Investing can seem really intimidating, especially when you don’t know where and how to start. Before I started learning about the stock market, I always pictured investors to be pretentious and overly dressed stockbrokers living out their The Wolf of Wall Street dreams. But this is definitely not the case. Anyone can start investing as long as you are willing to do a little bit of research and are eager to learn more about basic finance. Investing at a young age can also help secure long-term returns which provides financial stability and independence for your future. So, if you’re ready to get started, here are some tips and advice to start investing!
The first critical step is picking a company to invest in, which is done through purchasing that company’s stocks. Buying stocks represent owning a share of a company which allows the stock owner to participate in the upsides and downsides of the company’s finances. Investing in company stocks can yield high returns or high losses as it can be fairly risky. It can be hard to determine what constitutes a “good” investment. To professional investors, a good investment is seen as a company that is undervalued by the market. This means that their stock price is trading at a lower price than what the actual value of the stock is, which is determined through complicated calculations that are way too uninteresting from a beginner’s perspective. However, this way of thinking brings about an interesting insight about picking what stocks to invest in: try to pick companies that you think the market (or other investors) are overlooking and are actually more valuable than what the stock price is.
Pick a company that you truly believe in and go with your gut feeling. Choose a company you encounter in your everyday life that you think would be a good investment. For example, if you see that your favourite clothing brand has been opening new stores in the past few months and is gaining more traction on social media, it could be an indicator that the company is growing at a healthy rate, which means it could be a good investment. Also, don’t get caught up in what your friends are investing in. At the end of the day, everyone has different risk tolerances and investment strategies and it’s important to stick with your instincts.
Another important tip to becoming a smart investor is to diversify your portfolio, which is basically a way of spreading risks by investing in stocks from different industries. But why? If you only invested in airplane companies pre-COVID (American Airlines, United Airlines or Delta Airlines), your portfolio would have absolutely plummeted when the virus hit, as there was a huge disturbance to the airplane industry due to travel restrictions. However, if you invested in a combination of stocks like airplanes, technology and consumer goods, you would have been a lot better off when the pandemic began.
Another important thing to keep in mind is your risk tolerance. Are you a high-risk high-reward type of person? Or do you prefer to be more cautious and conservative with your investments? If you want to keep it on the safe side, consider investing in bonds or mutual funds. A mutual fund comprises multiple company stocks that are all managed by a professional investor. This significantly reduces the risk of your investment as you diversify your portfolio by investing in multiple companies. On the other hand, investing in bonds, which is basically like giving a loan to an entity, whether it be a company or the government, is also less risky in the case of economic downturns and company bankruptcies. Also, try to pick a company that is fairly mature with some presence in their industry. While newer and smaller companies, such as tech start-ups, have high growth potential, they are also riskier as it is difficult to put a value on them. However, keep in mind that less risky investments usually correlate with lower, yet consistent, returns.
Also, remember to be patient. One of the biggest mistakes that new investors can make is selling their shares when media headlines predict some impending economic doom. This is also known as panic selling. Investing is a long-term activity, meaning that short-term fluctuations in the market are most likely going to level out eventually. People often overreact to news, causing volatility in the stock market. Even though it can be hard, try not to let anxiety or emotion cloud your judgment when you are choosing to buy or sell stocks.
Lastly, it’s important to do your research. This could mean simple qualitative observations, such as you noticing that your favourite local clothing shop has signs of growth. It’s also important to read the news to get a sense of the market and general trends. Personally, I recommend subscribing to The Morning Brew, a daily email newsletter that summarizes important business updates in layman terms.
Once you start to get comfortable with market trends and you want to advance your investing knowledge, look out for these important quantitative metrics when assessing the value of a stock. All of these can be found through either a quick Google search or a look through a company’s financial statements on their annual report. To find out more about these key metrics and other important investing terms, check out Investopedia. The website offers extremely helpful information for all investors, whether you’re just starting out or you’re already a pro!
- Dividends: Dividends represent the extra cash or returns that are sometimes given to a company’s stockholders. As dividend payments are not always guaranteed, it may be useful to research a company’s history of dividend payments to see whether owning their stock could generate an extra cash payment.
- Price to Earnings Ratio (P/E) : Probably one of the most important ratios for all types of investors, the P/E ratio compares the company’s stock price against its earnings to determine whether the price of the stock is overvalued (expensive for its financial value) or undervalued (cheaper than its actual financial value). A high P/E ratio indicates that the stock is fairly expensive while a low P/E ratio indicates an inexpensive stock, which would be a worthwhile investment.
- Beta: Lastly, beta describes the volatility of a stock, meaning that it represents how much the stock price fluctuates in comparison to other stocks in the market. A beta greater than 1 indicates that the stock is relatively volatile, which could indicate higher risk, while a beta lower than 1 indicates that the stock is relatively more stable.
While I am by no means a professional investor, I hope these tips will help kickstart your investing journey! Good luck and don’t forget to have some fun!