Some people think stock investing is gambling. It can be, but it doesn’t have to be. Stock investing won’t be gambling if it’s a sure win. There is a range of concepts you can apply to increase your odds of winning.
Here are some useful tips that can make stock investing a lucrative endeavour for you.
Don’t Lose Money
This is easier said than done. To avoid losing money when you invest in stocks, first familiarize yourself with the topics around what makes a good business, fundamental analysis, and valuing a company.
I find learning about technical analysis helps. But identifying great businesses and trying not to overpay for them comes first.
Many investors share their investing strategies or why they buy or sell a stock through blogs or forums.
For instance, my friend recently invited me to join a Facebook (NASDAQ:FB) group, which had a focus on dividend investing. Of course, if you have more time on your hands, pick up a bunch of books about specific investing topics from the library or Amazon (NASDAQ:AMZN).
A good book for new investors is The Single Best Investment by Lowell Miller with a focus on Creating Wealth with Dividend Growth.
You can follow the people or groups that share stock investing ideas or strategies that interest you and learn over time.
Soon, you’ll be itching to apply your knowledge. If you want a sure-fire way to not lose money, experiment with a virtual account. I bank with Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
It offers a virtual trading account in which I can buy or sell stocks on the Canadian and U.S. exchanges like in a real account, but it’s for practice only. It starts you off with $100,000-200,000 of virtual money.
Key Takeaway: Preserve your capital. You need money to invest to make you more money.
Business Valuation Changes
In the previous section, I mentioned about valuing a company. If you’ve done some reading on stock investing already, you’ve probably heard that you don’t want to overpay for even the best of companies, including Johnson & Johnson (NYSE:JNJ), one of only two AAA-rated companies.
The most common valuation metric of a stock is the price-to-earnings ratio (P/E).
As of writing, Facebook trades at $162 per share and in 2018 it reported earnings per share of $7.57. So, its P/E based on trailing-12-month earnings is 21.4. However, its P/E was close to 60 when it first started trading. Facebook’s 2019 earnings are estimated to remain stable compared to 2018’s. That’s why the stock is trading at a lower P/E. Longer term, Facebook is currently estimated to increase its earnings per share by more than 15% per year.
There are other things that can affect a business’ valuation, such as the debt levels of a company. If company A and company B are the same except that A has more debt than B, A will have a lower price tag than B.
Key Takeaway: Business valuations change as the underlying businesses change. Typically, lower anticipated earnings growth (or worse, negative earnings growth or a net loss) will cause stocks’ valuations to drop like a rock.Read More