Still Struggling with Money? By Azizz Finance from the ZCommunity
Want a better future by Investing in the Stock Market, but you don't know where to start or what to buy?
You're off to a great start to changing your financial situation,
but investing is like learning how to swim. You'll end up losing all your hard
earned money by cannonballing right into the deep end. You want to avoid this
at all costs and for you to do this, there are 3 fundamental points to keep in
mind, to help you avoid the most common beginner investor mistakes.
Every successful investor who didn't have the right guidance made
these exact same mistakes. By knowing this, you'll be saving your hard earned
money and your valuable time.
The first mistake is jumping right into the game. The whole point
of investing money is to make money, so it's counterproductive for you to be
placing your money into something that's going to make you lose it. This is
always the case scenario when you invest blindly.
Just because your favorite YouTuber or a group chat says you
should buy or sell something OR it's made them tons of money, doesn't mean
it'll make you money too. If you really want to make money in the stock market,
you have to know exactly what you're doing which brings me to the next point.
The next thing you want to nail down is doing some In-Depth
Research to Understand the Company as a whole. This includes its competitors,
it's finances and it's position within its industry.
There are plenty of things that you could look at when it comes
down to researching a company and ultimately, you'll have to create your own
strategy, which is not something that will happen overnight.
Some good starting points for your research could be; how the
company makes it profits, comparing this with competitors that are in the same
industry with similar market cap’s and the choice between Value Metrics and
Financial Metrics.
Profits
Specifically, you want to find out how the company makes it's
profits and its likeliness to sustain this in the long term. You can see this
using their financial documents - accessible by SEDAR for Canadian companies or
EDGAR for American companies. A quick Google search for these 2 sources
will bless your soul.
Comparison
Making a comparison between it's close competitors, which are
companies that have similar Market Capitalizations and are within the same
Industry. You can find these 2 out by looking up their ticker symbol on Yahoo
Finance under 'Summary' and 'Profile' respectively.
Also, to put in simple terms, the Market Capitalization is just an
indicator of the company’s value.
Value Metrics VS Financial Metrics
Value Metrics
Value Metrics are derived from the financial documents that a
company releases and are really just a bunch of numbers, usually expressed in
decimals. Common Value Metrics that you've likely heard of before include the
PE Ratio or the EPS.
PE = Stock Price / Earnings
EPS aka Earnings Per Share = Earnings / Shares
Outstanding
Earnings = Profits that a company has made
Using the PE is one of many ways to tell you if the company is
overvalued or undervalued. Personally for me, if I find that the PE is less
than 15, I consider it to be a very undervalued company. If it's between 15-35,
I'd say it would be fairly valued. Anything over 35 is too overpriced for my
liking.
The EPS is another value metric that is a ratio of how much profit
the company made for each share that is available to the public. A lot of
people like to use this metric as a sign of profitability and how consistent
the company's profits are every 3 months
To put this simply, if You and 5 other people including myself
were invested in my company and it made $100 of profits this quarter, our
earnings per share would be $100/5 = $20. There’s obviously more to this but
this is extremely simplified, so be sure to do further research on what exactly
the EPS is.
These are only 2 types of value metrics and there's a lot more. I
suggest you do further research into more value metrics and come up with your
own little strategy!
Financial Metrics
Financial Metrics are the numbers you would find on a company's
financial documents and are for those who want to get to the nitty gritty with
their research being done on a company.
Because these include a bunch of different numbers, what I
personally do to make it easier is write these numbers down on an excel sheet
and convert them onto a graph to make things easier to read. If you want to
avoid that spreadsheet work, you can even check out macrotrends.net which does
this for you!
There are too many financial metrics to consider, so I suggest
learning about them all and then coming up with your own decision criteria for
what makes up a sustainable financial statement for a company. After that, I
suggest opening a demo to put your knowledge to the test.
These types of demo accounts are widely offered by all the
Canadian Brokers including Questrade, Interactive Brokers or any platform
offered by the big 6 Canadian Banks (RBC DI, TD Waterhouse, CIBC InvestorEdge,
BMO Investorline, Scotia iTrade and National Bank Direct Brokerage). The
largest benefit of using a demo account is that you’ll be to use “fake money”
to invest which is the perfect way for beginners to test out the markets or
even for experienced investors who want to test out new strategies.
Lastly, the topic that is not getting the attention it deserves:
your emotions. You heard right, for you to control your money-making abilities
in the stock market, you need to control your emotions, which means,
controlling yourself
As human beings, it's natural that most of our decisions are made
by emotion, but you need to eliminate that when it comes down to investing or
trading because this is where you lose the big bucks.
Imagine you invest $10,000 in a stock and in just a couple of
days, you've lost money and now you’re at $874. Your emotional instincts kick
in, telling you that since you've already lost money, you should just sell for
a loss. A few days later, the stock skyrockets and that initial $10,000
could've been $11,745.
Everybody goes through these cycles and it's a matter of time
before one quits managing their own investments and just gives it to the bank
to make you a safe 1% per year on your investments - not ideal.
I've found that the most effective way to control your emotions is
to have a plan and stick with it. Some pointers to help you formulate include
the following:
- Before
you press that buy button, ask yourself why you are buying This specific
investment and why there is a distinct opportunity
- Ask
yourself what your target price would be for you to exit to make
profits
- Define
what your maximum loss is going to be, meaning, what's the exact price
this stock would have to go down to, for you to sell at a loss?
Once you've figured these 3 out, then you're free to enter and
ready to follow your plan accordingly. You shouldn't lose more than what you
defined and you shouldn't gain more than you defined either because the
ultimate truth of the stock market is that you’ll inevitably lose money, but
you can control how much you lose.
I suggest aiming for a minimum of 2:1 win to loss ratio. This
would mean if you're aiming to profit $500, your maximum loss should only be
$250. Conversely, if you're aiming for a 2% profit, you should only tolerate a
loss of 1%
A 2:1 Win-to-Loss ratio is the bare minimum but I always like to
aim for anything higher than a 3:1 ratio. Just to make sure that there’s
significant progress being made that aligns with my specific strategy.
Keep in mind that these are just the basics - yet, not a lot of
people are aware of these when they first start off in the investing
world.
For more underrated tips for a smooth transition into the markets,
access to Easy and free resources, or just want Strategies for eliminating
emotions while investing, be sure to follow me on Instagram: @azizz.finance or
subscribe to my YouTube Channel @ Azizz Finance - ZCommunity.
See you there!
