10 Things You Absolutely Need To Know About Stocks
Are you an expert on Wall Street? 50 shares of Twitter for breakfast, then selling them off by lunch? You should not read this post.
The average person attempting to invest a few bucks or get greater control over their finances should read this post. These ten suggestions, ideas, and subjects ought to serve as a solid introduction to the stock market. They won’t guarantee success and they aren’t everything you need to know, but they are a terrific place for any investor to start.
1) Buy Low, Sell High
Sounds so easy, doesn’t it? However, investing is one of the few areas of our financial lives where price decreases are perceived negatively. Few people are complaining about lower gas costs due to the collapse in oil prices over the past 18 months, but a modest market decline is regarded as the end of the bull market.
The current bull market will end, and equities have historically performed well as investments over virtually any long-term timeframe. These facts are not mutually incompatible.
2) There Is No Such Thing As A Sure Thing
Oil prices at $100 per barrel are here to stay; Alibaba is an unstoppable global powerhouse; ESPN is resistant to the altering dynamics of the cable industry; and its ability to generate revenue for Disney will never be in question. These are just three instances of once-trusted narratives that have been exposed as false.
A word of caution: while conventional wisdom occasionally makes mistakes, it usually does so at the worst possible time. Warren Buffett, Carl Icahn, and others of their ilk have made some of the best long-term stock market investments by betting heavily on undervalued or tumultuous companies.
Despite the fact that equities have historically been a secure long-term investment,
3) Get Familiar With Filings
The rest of us have to conduct our research, although some investors might believe they have a sixth sense for identifying promising companies. There is no better place to start than the routine SEC filings that publicly traded corporations are required to submit, which must include information on everything from the company’s finances to any conflicts and risk concerns.
The most details can be found in the annual 10-K, which also provides descriptions of business lines, quarterly and annual financial data, and management commentary on expenses and growth prospects. Any senior management adjustments, acquisitions, and stock transactions by executives or board members will also be described in regulatory filings.
The SEC’s EDGAR system makes all filings for American public corporations and foreign firms that list on American exchanges accessible online.
4) Think Long Term
Short-term trading is a loser’s game for the majority of investors for more reasons than just taxes. It is not the average person’s game to try to purchase or sell shares based on a quarterly earnings report or an economic data point.
When a stock or industry is ignored by the market and languishes in spite of consistent economic results that will generate a steady stream of profits, better chances arise. Airlines and railroads companies have had protracted periods of underperformance before making significant gains when the economy and business dynamics are favourable.
Several airline companies went bankrupt in the 2000s as a result of years of poor management, but the subsequent merger wave strengthened American Airlines, United Continental, and Delta Air Lines.
5) Dividends Are Your Friend
In 2015, the price of an Apple share fell from $110.38 to $105.26. Even though there was an 11% fall, long-term shareholders only suffered a 3% loss. Why? because Apple distributed $2.03 in dividends during the year.
Although they are not immune from falls, dividend-paying equities do provide some protection that other stocks do not. However, a word of caution—rich payouts that seem like they won’t last frequently do. Just ask the shareholders of Kinder Morgan, who in December reduced their quarterly distribution by 75%.
A statistic that demonstrates that dividends, not price appreciation, has accounted for the majority of the S&P 500’s returns throughout the years is a favourite of Shark Tank investor Kevin O’Leary’s. He claims he will never own stocks because of this.
6) There Is No Perfect Metric
Both professional and novice investors have preferred growth and value indicators, such as price-earnings ratios, dividend yields, and profit margins. Good stocks and bad stocks cannot be distinguished by a single number, though. A stock that appears inexpensive at 10 times earnings can quickly go to 5 times, and a bright tech startup that appears expensive at 3 times revenues can quickly increase to 6 times.
7) A $100 Stock Isn’t Expensive And A $5 Stock Isn’t Cheap
The price of a single share is not the right number to evaluate when deciding if a stock is a good buy or not. While triple-digit price tags might cost too much for a new investor with limited funds, loading up on 100 $1 stocks isn’t necessarily a better strategy. Think of investing like grocery shopping — there’s a reason you go to the store with a list instead of just deciding what to buy based on price tags.
8) Taxes Can Take A Bite Out Of Your Profits
The FANG stocks — Facebook, Amazon.com, Netflix, and Google (Alphabet) — enjoyed a strong year in 2015, with gains ranging from 34% to 134%. However, from a tax standpoint, any investor who purchased them last year and is considering selling wants them to continue rising. The one-year point serves as a boundary for the taxman, which explains why.
A short-term capital gain, which is taxed as ordinary income, is generated when you sell stocks you’ve owned for less than a year. To Uncle Sam, that might entail paying back anything between 25% and 39.6%. Holding the same equities for at least a year, however, reduces the tax rate for the majority of tax bands to 15%.
9) Know What You Need, And What You're Paying For
For the majority of investors, the fundamental necessities may be found anywhere, despite the fierce competition in the growing brokerage business to provide the newest and best trading alternatives.
Make sure you are inputting the correct kind of buy or sell order. A limit order, on the other hand, will only complete the transaction within the price range you’ve set. A market order, for example, will be completed as soon as feasible, regardless of the current market price.
10) Take Market "News" With A Whole Shaker Of Salt
There was no shortage of news on the first trading day of 2016, from the collapse of the Chinese stock market to GM’s investment in Lyft, an Uber competitor, to the breaking of ties between Saudi Arabia and Iran. But is there really any justification for American stocks to fall by more than 2.5% (as they did before recovering from their lows)?
As an investor, you should view the news flow that drives daily market fluctuations as interesting reading rather than a reason to develop or modify a plan.