Stocks & Shares For Beginners
“The best investment is the one that beats inflation.” — Unknown.
Henny Youngman, the famous English-American comedian once joked, “Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it.”
The reality of that joke is shocking but so identifiable! There is only one word for the cause of this which is; Inflation! Inflation is the rise of goods and services over time, which can make your savings lose its buying power over time and cause your investment to stay the same or even shrink. But you can beat it by doing your analyses well and picking the right stocks on the stock market.
“Invest in what you know.” — Peter Lynch.
Peter Lynch is an American mutual fund manager who averaged 29.2% as manager of Magellan Fund at Fidelity Investments between 1977 and 1990, making him the best-performing mutual fund manager in the world at the time.
Perhaps the most famous of his quotes is, “invest in what you know” is a call to every investor to put their money only in companies whose businesses they understand. That is, as a smart investor, you do not buy a stock just because its price is rising; instead, you do because you understand the specific nature of its business.
What is the company’s business model? How does it generate revenue? Do you still see it in business in 5 or 10 years? Who are its management? How competent are they? It is important you understand full well what you want to own and why you want to own it by answering those questions, and more.
When I first started my investment journey, one of the first stocks I purchased was in JD Sports. Why? Because I know most of the teens in the UK shop there, my teenage son shops there and they are the leading sporting goods retailers in the UK. I believed that they would be a company that would be around for a long time to come, and they also paid a dividend.
Now I do not advise you to just jump in with this type of mentality, but I am using it as an example to show you how to start looking at individual companies to invest in as there are 2,024 listed on the London Stock Exchange.
“The secret to investing is to figure out the value of something— and then pay a lot less.” — Joel Greenblatt.
There is a difference between what a stock is actually worth and its market price. Like Warren Buffett once said, price is what you pay while value is what you get. So, once you have understood the company, the next is to figure out the value of its stock— and then wait to pay a lot less for it.
There are many ways to determine the intrinsic values of stocks. Although you can dedicate a whole lifetime to learning them, it will be easier for you to stick to the basics. With the following financial measures, you can extract the basic information you need about any stock you want to buy.
· Price-to-Earnings (P/E): The P/E ratio is a metric for determining whether a stock is trading below or above its intrinsic value. A high P/E relative to the industry's average could suggest that the stock is overvalued while a low one relative to it is often suggestive of being undervalued. As a result, the P/E ratio is used for comparing only companies within the same industry.
· Price Earnings-to-Growth (PEG): The P/E ratio has been found to be inadequate for most stocks. And that is where the price/earnings-to-growth (PEG) ratio, taking into account companies' earnings growth rates, is useful. A stock with a PEG ratio less than 1 is considered undervalued. But for overvalued stocks, the PEG ratio is higher than 1.
· Debt-to-Equity (D/E): The D/E metric indicates how a company sources for funds to finance its operations. Is it doing so through debt, or via its shareholders' funds? The D/E ratio is a relative proportion of the debt and the equity that the company is using to finance its assets. Hence, the lower it is, the better it is for the company and the safer its stock is for investors.
· Free Cash Flow: Free cash flow is exactly as its name suggests: the amount of “free cash” that a company has. It is significant because it indicates how efficient the company is. It can also be used to determine whether the company will be able to reward its shareholders in the form of dividend payments or not.
“It is far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” — Warren Buffett.
Once you have understood the business you want to invest in and determined the intrinsic value of its stock, the next thing is to buy. However, you cannot buy at just any price. For anything, of course, it is always better to buy it cheap. This is why the price at which you buy matters.
So, once you have ascertained its long-term fundamentals as earlier discussed, what you will do is to buy the stock when it is being undervalued by the market. When you do that, you will be buying it at a discount. In order to have ample room for profits, the general recommendation is to buy when the price has dropped to at least a third of the intrinsic value.
As we can see with the stock markets at the moment, there are a lot of companies on sale. So take the opportunity to start learning about stocks and shares; how to invest in the stock market and purchase your first share sooner rather than later!
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