Whether you are putting money into a qualified retirement account, or non-retirement managed funds, or even just buying equities as a retail investor, for many people, the stock investment is one of the greatest things to build wealth over time.
The market can make people a lot of money as long as they know what they are doing and make wise decisions about where to put their money. Money managers who are best at grasping this concept can make their investors a lot of money.
But that does not mean you need a money manager to make money. You can manage your own stock investment portfolio if you follow some basic principles. The stock market is the ultimate measure of supply-demand economics. When more people buy a stock than sell it over the course of a defined period, the stock value should increase. And when there is a sell-off, you can expect the stock value to decrease. The common term you here is to buy low and sell high.
For those who are rookies and don’t quite understand fundamentals, one of the easiest ways to buy stocks is to do some research on what analysts believe the stock is worth from a price perspective. For example, if a company is trading at $50 per share, and an analyst believes that its intrinsic value is $60 per share, they may be looking to buy it up.
If other analysts also believe that price targets should be at least $60 per share, it may be a good idea to buy, because not only is there consensus it should be worth more, but there will likely be more buyers than sellers over time that will drive the price up. Therefore, if you buy at $50 and the stock makes its way to $60, you will now have an unrealized gain of $10.
Once you get your feet wet and you see some small gains, you might be ready to take some bigger gambles. But when you start throwing more money at the market, you may want to start doing your own research.
Before looking into any company fundamentals, you should always try to understand the business model first and the long term outlook. What product are they creating and what problem is it solving. Or is the company trying to eat away market share and they have a proof of concept that makes them the leader in their industry. After you understand a business model, you can then begin to look at its fundamentals.
The three main financial sheets a company puts out are a balance sheet, an income statement, and a cash flow analysis. To build a great stock investment portfolio, you need to understand these statements well before you begin investing in a company. First, you should make sure that a company has more assets than liabilities on its balance sheet, to eliminate risk in case it goes insolvent. Second, you should take a historical view of its income statement and look at how its revenue and operating income are performing over time.
One of the greatest financial indicators for a growth company is to see consistent year over year growth in revenue, and operating income trending in a positive direction even its currently not profitable. Finally, on a cash flow analysis sheet, you will want to make sure that it’s not over-leveraging itself with debt and its free cash flow is moving in a positive direction. A sign of a stable company is one that can consistently develop free cash flow.
Finally, once you’ve figured out which stocks to buy, all that is left to master is finding the right time to buy it. Technical analysis is a great tool to use that measures natural trends in the price of a stock over time and is a good indicator of identifying optimal buy points. As we mentioned, a stock price fluctuates based on human behavior of when to buy and sell a stock, and so this can be a really good tool to squeeze out as much profit on a stock that you can. If this is too challenging, you can also resort to dollar-cost averaging, buying a few shares at a time at defined intervals to minimize risk.
Founder & Editor-in-Chief of Pinstripe Magazine. Creative thinker and menswear designer who has been writing articles dedicated to men’s fashion, lifestyle, luxury items, home design, gear, grooming and gadgets since 1998. For info on PinstripeMag, any editorial needs or to contact me please email at marv@pinstripemag.com.
