A 5-Minute Intro to Buying Stocks

Stocks can seem as confusing as differential calculus.

If you have money to invest, but you’re not learning how and where to do so, then you’re probably wasting valuable resources that could help you grow your nest egg or save for your children’s future. And you don’t want to do that.

This piece is merely a starting point, and should in no way be used as your sole stock-investing advice. Take what you learn here, then determine if stocks would be a good option for you.

The Basics of Stocks

1. Stocks represent companies. So technically, you’re not buying the piece of paper; you’re buying a slice of the company. You want to buy companies that boast solid foundations or solid promises of future earnings.

2. That said, if the company you’re buying stocks in isn’t turning a profit, you’re not really buying stocks — you’re speculating.

3. Ideally, you’ll want companies that are turning strong profits.

4. Never use stocks as 100% of your assets. Being diversified means investing in many places. If your company bottoms out, you don’t want to go with it.

5. If the market is what they call a “severe bear market,” you may want to look at other places to invest.

6. Stock prices are based on the company’s profits and environment. (This includes the size and quality of the customer base, its industry, the economy, and the political environment.)

7. Don’t always follow your adviser’s advice, especially over your own common sense. What he or she does is up to you, so don’t be swayed by jargon. Make sure they explain the ins and outs of what they think you should do in your own terms.

8. Always know why you’re investing in a particular company or stock. If you can’t clearly define that information, walk away.

9. Monitor your stocks, even if you plan to buy and hold for the long term. You’ll want to dump them if they’re not appreciating, or if the economy hits rock bottom (again).

Essential Terms & Facts

Earnings – This is the money earned by the company you’re considering investing in. You should look for a minimum of a 10% increase from the year before.

Sales – How were the sales this year? You should also look for an increase from the previous year.

Equity – This the amount of money a company holds, via stockholder investments and yearly earnings. This is also a value you want to make sure is higher than the year before.

Debt – You want to make sure this figure is lower than the assets, and lower than the previous year.

Important Considerations for Investors

Debt-to-Asset Ratio – This should be half or less of assets.
Earnings Growth – Check to see how long the company has maintained a 10% yearly growth.
Price-to-Sales Ratio (PSR) – Ideally, this number should be as close to one as possible.
Price-to-Earnings (P/E) – For all stocks, this shouldn’t exceed 40, but for large cap stocks, the ratio should be closer to 20.
Return on Equity (ROE) – Again, you’re looking for a steady increase each year of 10%.

Non-Negotiable Investment Reading

The company’s annual report The 10K and 10Q reports on file with the SEC

Supplement these with online reading from:

The Wall Street Journal Bloomberg Forbes MarketWatch NASDAQ The US Securities and Exchange Commission

In Case You’re Still Concerned

Invest in profitable companies that sell goods and services that people will continually need, and step away from companies that sell goods and services people want.

Diversify your portfolio by investing in exchange-traded funds, mutual funds, and tangible assets like real estate and gold, and you’ll be better off in the long run.

Educate yourself. Staying on top of what you’ve invested will help ease your fear. Learn about the tools you have at your disposal, and use them (like stop-loss orders and put options).

The basics are only the beginning. If you haven’t already started, do some research to see how you can use stocks to diversify your portfolio and increase your worth. Good luck!

What other basic stock-investing tips would you like to share?

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