The basics of Investing

Investing in your first company can be an interesting, exhilarating and intellectually stimulating experience that opens you up to the mechanics of the stock market and how to make a considerable amount of money through wise and nurtured investment techniques. Just like other skills, it takes patience, resilience and an unparalleled drive to master the stock market. Wealthy people know that to maintain and extend their net worth, they must invest in profit generating assets, whilst diminishing their exposure to liabilities. In addition, the wealthy know the key to financial freedom is not to work for money, rather money to work for them.
The stock market offers a wide and diversified range of great stocks from blue chip to penny stocks that if interpreted correctly, can hold significant upside potential. Understanding the compound effect, coupled with a passion for developing your intellectual capacity will make you successful in the long run. However, no matter how information rich you are, or how much experience you have accumulated over the years, you are still prone to exogenous shocks and the wrath of an ever-changing, dynamic international economy.

Just like businesses invest in technology to keep at the forefront of change and innovation, successful investors must do the same. Constantly adapting to fluctuating market environments, reading the latest insights and making smart decisions allow the average investor to become an intelligent investor. Capitalising on opportunities and selling a vision is equally as important when interpreting what constitutes a successful investor. Here are 5 things to keep in mind when choosing your first stock:

Read, Read More & Read Again

Reading a company’s prospectus, financial statements and general background information are not the most glamorous of tasks; however, it is absolutely essential in terms of understanding the company, understanding the fundamental and technical analysis and ultimately provides the foundation to make an intelligent investment decision. The balance sheet is perhaps the most important financial instrument to study as it will tell the reader the story of what happens in the business.

It provides an update of the business journey as the month’s progress. Dissecting this information effectively will ultimately dictate how successful you will be in the stock market. You should invest a great deal of time into understanding how to interpret financial statements. In addition to the financial statements, you should study the 8k/10k press releases and try to read between the lines of hints for the direction the management are taking the company. Although you should never trade on speculation communicating with like-minded, driven individuals can help you better understand the business you are studying and can help formulate ideas for yourself to research and discover.

To Start, Follow The Smart Money

My #1 rule with regards to investing is to never, ever purely follow someone else’s investment advice without conducting and delivering your own substantial due diligence. However, when addressing 13-G filings, look for big investment/hedge fund firms that have taken a large position.

These funds have huge experience within the stock market and should potentially be seen as an indicator of future performance. After earnings reports, wait until the funds release their latest filings and see if their position has increased or decreased. If the funds increase their holdings, that is a strong indicator of confidence and future growth. If they decrease their position, then you should reassess your position and find out what made them sell.

Heed Caution With Low Cap Stocks

We’ve all heard the glory stories from Wall St from individuals becoming millionaires in a short space of time from investing in penny stocks. However, these stocks are the riskiest and I urge you take a sense of caution when investing in this stock class. Although the price per share of a penny stock company may seem cheap, these are often the riskiest and are subject to substantial volatility.

When investing in these stocks, you have to believe fully in the company for its fundamentals and not the short term potential. For example analyse the management’s ability to deliver shareholder value, scrutinise the company’s cash flow and pay particular attention to current assets and current liabilities in the balance sheet. If it sounds too good to be true, it probably is. However, if you look hard enough, there are unpolished gems out there in the marketplace.

Author: Scott Hennessy