock to pick.
Therefore, before deciding whether or not to buy shares, it is very important to analyse not just the technical aspects of the stock in question, but also the fundamentals of the business behind the company.
Fundamental analysis involves looking at everything that can affect the company’s value, from the state of the economy, through industry conditions, to company-specific factors.
That is looking for “intrinsic value involves the detailed study of their Forms 10-K, Forms 10-Q, Forms 8-K, annual report, balance sheets, and all the figures you can get about the company.
All this information is filed as a SEC requirement so they are readily available.
You can learn all this information from a computer or your smartphone, and you can read this post for more information about these forms.
So what do you need to look for in a stock when you’re Investing?
Stock Picking Strategies or What To look For In Stocks
Picking stocks is based on a series of criteria, with the aim of achieving above-market returns. This is important before you start investing. Two main tactics here are qualitative and quantitative analysis. Qualitative analysis is all about looking at the leadership and direction of the company. If it’s going really really well and it’s got a good leader. Let’s. Take for example, Tesla with Elon Musk. I mean you just invest in him anyway isn’t it? Wouldn’t you? He is very charismatic, but you can’t just do that. So 20 % of my research will be on that and then you go to your quantitative analysis.Urban Myth on how to start investing
Before we continue I want to clear up a few misconceptions and urban myths. Many novice investors assume and believe that there is a fool-proof strategy whose application will ensure their success in investing.
It does not however mean that you cannot build wealth from investing in the stock market.
I believe, it is better to consider stock-picking as an art than a science, for the following reasons:
- Stocks are influenced by so many factors that it is virtually impossible to devise a formula for predicting their success. The compilation of useful data is one thing; the selection of the relevant figures is another.
- Many intangible factors are not measurable. The quantifiable elements of a stock, like profit, are relatively easy to find. But how do you measure qualitative factors: business information, personnel profile, competitive advantage, or market reputation? The combination of tangible and intangible aspects makes picking a stock a highly subjective, even intuitive process.
- Given the human element (often irrational) involved and as a driving force of the stock market, stocks do not always move as expected. Investors’ moods can change suddenly and unpredictably. And, unfortunately, when confidence gives way to fear, the stock market can be a dangerous place.
Let’s look at how qualitative factors contribute to stock picking.
Qualitative Analysis
Qualitative analysis is the soft metrics of the company and refers to aspects that aren’t quantifiable or easily explained by numbers. To evaluate a company’s intangibles, one must dig below the surface and beyond the 10-K. When conducting qualitative analysis of a company, you look at the business model, competitive advantage in the industry, management and corporate governance. This helps to determine how a company makes money, its uniqueness versus the competition, management team – which people are making the decisions and how they treat ordinary shareholders. Gathering all of this data can provide a better idea of how a company intends to grow its business while rewarding shareholders. Other things to look for is customer satisfaction, supplier relationships, supplier satisfaction, employee rewards and employee satisfaction. What we must know is businesses whose stock price has risen consistently over time mostly satisfy its stakeholders. Qualitative analysis should be about 20% of your research time or more if possible. The next bit of analysis is what takes the lion share of time during your stock evaluation.Quantitative Analysis
Quantitative analysis is all about looking at the figures of the company.
We look at financial performance or other business metrics. We look out for figures telling you a story that that stock is undervalued as we discussed in fundamental analysis.
For this, we require certain data sources or inputs about the company. The most common data sources are Income Statement, Balance Sheet and Cash Flow Statement
There are other additional documents and information which are also equally important to supplement this data.
Additionally, Quantitative analysis can be seen as an approach that emphasizes mathematical and statistical analysis to help determine the value of a financial asset, such as a stock or option.
You use a variety of data including historical investment and stock market data to develop trading algorithms and computer models.
The ultimate goal of financial quantitative analysis is to use quantifiable statistics and metrics to assist investors in making profitable investment decisions.
After you have done both analysis and you think my oh mine, those stocks are only 20 dollars each and you think that company’s worth thirty dollars.
By doing the analysis you are then buying stocks based on “informed decisions” as far as you can tell so that is what I look for in a stock.
Passive investments
The third strategy is your passive investments strategy. I don’t personally like the term “passive” as it connotes not doing a lot. According to Investopedia, the goal of passive investment is to build wealth gradually. To do this, investors buy index funds and stocks and hold on to them for a long period of time. By avoiding the quick buy and sell strategy, investors reduce fees and complications that often come with very active portfolios. Passive investments are great because you don’t have to spend too much personal time on it. So now that you know the strategies where do you start?3. Starting Your Investment Portfolio
I normally recommend starting with a simple three fund portfolio made up of index funds. An index fund is a exchange-traded fund (ETF) or mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. *I encourage you to read about index using this link on the blog “How To Make Money from Stock Market” An index fund boiled down to the simplest way is this. Imagine a massive basket, and in that basket you have so many business and by investing in that basket of companies or index, you have a share in each and every one of those companies, so if one goes down, you still have the others to rely on. This also applies to the down side and if one business goes sky high, you don’t get that sky highness. The upside of it is, if one of them fails or goes bankrupt. You don’t, get the down side of that as it all balances out across the board.Good index funds to start your investment portfolio
Just to give you some specifics. My choice of three of the most popular index funds are:Vanguard Total Stock Index Fund (VTSAX)
VTSAX is designed to provide you with exposure to the entire U.S. equity market. This is including small-, mid-, and large-cap growth and value stocks. The fund’s key attributes are its low costs, broad diversification, and the potential for tax efficiency. If you are starting investment in stocks this is a low-cost way to gain broad exposure to the U.S. stock market you may wish to consider this fund as either a core equity holding if you are younger. I will give my percentage preferences for all three stocks at the end of this piece.
Vanguard Total International Stock Index (VTIAX)
VTIAX offers you as you starting out investing in the stock market a low cost way to gain equity exposure to both developed and emerging international economies. The fund tracks stock markets all over the globe, with the exception of the United States. Because it invests in non-U.S. stocks, including those in developed and emerging markets, the fund can be more volatile than a domestic fund. Long-term investors who want to add a diversified international equity position to their portfolio may want to consider this fund as an option. And finally the VBTLX.
Vanguard Total Bond Market Index Fund (VBTLX)
VBTLX is designed to provide broad exposure to U.S. investment-grade bonds. The fund invests in the U.S. Treasuries and mortgage-backed securities of all maturities (short-, intermediate-, and long-term issues). As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease. This will price the fund’s net asset value (NAV) lower. Because the fund invests in several segments and maturities of the fixed income market, mature and older investors may consider the fund their core bond holding.
Best percentages for portfolio by Age (Younger Investor)
Now, generally speaking, I would say you’re better off as a young person to start investing now. The younger you are the more you can enjoy the benefit of compounding. If you are younger and starting to invest, It is better to mostly go into the usa fund and some international and less of the bonds. That is, younger investors: VTSAX – 60%; VTIAX – 30%; and VBTLX – 10%Best percentages for portfolio by Age (Mature or older Investor)
As you become older, more mature and planning for retirement, then you can drop out of the slightly more risky funds and go more for the bonds because they are seen as a much safer, more stable and less volatile. For mature or older investors: VTSAX – 20%; VTIAX – 10%; and VBTLX – 70%.4. Think Deeply About Your Life Goals
Spending time to reflect and think about your life goals affects your attitude to money and investing. Ask yourself questions like why do you want to be wealthy or why do you want to become a millionaire? And truthful in your answers so you know why you are doing what you doing. A millionaire is a different thing to different people. Some people like to see flashy cars and flashy this and that. I am not one for flexing that’s just not me. I just like to have enough money to do the things I believe God put me on this planet to do. To know my family is secure and I can do the things that I really want to do. Having money makes opportunities for you and that is what life is all about, so you can enjoy opportunities. It also buys you time as well because realistically, that’s the hardest most finite of resources to get. So if you can pay someone to do something for you to free up your time why not?5. Where Do You Start Learning How To Invest
My best advice on how to start learning how to invest will be recommending you buy three books. These are some of the best books out:- The Intelligent Investor,
- The Little Book of Common Sense Investing, and
- The Essays of Warren Buffett.
6. Play The Long Game – Invest Long Term
Yes, there can be and there will be stock market collapse in the future. That is certain but what is certain also is they always bounce back. In your lifetime you will see many of them and they should never discourage you from investing for the long term rather it should encourage you. When you invest for the long term all these markets up and down have one resultant effect – It evens out and the graph is always on the ascendency cumulatively. Warren Buffett whose net worth is $84 billion should know a thing or two about the markets, don’t you agree? Warren Buffett said the recession is where he makes most of his money, because when everyone’s selling and getting rid of their shares, he’s getting greedy 🙂 and buying them all because you will never get them at a better price. So all those new investors out there – this is really important. It’s all about time in the market, not timing in the market!7. Types of Markets
There are two types of markets going on out there. A bull market and a bear market.
A Bull Market
A bull market means the market is going up aggressively over a period of time and the market as a general is on the rise. A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies and commodities. Because prices of securities rise and fall essentially continuously during trading, the term “bull market” is typically reserved for extended periods in which a large portion of security prices are rising. Characteristics: Bull markets are characterized by optimism, investor confidence and expectations that strong results should continue for an extended period of time. It is difficult to predict consistently when the trends in the market might change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets. As the market starts to rise, there becomes more and more greed in the stock market. You see more and more people thinking, “Oh yeah let’s put money into the market because it’s going up.” There is no specific and universal metric used to identify a bull market. We however call a market bullish in a situation in which stock prices rise by 20%, usually after a drop of 20% and before a second 20% decline. Since bull markets are difficult to predict, analysts mostly only recognize this phenomenon after it has happened. Bull markets tend to last for months or even years.
What causes a bull market?
Bull markets generally take place when there is a drop in unemployment or when there are high employment levels across the board. They also happen when the economy is strengthening or when it is already strong. Bull markets also tend to happen in line with strong gross domestic product (GDP) and and will often coincide with a rise in corporate profits amongst a wide range of other factors.Why is it called a bull market?
The commonly held belief about the origin of these terms suggests the way the animals attack their opponents. A bull thrusts its horns up into the air, when attacking. These actions are metaphors for the movement of a market.A Bear Market
A bear market is where the market is on the decline, but the good thing about a bear market is it is always followed by a bull market. The bear market is when securities prices have fallen 20% from recent highs, if not more, spawning widespread pessimism from investors. That signals a bear market, and when that happens people start to get really scared about putting money into the stock market. It is characterized by falling prices and shrouded in an atmosphere of pessimism.
What Causes a Bear market?
A bear market is one that is showing signs of a decline- decline in markets, decline in market confidence, decline in employment numbers etc. Share prices are dropping to the point where seasoned investors believe that this trend will continue, at least for the foreseeable future. Bear markets longevity can vary wildly depending on the specific situation. Some can last for just several weeks, while some bear markets can last years. A cyclical bear market can even last several years depending on the contributing factors.Why is it called a bear market?
Interestingly, a bear market is named for the way bears attack their opponents. A bear swipes downward during an attack, thus becoming a metaphor for market activity under these conditions. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.8. Dollar Cost Saving
Dollay cost saving is important if you are in for the long term and do not have a lot of cash to invest at a go like most people. Dollar-cost average is an investment strategy where you can invest a fixed amount at regular intervals into the same stocks, mutual funds, or ETFs (exchange-traded funds). No matter what the financial markets are doing, the dollar amount never varies. At times when the market price per share is high, the amount you invest buys fewer shares of the investment. Then, at times when the market prices fall, you are able to purchase more shares. Simply put, dollar-cost averaging refers to the practice of building investment positions by investing fixed dollar amounts at equal time intervals, as opposed to simply investing a lump sum all at one time.Example of Dollar Cost Savings
For example, if I want to invest $15,000 into Tesla stock. Instead of investing all of the money .ie. $15,000 at the same time, I invest $3,000 on the first trading day of the month for the next five months.This slowly builds my full position. Alternatively, dollar-cost averaging can be used to quickly build a stock position in a volatile market. For example, instead of investing $15,000 into a stock all at once, I could choose to invest $3,000 every Friday for the next five weeks. The strategy can also be used to accumulate stock positions over a period of years. For example, You can put $3,000 into a certain stock on the first trading day of every year. The point is that while the general idea behind dollar-cost averaging is quite simple, there are a variety of ways it can be implemented to fit specific goals or investment styles. Perhaps the biggest reason to use dollar-cost averaging is that it guarantees a mathematically favorable average price for your investment. This is easier to explain through an example, so consider this:
Let’s say that you want to invest $15,000 in a certain stock, and that you choose to invest $3,000 on the first trading day of the month for five months in order to build your position through dollar-cost averaging.
We’ll say that on each of the five days you make a purchase, the stock is trading for $50, $40, $20, $40, and $50, respectively.
In other words, the stock ended right where it started, although it was quite volatile along the way.
Here’s how your five purchases would have turned out:
Here’s what I mean by a “mathematically favorable price.”
The average share price of this stock for the five days you made your purchases is $40 (add $50, $40, $20, $40, and $50, and divide by five), but the average price you paid ($35.71) was significantly lower.
I used round numbers to keep the calculations neat, but you can repeat this experiment using any five hypothetical share prices. Your average cost basis per share will always be less than or equal to the average of the five share prices.
It’s good to develop an appreciation for investing for a long period of time, and the good thing about that is, you can take advantage of dollar cost averaging.
So some months you might be getting a great deal, another month you might be getting a bad deal and another month you might be getting in between deals, but what happens is that all of those average out and that is what it is dollar cost averaging?