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.
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.
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 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 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!