There are so many ways one can invest in stocks. You either buy through a brokerage platform, or you employ a broker who buys on your behalf and manages your portfolio. These are the two known ways, at least, which I know.
However, before you invest, some fundamentals need to be in place, there are somethings which you must take into consideration before you invest your money in any company.
Therefore, in this particular piece, I would be enumerating on some fundamentals you need to know before you spend your money on any stock.
As a caveat, I would like to state clearly that these fundamentals are from my investment strategy. I do not claim that what works for me would work for anyone.
What are the fundamentals?
Let’s start with an example. For instance, you want to buy a house, before you make that decision to buy a home, you first gather necessary information about the house. You want to know the location, the history behind the house, how many owners, what needs repairs, and more importantly, you must consider the cost of the house. This information is what you would need before you pay for your new home. In the same vein, before you buy a stock, you want to gather as much information about the company you are buying.
Fundamental analysis in stock buying is one key factor that every investor understands. The investor looks at the perceived value of the stock. That means following the company, and asking questions about their products and services. In the fundamental stage you want to pay attention to the business cash flow, return on assets, history of their profit retention, earning per share, their history of dividends sharing and their capital management methodologies. It might seem like a lot, but it will help you play the game of investing on a safe plane.
Another fundamental approach will include understanding the industry as a whole, the competition, the company’s management structure, its income as well as the company’s financial statement. The king of investment, billionaire Warren Buffet, suggests that this information will help one make the right pick when it comes to investing. As an investor, therefore, you want to seek the best deals on the market and make the right decision.
What is my framework for investing?
Before I started investing in the global market, I started by educating myself about the intricacies of investing. I read some books first about investing. I read Benjamin Graham’s books, namely The Intelligent Investor and Security analysis, and Philip A. Fisher’s Common Stocks and Uncommon Profits . These books, to summarise opened me to the way smart investors invest their money and never LOSE money. These are quite big books but you should invest in them to arm you with strategies.
We are opening a Stock Account?
I set up an account with The Share Centre about eight years ago. Then the first step for me was to have a practice account where I traded with the money in the practice account. I would enter into the live market with this practise money and study how the market works. It took me a month of paying to the platform and reading information around the companies in my practise account to understand how they operated and what affected their market value. After about three months, I put in my own money and started honing my investment skills from there.
Building a portfolio
Investment is a long term game. That said, any smart investor would have their strategies and what exactly they want to gain from their investment. Graham, in The Intelligent Investor, explains in clear details how to build a stock portfolio.
Many investors go blindly into investing without having their goals set appropriately and therefore, quickly make decisions based on whims of the market or without settling down to build a good portfolio. It is always best to build a portfolio of companies that one can monitor.
From the watchlist I make, I knew the companies I wanted in my portfolio and how much I was going to be investing within a month. I gauge various sectors in the market and ensure that the companies in my portfolios are sure buys.
In building a stock portfolio, it is good to have a set amount you will invest monthly and set annual targets for total investment cash.
There are no known strategies for building a portfolio, but what I do is pick a particular industry and focus on getting some companies per month within that specific industry. At the moment, I am interested in companies that are promoting the proponents of artificial technology and machine learning.
Building a portfolio runs through the lifetime of an investor. You have the opportunity to assess how much you have in your pot, understand the companies that are not doing well in your portfolio and know the ones to sell.
Whether to diversify in the companies that are in your portfolio is another personal decision you should make. Some investors advise that you should stick to one industry and invest only in companies that you understand. Others would argue that it is good to spread your investment risks.
For me, I like to have multiple companies within my portfolio. Many factors affect various sectors per time. The pharmaceutical sector, for example, shows an upward trend because of the recent pandemic. The focus on them has to lead to some of these companies increasing their value in the market.
You are assessing your risk appetite.
The game of investing is not a sport for those who are risk-averse. What you are trying to do when you are investing is that you want to make the least possible mistake? But, you must have the mind to ensure that you can ride the wave and come out on the side with your head held high.
Sometimes, you might not come out with your investment. So you have to assess your risk appetite.
Are you willing to still go into an investment and how much are you ready to invest? Are you doing this for the long term? You need to gauge your psychological disposition and ask yourself some fundamental tough questions about your investment.
I have seen some people give up on investment because they made the wrong choices at the beginning of their investment journeys, and they’ve sworn that they would never get back to investing. Before you start investing, therefore, you must understand your risk appetite. If the existing risks in the market scare you, then don’t toe the line of investment. However, if you are willing to tame your fear, and invest, there is always treasure for the bold. Shakespeare reminds us about the man who dies once and the coward who dies a thousand deaths. Which one are you?
Ensuring that you don’t depend on stocks for survival
Do not depend on stocks for your daily survival. That means you should not hope that immediately you put in some money today and tomorrow, you want to sell the stock for an urgent need. It doesn’t work that way. Ensure you have other means to survive.
Depending on the stock should be for a long term plan that you might have, and this may include setting up a pot to buy your house or for your child’s university fees.
It goes without saying that if you are playing for the short term, then the investment side of things shouldn’t be your kettle of fish. It would be best if to spend time on trades that can quickly give you a return on investment.
Investment is a long term game and requires that you look at your investment as something that would be beneficial to you in say five to ten years.
When to monitor your stocks?
Some people have cute habits of looking at their portfolio daily and checking if there is an increase in their investment.
If you have done your homework correctly, then you shouldn’t need to check your stocks every time.
Ideally, it would help if you looked at your portfolio weekly, monthly or even quarterly. You don’t want to put more pressure on yourself to check your collection daily. The ideal investor is the one who is sure of his purchases and is rest assured, against all the odds, he can make profits or at worse, breakeven from his investment.
What to invest?
There are different companies that one can invest in, and there are various funds and bonds you can buy (more on funds and bonds later).
For starters, it is usually best to start with company stocks. As time goes on, you can now begin to gather more information about bonds and funds before you decide to invest in those tools.
At the basics, you should be able to apply the fundamentals to investing. Understand the groundwork and this comprehension will be able to guide you as you hone your investment skills. Again, it takes time before you can understand what market to invest in and what companies to invest in, do your homework.
Information! Information!! information!!!
Without getting information and knowing how to use them, you cant be an investor.
You need to always be on top of the market. It would be best if you read news and listening to report about world politics, the world economy and the markets.
Certain factors drive the prices of companies, and you want to be in the know at all times. Information will not only educate you about world events but will also position you as an informed investor. As such, you will make informed decisions, and you would be able to sniff the negatives in the market and use them to your advantage.
I mentioned that you need the fundamentals before you start investing, and I said my strategy before I start investing. The game of investment is a long term thing, and for those who play the longterm game. Smart investors know that information is the key to their success, and they will always get this information. If you want to be an investor indeed, then the onus is on you to understand the implication of work involved, gauge your strategy and have your management strategy for the long term. I mean what’s wrong with passing your wealth to the next generation?