Welcome to the another amazing post from viraldollar.com. In this post I want to describe all step by step methods about how to invest in the stock market for beginners.
The goal with investing is to one day live off our investment portfolio but we have to start somewhere. We can’t just click our fingers and be sipping cocktails on a beach living off of dividends.
Let’s start with the basics and break it down step by step how to get into investing.
Why Invest in Stocks?
There are two ways of earning income.
One is you go to work all day whether that be in an office or construction site or customer service. You actively earn your active income work income.
2. Passive Income
The second type of income is passive income and this is where you own an asset like a stock that produces income for you. Once you own it you get paid without having to do any extra work so it’s completely passive
What is a Stock?
One reason to get invested in stocks is you don’t have to work for every dollar that you earn. A stock is a security that represents ownership in a fraction of a business.
For example, if you own a stock in Coca-Cola you actually become a very small owner in Coca-Cola. You own part of a business but you don’t have to work for the business.
How do we get started in Stocks?
In order to buy a stock you need to sign up to a brokerage company. A brokerage company is a platform that allows you to buy and sell. You don’t need a dodgy broker from wall street to do your trades go with a well-established company with a proven track record.
If you’re looking for a very cheap broker and you’re just beginning your investing journey Robinhood and Weeble are quite popular. You can buy and sell stocks for free with them. If you have a bit more money and you’re looking for a platform that’s been around for a lot longer look into one like Charles Schwab or Fidelity or TD Ameritrade. They’re pretty easy and straightforward to sign up to if you’re living in the USA.
Just google them go to their website and fill out a form and step one find a stock broker.
4 Types of Stock Investing
This is the important part this is where a lot of people can go wrong. They get greedy, they don’t do the work up front and instead of making money they lose money through uneducated silly investing.
You need to decide what investing strategy you’re going to employ and then what stocks are you going to pick.
So, here are four different approaches to investing and the positives and negatives that come with them. Pick the one that you feel suits you in your specific situation and how you want to invest.
The four styles are:
- Dividend investing
- Value investing
- Growth investing
- Passive investing
1. Dividend investing
This approach is one where you can pretty much have guaranteed passive income through quarterly or monthly dividends. Dividend investing is an investing style where you buy stocks that pay a dividend as a portion of their earnings. They normally get paid every quarter, every three months or sometimes they get paid every month or semi-annually.
If you pick out some good dividend stocks, that’s one way to ensure passive income rolling into your bank accounts throughout the year. But you got to play things smart. You can’t just put your hand on a piece of paper and pick out the ones that pay the highest dividend, that’s too risky.
4 Key Points to Look for in Dividend Stocks
We need to understand the numbers behind the stock so here are some things to look for in a dividend stock there’s four key things. We’re going to use Coca-Cola stock for the example.
Directly jumping to dividends and splits and this is going to give us some important information on the dividend side of Coca-Cola stock.
One of the first statistics we should look at is the dividend itself so we can see here that the dividend for Coca-Cola is $76 which gives it a dividend yield of 2.90%
If we bought a hundred dollars of Coca-Cola stock, we will get $2.90 every year as a dividend. 2.90%percent is not too bad considering that the average dividend in the market is 1.3%. It’s always good to compare things to the average or to their competitors and that’s how you get a feel for how good a stocks numbers is.
2. Payout Ratio
The next thing we want to look at is the payout ratio. Payout ratio shows the proportion of earnings a company pays in the form of dividends and how much it reinvests in the business. If a stock earned $10 a share and its payout ratio was forty percent this would mean they would pay out $4 as a dividend and 6$ would be reinvested in the business.
With Coca-Cola we can see that the payout ratio is 76%. This means that most of the earnings that they generate they pay out to the shareholders as a dividend. The other 24% they use to reinvest in the business. This is a high payout ratio because Coca-Cola is such a mature business and they’re more of a cash cow than a growth company.
3. Company’s earnings over the past
The third thing that we need to look at is the company’s earnings over the past now to do this we go on the summary section of Yahoo Finance.
Down a bit and here we get a good look at their past earnings so the blue line is earnings, the green line is revenue and with Coca-Cola the earnings were trending to be higher and higher that is up until 2020 where of course they got hurt in the pandemic and earnings went down and there’s a good growth in 2021 which is a good thing.
4. Dividend history
Another important thing to look at before buying a dividend stock is their dividend history. Do they have a reliable past of paying dividends consistently or are they perhaps a bit more inconsistent. For dividend history the website macro trends, which we can find pretty easy on google and with Coca-Cola stock.
They have a very strong history of paying out dividends in fact it seems that they’ve never dropped their dividend payouts over the course of history of their stock since 1974.
As per this graph, this means that in the future if we bought the stock they are pretty unlikely to drop their dividend payouts even in recessions and in bad economic times. That’s a big reason why Coca-Cola is and has been such a popular dividend stock over time.
Other dividend stocks that are quite popular that you may want to look into in order to start building up a portfolio is 3M (MMM) dividend yield 3.3% . That’s a consumer goods company with quite a good dividend to it.
Johnson and Johnson (JNJ), dividend yield 2.5% in the health care sector.
You could look at something like AT&T(T) dividend yield though is 8.5% so that’s very good in this market so guys get and slowly get in stocks that are reliable with a good business model behind them.
Start building up a portfolio that hopefully one day you can retire off obviously. It’s not going to be any time soon. Don’t get your hopes up too high but once you start building and allow for some compound interest you can actually grow a portfolio into something quite impressive if you give it time.
Positive & Negatives to Dividend Investing
|Passive Income||Less Room for High Quick Growth|
|Capital Gains Income|
The positives of dividend investing are the passive income from the dividends. That income is pretty reliable especially if you buy into strong business model. You’ll get income from the capital gains of the stock.
The main negative with dividend investing is sometimes these companies are more mature and they have less room for that high quick growth that we see in other investing styles. It’s a lot safer form of investing and a lot more reliable.
2. Value Investing
The essence behind value investing is buying stocks at a price below their value basically. It’s like bargain hunting but instead of going to a garage sale or going to shops you go to the stock market.
How do we know if a stock is cheap? Do we just look at the price and if the price goes down by 20% then it’s cheap and it’s a bargain. Unfortunately it’s not that simple because often when the price goes down the value of the business goes down as .well
The key to value investing is determining the intrinsic value of the business. Once you know the value you can simply compare it to the price and see how much of a bargain you’re getting or how badly you’re getting ripped off
It’s actually not too hard once you know what you’re doing and then basically what you do is you go around analyzing different stocks. You compare the price to the value, compare the price to the value the price to the value.
P/E Ratio (Price to Earnings Ratio)
There’s a lot of stocks in the stock market. One way of screening for value stocks is looking for the ones with low P/E ratios. A P/E ratio is short for price to earnings ratio and essentially as per the name it compares the price to the earnings.
If the number is low it means the price is cheap compared to the earnings and if the number is high it means the price is expensive compared to the earnings that a stock brings in.
It’s pretty easy to find the P/E Ratio on stocks so you just go to Yahoo finance again and go to the summary section and it says 26 for Coca-Cola so that means the price is 26 times higher than the yearly earnings and it will take around 26 years to get our money back if earnings stay the same
Is 26 High or Low? One way to work that out is to compare it to the market’s average P/E Ratio. The market’s P/E Ratio is sitting around 26.1. Coca-Cola is around the average price of the market price to earnings. It’s not really cheaper, it’s not really more expensive
So, Coca-Cola is definitely more of a dividend play compared to a value play.
Some examples of stocks that are quite popular with value investors include:
1. Alibaba the Chinese e-commerce company. A lot of value investors are buying this after its recent dip. It’s a bit of a controversial investment but famous value investors like Charlie manga and Ray Dalio are two big names that have bought the stock.
2. Berkshire Hathaway, another value stock. This is kind of like a group of value stocks since. Warren Buffett is the head investor of Berkshire who owns a bunch of stocks under the company.
3. Gamestop was a huge value play especially a year ago before the whole reddit hedge fund saga. Bank stocks are another place to start for value investors this year especially with their low P/E Ratio.
These stocks are a place to start if you’re looking to find a value investment.
3. Growth Investing
This is an investment style that has more risk associated with it. If a recession comes you’re probably going to get hit hard but on the other hand. There’s a lot more potential for those quick high returns.
Growth investing if done smartly, can pay off big time and there’s a couple of core things that we need to focus on with growth investing. The most important thing is we need to work out where is the business heading in the future.
Is it innovative? Is it disruptive? Is it the next tesla changing the car industry or will it be the type of business that gets left behind like the textile business in the 70s or the video rental or newspaper business in the 2000s. They got wiped out by innovation.
Put your thinking cap on and try work out what will be the disruptive companies over the next 5 to 10 years.
Some examples of industries that could flourish in the future include:
- artificial intelligence
- self-driving cars
- blockchain companies
These sectors could change the way business is done in the future and a lot of growth investors are focusing on these particular ones these sectors but you do need to do a bit of digging into their financials. There’s no point in buying a business that’s going to be popular but not make any money.
Revenue, Return On Equity Profit Margins
For growth investing, revenue is a very important figure to look at. Revenue is the total income that the business is generating. We need to look at this and importantly check that it’s growing.
For tesla stocks we can see that in yahoo finance that every year they’re generating more and more money.
Also if we look into the future under revenue estimates we can see that the analysts expect it to keep growing at a strong rate of knots.
Return on Equity
The other thing that we want to look at is return on equity because it gives us a good idea on how effective the business is from a monetary standpoint. Return on equity is calculated as net income divided by shareholders equity this shows us how much profit we can make as a percentage of equity.
We want this number to be as high as possible and we can find return on equity by simply scrolling under statistics in yahoo finance.
We have a return of equity for tesla of 32.24%. 32 is a good number especially when we compare it to their competitors.
Another metric to help us get a feel for the business and its effectiveness and as we can see tesla’s is 14.95% so that means for every $100 in revenue that tesla generates $14.95 will be the profits
We have to compare it to other companies in order to get a feel for things.
Tesla’s competitors include:
- NIO which has a -26.67% profit margin and a -104.28% return on equity.
- Ford a -2.1% profit margin and a 22.9% percent return on equity.
- Volkswagen 5.59% in profit margin and a 11.13% return on equity.
- Nikola another competitor which has a -953.99% profit margin and a -104.28% return on equity.
Tesla actually beats all of these competitors with these two metrics. Elon musk is a very smart man. We can just say that another thing that many growth investors like to do is looking at the past price of a stock and see if it’s trending upwards.
It’s pretty easy to see this. We just type in tesla stock and google go back five years and we can see that every year it seems to be trending upwards by quite a bit and this is no guarantee that in the future that the stock will only head up. Some people like that positive forward momentum.
Some examples of growth slash innovation stocks to start looking into can include Coinbase, a cryptocurrency exchange platform.
If you want to build into the blockchain sector without buying individual cryptocurrencies intelligent, therapeutics(Intellia) are an exciting company that are into genome editing looking to cure diseases.
Then we’ve got Palantir, a company that uses software to integrate data to improve business decisions. This is an exciting company founded by Peter Thiel who also co-founded Pay pal and was the first outside investor into Facebook. so he’s
So if you buy earlier that’s where you make the big 10, 20 even 100x type returns.
4. Passive indexing (in an Index Fund)
Passive investing in an index fund is the way to go if you don’t want to spend time researching and analyzing different stocks. The interesting thing about index investing is it actually beats most other returns that big hedge funds gets. It sounds untrue but it is actually true so this is why you have people like Warren Buffett recommending it to most investors.
An index fund is simply a basket of stocks that tracks a specific group of the market.
For example, the S&P 500 index fund is a group of 500 large stocks that tracks the American stock market.
The Vanguard information technology fund has more than 300 U.S. technology stocks tracking the tech side of the market
Then we got the vanguard dividend appreciation fund tracks a group of 247 companies that have increased their dividend for long periods of time. You can buy index funds aka a group of stocks that tracks most areas of the market depending on what you want to invest into. It sounds weird and it almost sounds too easy like what’s the catch but sometimes when it comes to investing less is more
Among the various propositions offered you a very low cost index fund where you don’t put all your money in at one time. If you accumulate a low cost index fund over 10 years with fairly regular sums.
You will probably do better than eighty percent of the people around you that take up investing at a similar time
So to buy an index fund you simply enter the ticker symbol of the fund you want on your brokerage accounts whether that be a world market index fund. One think of the sectors of the market that you want to be invested in and go from there. The important thing is not to wait around too much.
Do your upfront research, make sure you have a good understanding of the basics but you don’t need to be Warren Buffett before you start investing dip your feet in by buying your first stock.
Remember, stocks are not too expensive. Get in the game with a small amount of money and then learn as you go. The worst thing you can do is wait lose the motivation to invest and then not invest
We may ask is look how high stock market prices are right now. We’ve essentially been on a 13-year bull market run. Prices have just kept going up.
With investing we need to be looking long term. We must think in five to ten years time, is the market going to be higher or lower it’s going to be higher.
Stocks continue to produce and earnings, continue to increase so even if we buy now and god forbid, there is a crash. That crash at some points will rebound the key is that when it crashes we don’t panic and sell.
Buy more stocks because that’s when stocks are cheaper. That’s where there’s even more profit to be made. If you buy good quality stocks that are producing income adding value to their customers innovating, you’re going to make money even if the market has its dips.
If you invest smartly you don’t need to fare a crash. So pick which investing method you want to take up going forward. Learn all you can about that method. Start dipping your feet into a couple of stocks make some mistakes. It’s okay you will make mistakes and slowly start to master the art of investing and at some points you’ll be able to retire off of your portfolio.
That’s the goal with investing and I wish you guys the best of luck with your journey in the stock market. I hope you liked this blogpost about How to invest in stocks. Make sure you share it with your family and Friends. If you want more information on Finance related to Stocks, NFTs, Cryptocurrency, Dividends and any other financial guide, you can visit viraldollar.com.
Thankyou for Reading!