So, I heard you have little problem.
A little bird told me that you, being the young, vivacious, go-getter that you are, want to get involved in the stock market. You’ve listened to Tim Ferris’ podcasts and are thoroughly inspired.
I will say, I’m impressed! Not many people under the age of thirty are trying to shoulder their way into the stock market.
Investing now, early, in stocks and creating a stock portfolio is absolutely incredible. It’s a fantastic way to create what’s called “passive income”. This means that the money you spend buying stocks (buying good stocks, any way) is going to create profits for you without you having to engage any further with them.
Basically, you get to sit on your butt and just collect the money your stocks earn you.
To help you get started, I, your Fairy Stockmother, have created a little cheat sheet to guide your inundation. Without further adieu, here is your step by step formula to dipping your feet into the stock market and world of investment…
Buying / Selling Stocks 101
Common v. preferred stock
The difference is in the method of payment to you, the stock owner. Common stock will distribute a portion of the companies earing for the period, a percent of company profits. Preferred stock has a fixed dividend payout, meaning it pays out shareholders (you) the same amount regardless of company profit.
Use a Search Engine
To find a company and buy their stock, use a search engine like Yahoo or Google finance. Sifting through millions of companies sounds tedious, to put it lightly. So I encourage you to set the filters to your preferences! Don’t know what to look for? Let’s talk about finding “good” stocks.
Finding “Good” Stocks
I’ll preface this point by saying there are no ‘good’ stocks. There are high risk companies, but that doesn’t mean they are bad. The great thing about stock purchasing is that you can’t loose more money than you invest. The price you paid for the stock is the most you can spend and you can’t loose more beyond that amount; you can only make money from that point from the companies dividend payouts. The aim is to find a company that will earn you back your initial investment and then some.
Now that we cleared that up, here are some things you will want to consider and search for in companies…
- Growth rate : You can search either by sales or company earnings, your choice!
- Price-earnings ratio : A lower P/E ratio means the stock has high value compared to its price meaning it’s a good deal with high likelihood of making you more money on your investment.
Diversify
The final note, and very important one, is to diversify your stock portfolio. Now, I know this sounds like intimidating “Wall Street” talk, but it’s actually a very simple idea. Basically, you want to diversify the kind of stocks you hold by purchasing shares from various companies. Your stock portfolio should not be a bunch cosmetic companies because you like makeup, or clothing companies because you’re interested in fashion. A good stock portfolio is one that isn’t dependent on one market.
Excuse my use of business jargon, but this is a very important idea to understand because it can exponentially increase your potential profits. Let me put it this way, say you didn’t come across this lovely little cheat sheet and did buy into only certain companies. Those companies are all from the same market, meaning they’re all part of the cosmetics, or clothing, or tech industry. So what happens if that market, as a whole, does poorly? What if you only bought into restaurant chains and there’s an E. Coli break out. That entire market will take a hit and so will every single one of your stocks.
But you’re a smart cookie and you read this article! You bought into one food company, one cosmetic company, one pharmaceutical, one sports, etc. Therefore, when one market takes a dive, you barely notice! The success of your portfolio and the money you make from your stocks isn’t dependent on the success of just one market.
Don’t believe me? Just take a look at the Dutch economy. They rose to be the economic powerhouse of 16th century Europe through diversifying their economy and are still, to this day, one of the wealthiest European nations. So don’t take my word for it, take the Dutch.