“Where do I start?”
“What do I do?”
“How do I even do it?”
“Is it worth it?”
If you are new to the world of finance, chances are you might have asked one of these questions before. Maybe you’ve grown frustrated by all the technical jargon or you felt intimidated by the possibility of losing your hard-earned money. Or maybe you thought only the chosen few, a.k.a the financial “experts,” could become good investors. To be frank investing is a lot to unpack — there’s no doubt about that. According to a survey done by Ally Financial, nearly 61% of millennials found investing in the stock market to be overwhelming and confusing.
But don’t let that discourage you.
With the right resources and a little bit of time, you’ll soon begin to realize how terribly misplaced your fear of investing was — that investing isn’t just meant for the pros or the financially savvy people. It’s something that everyone can practice and even excel in. All you need is the right attitude and perhaps the willingness to accept a few challenges along the way.
So to get you started, here’s a list of 4 important tips for investing.
1. Know Your Basic Terms
A majority of people back away from investing because they fear that their lack of financial knowledge will inhibit their future success. And rightfully so. If you don’t know even the most basic terms, you’ll have a very difficult time making the most of your money. To prevent this from happening, try to memorize some of the words investors often use.
Below are 20 most commonly used investing terms and definitions:
1. Ask — Referred to as the “offer price”, Ask is the lowest price a prospective seller is willing to accept for a particular security. For example, if David asks to sell his Company XYZ share for $50, then this means he will only proceed to trade at or above $50 and nothing less.
2. Asset — Asset is anything that has the potential to make money for you. Assets can include stocks, bonds, real estate, and other investment shares.
3. Bear — Bear refers to an investor who believes that a certain stock or the market as a whole will drop.
4. Bull — Bull refers to an investor who believes that a certain stock or the market as a whole will rise.
5. Bid — Opposite to Ask, Bid is the highest price a prospective buyer is willing to pay for a certain security.
6. Blue Chip — Investors often refer to “blue chip stocks” as stocks of large and well-established companies that have a history of consistent earnings, increasing dividends, and solid balance sheets.
7. Book Value — Book value is the total value of a company’s assets subtracted by all the accumulated liabilities. In many cases, investors use book value to determine a company’s valuation.
8. Broker — A broker is a person or firm that buys and sells investments for you in exchange for a set fee or commission.
9. Dividend — A dividend is a portion of the company’s profits distributed amongst its shareholders as a form of a reward. Dividends are usually managed by the company’s executives and can be paid monthly or annually.
10. Exchange — Exchange is a marketplace where investors trade stocks, commodities, bonds, and other financial assets. The purpose of an exchange is to ensure that trading runs smoothly. Below are the 2 most famous stock exchanges in the world.
- NYSE — Located in Manhattan, the New York Stock Exchange is an American stock exchange and the world’s largest stock exchange with a market cap of $21.3 trillion. It is a marketplace for buying and selling over 9 million corporate stocks and other securities.
- NASDAQ — Referred to as the “National Association of Securities Dealers Automated Quotations,” the Nasdaq Stock Market is the second largest stock exchange in the world and the benchmark for technology stocks.
11. Index — Index is the measurement of some selected stocks that represent the entire global markets. Many investors use indexes to track the stock market’s performances. The 3 most famous indexes are listed below.
- DJIA — Often referred to as “the Dow,” the Dow Jones Industrial Average is the average of 30 blue chip stocks and the key indicator of the entire U.S. stock market. In most cases, if you hear a reporter talk about how the market is up, he/she is referring to the Dow.
- S&P 500 — Formerly known as the “Standard & Poor’s 500 Index,” the S&P 500 is a stock market index that includes 500 of America’s largest publicly traded corporations. Because of its diversity, this particular index is considered a better representation of the U.S stock market compared to the other market indices.
- NASDAQ Composite — The NASDAQ Composite index consists of over 3,300 common stocks listed on the NASDAQ stock exchange. What’s unique about this index is that it uses market capitalization weighting methodology, which means that the largest companies have the most impact on the index’s value.
** To further clarify the difference between an exchange and index, a stock exchange is an organization that allows investors to offer and clear trades while a stock index is a calculation of prices based on a collection of stocks.
12. Liquidity — Liquidity refers to how fast an asset or security can convert into cash without affecting the asset’s price. To simply put, your liquidity means how easy it is to buy or sell your investments.
13. Margin — When you buy a margin, you are borrowing money from a broker to make more investments. The idea is that with the margins, you can make enough money on your investments to pay back a broker.
14. Market Capitalization (Market Cap) — You can figure out a company’s market cap by multiplying its individual share price by the number of its outstanding shares. This is a great way to measure a company’s size. For example, if a company’s stock price is $50 per share and it has 10 million shares in total, that company’s market cap would be $500 million.
15. P/E Ratio — The price-to-earnings ratio is the ratio of a company’s stock price to its earnings per share. For example, if a company’s stock sells for $20 per share and earns a profit of $5 per share, then the P/E ratio is 4. This ratio helps investors know if a stock price is undervalued or overvalued.
16. Portfolio — An investment portfolio is a collection of assets and securities owned by one or more institutions or by an individual.
17. Risk Tolerance — Risk tolerance is the level of returns an investor is willing to withstand. For example, what would you do if the stock market fell by 40% this year? Would you wait or sell your stocks?
18. Securities — This term is often used by investors to refer to all types of investments, including stocks, bonds, mutual funds, exchanges, etc.
19. Spread — A spread is simply the difference between the asset’s Bid and Ask price.
20. Yield — Yield is the percentage of a company’s dividend over its individual stock price. For example, if a stock price is $50 per share and the dividend is $1, then your yield would be 2%. This means that every time you invest in one stock, you are receiving 2% back each year.
Added to this list are the 4 major types of investments you will likely encounter as you start your investing journey:
1. Stock — If you purchase a company’s stock, that means you own part of the company. Companies divide their ownership stakes into shares. The more you buy those shares, the more you own part of those companies. There are 2 main types of stocks: common and preferred.
- Common Stock — If you own a common stock, you have the right to vote during shareholders’ meetings and receive company’s dividends.
- Preferred Stock — This type of stock has a higher claim on a company’s assets and earnings. If you own a preferred stock, you won’t have voting rights but you’ll have preference over dividend payments.
2. Bond — A bond is a debt instrument created by companies or other entities to raise more capital. It is a fixed-income investment where organizations borrow investors’ money at certain interest rates. This usually happens when companies need to raise money for new projects or maintain ongoing operations. Bonds usually have 3 key components:
- Face Value — Also known as “par value,” face value is the dollar value of a security when it is first issued. For example, the price of the bond will fluctuate in the market according to interest rates. But the bond’s face value will remain fixed.
- Coupon Rate — This is the bond’s rate of interest expressed in percentages. Companies or other entities will apply this rate to the face value of the bond.
- Maturity Date — The date in which the interest payment ends and the full debt needs to be repaid to the investor.
3. Mutual Fund — One of the more popular types of investing is through a mutual fund, which is operated by a group of professional investors or a company that invests in stocks, bonds, and other assets for a large group of people. The difference between a mutual fund and a stock is that buying a share of a mutual fund includes several different stocks and other securities, whereas buying a stock includes just one holding. One key advantage of investing in mutual funds is that you get to have a professional analyst review your personalized portfolio on a daily basis. This is ideal for investors who are just starting out.
4. Real Estate — Perhaps the easiest type of investment to understand is real estate. Simply put, real estate investing involves purchasing or owning a property, land, or buildings to generate more income. There are 4 major types of real estate investments:
- Residential — This involves buying properties such as houses, apartments, condos, or townhouses that you can later lease for rent. You essentially become the “house owner” and a person or family will pay to live in your property.
- Commercial — This type of investment consists of purchasing office buildings for business owners. Investing in office spaces can be tricky because there are several factors involved. For example, if a tenant decides to leave midway into the contract, you might lose returns on the property since the building maintenance fees for office spaces tend to be high. Or if you sign a multi-year contract, you cannot change rental rates once markets start to skyrocket.
- Industrial — In most cases, the average real estate investors have taken part in this type of investing. Industrial includes warehouses or any type of storage units that bring in sales. Compared to other spaces in real estate, industrial is known to be less intensive in terms of operation and management.
- Retail — Investing in retail properties means you are putting your money on all the places that market and sell consumer goods and/or services. This includes shopping malls, storefronts, any individual shops including dry-cleaners, cafes, pharmacies, etc. One key difference between office and retail spaces is that retails tend to have more stability than offices. This is because shop owners don’t relocate as often.
2. Keep Up to Date
Now that you are familiar with some of the more important terms and concepts about investing, the next step is to keep up with the financial market updates — whether that’d be in the form of news, trusted advisors, or third-party financial providers. The important thing is that you understand how the market is doing before you make a decision to invest.
But since we live in a world of information overload, this doesn’t always run as smoothly as we want to. More often than not, we get confused by the sheer volume of information available online. We don’t know which ones to cut out or which ones to trust.
Fortunately for us, most of the work has already been done because many investors usually share a similar pool of online news sources. They are Yahoo! Finance, The Wall Street Journal, Bloomberg, Reuters, and CNBC. Obviously, there are tons more out there and the pool varies by each investor. But the most important thing to consider when deciding which news outlets to focus on is how reputable the stories are and which reliable sources they use.
In other cases, many investors use alternative trading solutions platforms like Robinhood or Acorns to check the latest financial news reports. These services are useful because they cut down your research time and provide you with the most up-to-date and informative data in just one single place.
At QARA, our financial forecasting and analytics app KOSHO can provide you with the latest news regarding a specific stock you choose. For example, if you are investing in Apple, Amazon, or Facebook, our deep learning algorithm will detect relevant news regarding those companies and display them right at your fingertips.
To download KOSHO, click the button below.
3. Set Your Goals
As a new investor, learning to set goals is one of the most important things to do. Without goals, you are less likely to make sound and timely decisions, thereby making mistakes and losing your investments. Good investment goals are measurable, which means your goals should be clear and attainable.
Before you start investing, ask yourself — Why are you investing?
Are you investing to…
- Prepare for retirement?
- Start your own business?
- Pay off college loans?
- Buy a house or a car?
- Save for traveling?
- Donate to charity?
Maybe you have short-term goals or long-term goals. But no matter what they are, knowing the “why” behind your investments is always paramount to lasting a long time. There’s always the option to seek out help from financial advisors or visit wealth management services. Working with experienced professionals who can match your risk level and guide your investment portfolio is a safe way to ensure that your goals are met. But in many cases, people cannot afford their services. And starting out on your own doesn’t mean you are doomed forever. With just the right tools and resources, you can become a great investor as long as you put in some time and effort to research and study the market.
4. Know Your Limits
“You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences.”
– Warren Buffett
This is an excerpt from Warren Buffett’s letters to his shareholders in Berkshire Hathaway. To be a successful investor, you must assess your own skills and decide if you can handle certain risks. Investing has many layers and if you want to become an expert, you need to do your homework — study the market, follow trends, ask questions, seek advice, manage your own risks, etc. Anybody can become a great investor, but the point is if you don’t have the time or can’t afford to stay focused, then you need to understand there’s a limit to how much you can do.
Do your homework, keep your emotions in check, understand your own risk tolerance, and remember — know the boundaries where you can or cannot cross.
Where To Go From Here
There’s a lot to consider with investing. Especially if you are new, getting started isn’t always easy. But sometimes the best way to learn is to just do it. An important thing to consider, however, is that you start out small.