Are you interested in investing in the stock market? Of course you are! In this article I am going to give a brief overview on certain things you should understand before you jump in and start buying stocks.
First things first, if you are trying to make a quick buck off the stock market, you should probably stop right now. Many people do not immediately make a lot of money by investing in stocks. In fact, many beginners end up losing money because they don’t have the patience. It takes a while for your money to grow. Unless you are able to invest a huge amount of money, you aren’t going to be able to make a significant amount of cash in a short period of time. Playing the stock market requires patience, smarts, and a little bit of risk tolerance. As long as you remind yourself of this, you will be better off than most people out there.
Next, it important to understand the financial statements of a company. If you don’t understand how to read financial statement I would definitely recommend you start by reading my prior post, “A Quick Overview on How to Read Financial Statements”. It is vital that you know what revenues, expenses, assets, liabilities, and stockholder’s equity are. These are the backbone to every company’s financial statements. It is these items which ultimately determine how attractive a company is to you.
Financial ratios are also extremely important when you are trying to decide whether or not to invest in a company. There are a huge number of ratios out there that investors use to understand a company. Financial ratios are a fundamental part of the analysis of financial statement data. These ratios take the information found in financial statements and give meaning to the numbers. Examples of financial ratios that are used heavily in making investment decisions are the current ratio, debt ratio, and free cash flow.
If you are a beginner and you want to invest right now, I would suggest you look into stock indexes, ETFs, and Mutual Funds as a place to put you money. These funds and indexes are made up of a large number of companies, and allow you to diversify you holdings while keeping you risk low. You are not subject to the risk of losing everything if a company goes under because there are a huge number in these funds. Examples are the S&P 500 (.INX), SPDR S&P 500 (SPY), and T. Rowe Price Blue Chip Growth Fund (TRBCX). If you choose to go this route, you must once again keep in mind that you are in it for the long haul. I would suggest you choose your fund carefully and don’t even look at it for the first few weeks. It is very easy to panic and sell of your holdings early on, especially if the market is having a down day. I can’t stress this enough.
This was a quick overview of what you should understand before you jump into investing stocks. If you have a friend who is a beginner please feel free to share this article with them. Happy Investing!