How to start investing - Basics

Question 1

What is the first step when you are ready to start investing as a beginner?

Answer 1

Determining your investing approach. Would you prefer to buy individual stocks or take a less active approach?

A proactive approach requires you to regularly set aside time to do research. With passive approach you put a lot of the research into the hands of others.

Question 2

What is the second step when you are ready to start investing?

Answer 2

Decide how much you want to invest in stocks.

The money you decide to invest should be money you can live without at a minimum of the next five years.

Question 3

How does your age play a role in how much you should invest?

Answer 3

A young person typically have more investing years available than their older counterparts.

General Rule of Thumb:
110 - ‘your age’ = The approximate percentage of your investable money in stocks.
The remainder should be in fixed-income investments.

Question 4

What is the third step when you are ready to start investing?

Answer 4

Open an investment account.

You need a specialized type of account called a brokerage account. It generally only takes a few minutes but you need to think about a few things:

• The type of brokerage account
• The costs and features of the brokerage account

Question 5

What is the fourth step when you are ready to start investing?

Answer 5

Choose your stocks.

That’s easier said than done but here are some things to consider:

• Diversify your portfolio
• Invest only businesses you understand
• Avoid high-volatility stocks until you get the hang of investing
• Stay away from penny stocks as a beginner
• Learn the basic metrics and concepts for evaluating stocks

Question 6

What is the final step for someone who wants to start investing?

Answer 6

Continue Investing.

Continue to buy shares of great businesses at reasonable prices. Don’t let volatility scare you away from getting your portfolio to where you want it.

Question 7

What is an investment strategy?

Answer 7

Strategies that help investors choose where and how to invest as per their expected return, risk appetite, corpus amount, long-term, short-term holdings, retirement age, choice of industry among other things.

Question 8

What is a passive investment strategy?

Answer 8

Buying and holding stocks and not frequently dealing in them to avoid higher transaction costs.

People that use this strategy tend to believe that this strategy is less risky.

Question 9

What is an active investment strategy?

Answer 9

Frequently buying and selling.

People who use this strategy feel they can outperform the market by making on the fly decisions more often than many other investors.

Question 10

What is the growth investing strategy?

Answer 10

Looking at company and gauging the growth. Investing in such companies that they believe will grow in the long term. This investment builds the company’s corpus value.

On the other hand if they feel it will only do good for a few years they will invest in it short term with a goal of when they plan on pulling the money.

Long story short the goal is to try to gauge the growth and determine how long they want to invest there.

Question 11

What is the value investing strategy?

Answer 11

This involves investing in the company by looking at its intrinsic value because some companies are undervalued by the stock market.

The idea here is that once the market goes for correction it will correct the value and the price will shoot up leaving the investors with high returns when they sell.

Question 12

What is the income investing strategy?

Answer 12

This focuses on generating cash income from stocks rather than investing in stocks that only increase the value of ones portfolio. Investors in these types look for either dividend or fixed interest income from bonds. This type of strategy is used by those who are looking for a steady income from investments.

Question 13

What is the dividend growth investing strategy?

Answer 13

The investor looks out for companies that consistently paid a dividend every year. This companies tend to be more stable and less volatile compare to other companies. Many investors of this strategy reinvest their dividends for compound returns.

Question 14

What is the contrarian investing strategy?

Answer 14

This allows investors to buy stocks of companies at the time of the down market. This focuses on buying low and selling high.

Question 15

What is the indexing investing strategy?

Answer 15

This allows investors to invest a small portion of stocks in a market index. This is generally done through mutual funds, index funds, or exchange-traded funds (ETFs)

Question 16

What is the momentum investing strategy?

Answer 16

This strategy looks to ride the wave and buy stocks experiencing an uptrend.

Question 17

What is the dollar-cost averaging strategy?

Answer 17

This is the practice of making regular investments in the market overtime and is not mutually exclusive to any other strategies. One may decide to invest a set amount monthly. This will result in buying stocks that are either on the low end or high end of their spectrum.

Question 18

What is the buy-and-hold investing strategy?

Answer 18

Buy-and-hold strategists seek investments that will perform well over many years. The idea is not to panic when the market dips or drops in the short term. This strategy requires the investor to carefully evaluate their investments.

Question 19

What is the buy-and-hold investing strategy?

Answer 19

Buy-and-hold strategists seek investments that will perform well over many years. The idea is not to panic when the market dips or drops in the short term. This strategy requires the investor to carefully evaluate their investments.

Question 20

What is a socially responsible investment strategy?

Answer 20

(SRI) aims to create positive change in society while trying to generate positive returns. Some investors also exclude certain stocks that go against their moral compass.

Question 21

What is the small cap investing strategy?

Answer 21

This strategy focuses on companies with a market cap (total value) between $250 million and $2 billion. This means you don’t focus on companies such as like Apple, Ford, IBM and instead focus on smaller companies that you think could do well in the future.

Question 22

What is the quality investing strategy?

Answer 22

This strategy focuses on companies with outstanding quality characteristics such as credibility of the management or stability of the balance sheet.

Question 23

What are the 4 basic steps to stock research?

Answer 23

1. Gather your stock research materials.
2. Narrow your focus.
3. Turn to qualitative stock research.
4. Put your stock research into context.

Question 24

What are the methods of gathering stock research materials?

Answer 24

Review the company’s financials. This is quantitive research, which begins by gathering documents that companies are required to file with the U.S. Securities and Exchange Commission (SEC).
Form 10-K: Annual report with key financial information.
Form 10-Q: A quarterly update on operations and financial situations.

Best stock research websites:
- The SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) website. It’s valuable to learn how to research stocks.
- Look for information on your brokerage firms website or on major financial news websites.
- You can also fine useful information from the company’s website.

Question 25

What is the method of narrowing your focus when doing stock research?

Answer 25

There are a lot of numbers in the financial documents for a company. To save time you can focus on these items:

• Revenue: The amount of money a company brought in during a given period. It’s the first thing you will find on the income statement which is why it’s called “top line”.
• Net Income: The total amount of income a company has made after operating expenses, taxes, and depreciation are subtracted from the revenue. It is at the end of the income statement which is why it’s called the “bottom line”.
• Earnings and Earnings Per Share (EPS): When you divide the earnings by the number of shares available to trade you get the earnings per share. This shows the profitability on a per share basis.
• Price-Earnings Ratio (P/E): Dividing a company’s current stock price by its earnings per share — usually over the last 12 months — gives you a company’s trailing P/E ratio. This measure of a stocks value gives you how much investors are willing to pay to receive $1 of the company’s current earnings.
• Return on Equity (ROE) and Return on Assets (ROA): Return on equity reveals, in percentage terms, how much profit a company generates with each dollar shareholders have invested. The equity is shareholder equity. Return on assets shows what percentage of its profits the company generates with each dollar of its assets. Each is derived from dividing a company’s annual net income by one of those measures. These percentages also tell you something about how efficient the company is at generating profits.

Question 26

What is the method when you turn to qualitative stock research?

Answer 26

If quantitative stock research reveals the black-and-white financials of a company’s story, qualitative stock research provides the technicolor details that give you a truer picture of its operations and prospects.

Here are questions to ask about potential companies to invest in:

• How does the company make money? A good rule of thumb that’s served Buffett well: Invest in common-sense companies that you truly understand.
• Does this company have a competitive advantage? The harder it is for competitors to breach the company’s moat, the stronger the competitive advantage.
• How good is the management team? Also research the company’s board of directors, the people representing shareholders in the boardroom. Be wary of boards comprised mainly of company insiders. You want to see a healthy number of independent thinkers who can objectively assess management’s actions.
• What could go wrong? We’re not talking about developments that might affect the company’s stock price in the short-term, but fundamental changes that affect a business’s ability to grow over many years. Identify potential red flags using “what if” scenarios: An important patent expires; the CEO’s successor starts taking the business in a different direction; a viable competitor emerges; new technology usurps the company’s product or service.

Question 27

How can one put their stock research into context?

Answer 27

Before you buy any stock, you want to build a well-informed narrative about the company and what factors make it worthy of a long-term partnership. And to do that, context is key.

For long-term context, pull back the lens of your research to look at historical data. This will give you insight into the company’s resilience during tough times, reactions to challenges, and ability to improve its performance and deliver shareholder value over time.

Then look at how the company fits into the big picture by comparing the numbers and key ratios above to industry averages and other companies in the same or similar business. Many brokers offer research tools on their websites. The easiest way to make these comparisons is by using your broker’s educational tools, such as a stock screener.

Question 28

What are the steps in selling stocks?

Answer 28

1. When to sell stocks
   When you sell depends on your investing strategy, your investing timeline, and your tolerance for risk.
   Ongoing poor performance relative to the competition, irresponsible leadership and management decisions you don’t support may all make the list of good reasons. Maybe you’ve decided your money would do better elsewhere, or you’re harvesting losses to offset gains for which you’ll owe income taxes.
   Bad reasons typically involve a knee-jerk reaction to short-term stock market fluctuations or one-off company news. Bailing when things get rocky only locks in your losses, which is the opposite of what you want. (You know the saying: Buy low, sell high.) Before you sell, think about why you bought the stock in the first place. Did you consider what news or circumstances would make you sell it? Go over your reasoning to ensure you’re not giving in to an emotional response you might later regret.
2. Decide on an order type
   Market order
   The order will execute within a few seconds at market price.
   The risk: Your stock could sell at any price, with no restrictions.

Limit order
You set a limit price and the order will execute only if the stock is trading at or above that price.
The risk: You could end up not selling if the stock never rises to your limit price.

Stop-loss order
You set a stop price and your order will execute only if your stock begins trading at or below that price.
The risk: You could sell for less than your stop price — there is no floor. Also, a temporary drop in price may trigger a sale when you don’t want it to.

Stop-limit order
You set both a stop price and a limit price.
The risk: You’ve added a floor, but if the stock drops below it too quickly — which can happen in a volatile market — you may not sell at all.

3. Fill out the trade ticket
   Filling out the trade ticket is a quick process: You’ll select sell, plug in the symbol of the stock, the number of shares, your order type (and limit or stop price, if applicable) and what’s called the “time in force” or order expiration: essentially, how long the order should remain open.