Must know things before investing $1 in stocks?

These are probably a few things you must have either read somewhere or heard from someone you know in the past 1-2 years

  • I made a lot of money in stocks.

  • My friend asked me to put all my money in stock, I am totally broke.

  • It will be cool to get rich and retire – looks like i need to invest in crypto.

  • You know, when this covid lockdown is over, stocks like Gamestop or AMC will make us rich. Put all the money there.

  • I put all my money in big tech companies like Amazon, Google, Apple s safe investment

  • No, I don’t want to take any risk. I put everything in Index funds. Even Warren Buffet says no one can beat the S & P index.

I don’t think any of the above statements are completely accurate or completely false. The main problem is that most of the people do not know the basics of investing and yet, all of them expect to grow their money very quickly. Well, in very simple and plain terms, that is known as “Being Greedy!”.  How can someone buy something without knowing or understanding what he or she is buying. When we buy something, don’t we ask simple questions like:

  • What does it do?

  • Is there a need to use it?

  • Does the price seem expensive?

  • How long does it last?

  • Do other people use it?

  • Is it a seasonal thing? E.g. is it relevant only during a particular season or holidays?

 And so on

 Unlike buying something from a store, investing is buying a piece of a business. Anyone who has an account (often called a brokerage account) can buy stocks of a publicly traded company. This means the individual just invested in a business. If the business (the company) does well, many more people would be interested to be part of and the stock price goes higher. If business does not do well, people do not want to be part of the business and sell the stock, then stock price goes down. Please keep in mind that stock price goes up and down on a daily basis based on how many buyers and sellers there are. Many times, even though the company does well, people may not be interested in the company because of various reasons such as the company may not have long term prospects, it may be seasonal, it may have too much debt etc. Based on this very first newsletter on this topic, we recommend that you consider the following before putting any money in stocks:

  • Make sure that you are investing (not trading, which is like gambling and mostly driven by luck). This means, you must know about the company, what it does and its products and services, leadership etc.

  • Business model – How does the company make money?

  • Stock fundamentals – Is this company already (or near future) profitable and returning money to investors? How does this compare with other companies in the same industry?

    • Price to sales

    • Price to Earning

    • Price to bookings

    • Market cap

    • Debt

    • Growth rate Y/Y

    • Growth, value, dividend, Spec

  • Long term prospects – Is this going to be a good business long term or not?

  • Trend and momentum – How much volume stock has been bought or sold? Is it going into a positive trend? 

  • Volatility – How much stock has been up and down recently and this past year? What are 52 weeks high and low?

  • Risks – Are there any major red flags in a company’s business from any publicly available information?

  • Overall conviction – Do you strongly believe this company’s business will do well in future without any major red flags?

 Yes, this is a lot of information to digest and it can be very stressful to put your money on something that you don’t understand well. While there are many financial advisors and investment managers to do this for you or guide you through investment decisions, they charge you a lot of money, as a percentage of your investment irrespective of your profit or loss. So, we would like to take a different approach by equipping you with the information that you need to make your own decision. We will develop a training course with a nominal fee in the future with all the useful information you need to make critical investment decisions. Until then, we will continue to send you these free newsletters. Hope you are able to get as much information from these and grow your wealth! 

Well, you might be thinking – can you then suggest what is a good company to invest in now? 

Here is the stock that you can consider investing in now.

Amazon (Ticker: AMZN)

What is Amazon? 

Products and Services

E-commerce and Cloud computing

 
Business model: Collect revenue per unit

 Stock fundamentals: Good

Long term prospects : Good
Advertising business

Trend and momentum: Good 

Volatility: Low

 
Conviction : Very High

Very important tip: if you are a beginner and just encouraged to try, you will probably invest into 1-2 companies which is very risky. It is entirely possible that you may lose a considerable amount of money even in the best companies short term because stock market depends on the overall economy such as employment data, inflation, political stability, new economic policies etc. So, we recommend that you invest in at least 5 companies that have good business and stock fundamentals, with less volatility and highest conviction.

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