How To Start Investing In The Stock Market?

Jan. 08, 2020 1:03 PM ET
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Contributor Since 2014

A software architect by day. An investor in a variety of industries, with a special focus on technology by night. Specially focused on value stocks, poorly understood, or under-followed situations. I'm primarily investing in special situations with a value that is not fully appreciated or where there is a highly asymmetric risk/reward perspective. Also, an avid fish grower - talk to me if you are curious about those topics as well.

For many, the stock market seems too complicated and confusing, but in reality, everything is completely different. Even the famous Warren Buffett claims that you do not need to have 120-130 IQ points to earn money on securities. A person with even the most ordinary mind will cope with this, provided that he has a sufficient reserve of patience, as well as a clear understanding of what he is doing and why.

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Where to start investing in stocks, in what ways and how much you can earn, what risks investors expect - let's figure all this points out.

So, how to earn money from shares? The first source is dividends. The source of dividend payment is the company's net profit, and its specific amount is determined by the meeting of shareholders at the end of the financial year. Investing in order to receive dividends causes many investors as much delight as observing how the paint dries on the fence is long and boring. But it was precisely the patient expectation of payments from the shares, then their careful reinvestment that made the main "monsters" of the stock market those who they are now.

A good example is the well-known American investor Ann Scheiber, who over the past 50 years has been able to turn $5,000 into $22 million on dividend reinvestments alone.

The seconds one, is the price difference of the stock itself, on the exchange. Exchange rate differences are the main way to generate income. The essence, at first glance, is simple - to buy cheaper and sell more expensive. But immediately start trading is not worth it. Before you start investing in stocks, you need to carefully analyze the company, all its indicators, prospects, etc.

How to start investing in stocks? Well, as with any other type of investment, you first need to formulate a plan: what do you want to buy and for how long, then raise the starting capital to buy a certain number of shares. Investing in securities is not an activity for the poor and, moreover, involves a significant share of risk, since even large corporations go bankrupt from time to time. Therefore, one should approach the matter wisely.

What stocks to buy? Everyone who decides to switch from planning to active actions needs to decide on this issue. Indeed, do not buy the same shares, focusing only on rumors, news, friends' advice and the opinions of various "experts." First of all, you should decide on the direction. There are three main classes of stocks. All further strategies, techniques, and subtleties of investing depend on exactly what choice was made at this stage.

The first one is dividend shares. In this case, the growth of stock prices is not a key factor, but only the profit of the company is important, which results in a stable inflow of dividends for the investor. Dividend shares have one difference - the benefit received from them is directly proportional to the company's net profit, therefore, among such companies, as a rule, securities have a low growth rate. These are stable and large companies that do not need extra money to increase profits.

The second one is growth stocks. These are stocks of companies whose performance is growing rapidly (tens of percent for the reporting period). An increase in indicators also means an increase in prices, which makes such stocks attractive for trading. Such companies rarely pay dividends, and all funds are directed to expansion.

And value stock. Undervalued stocks whose market value is lower than real. Usually, stocks become underestimated due to false news of a negative color, a crisis in the industry, low fame, or simply a temporary lack of active interest in the company’s field of activity. The peculiarity is that sooner or later the market will revalue the shares, and their liquidity will go up. The disadvantage is that you can wait a decade for this moment. However, you should not be afraid of expectations.

For example, Warren Buffett is very fond of investing in such shares. So, absolutely good or absolutely bad stocks do not exist. There are only those that are best suited for a specific earnings strategy and are fully consistent with the goals and views of the investor.

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