The No Hype Guide To Investing In Stocks 101

Written on November 6, 2007 by Tezza

Tuesday’s weekly guide to Personal Finance from 4EvaYoung.com

Getting started investing in stocks can be a somewhat daunting task considering the wealth of conflicting information out there. While there are many self proclaimed gurus who are happy to lend you a helping hand for a fee most of them aren’t worth the piece of paper their marketing material is printed on. So for a novice who isn’t interested in the hype of the get rich quick guru where do you start?

To help you get started here are the three different ways to invest in the stock market. Once you know which of these three options you feel most comfortable with or the one that best fits your personality or time commitment then this will form your starting point in which to gather more knowledge and expertise.

This is not meant to be a comprehensive guide, rather a way for you to disseminate all your options so that you can best concentrate your time and resources on one particular path which will give you the best chance of success. The three options to investing in the market all have their pro’s and con’s and one is not better than the other, just different.

Just remember this is no substitute for sound financial advice from a reputable adviser. It does however, give you a starting framework for which to begin your investment journey.

1. Buying Stocks Through A Managed Fund
If you are someone who doesn’t have the time nor the motivation to really learn about investing in stocks then your best option is to select a managed fund. The advantages are that it is managed by a professional team. Your overall risk is minimized since your funds are pooled with other investors and the fund you are invested in generally has a well diversified portfolio of stocks. This makes it an attractive option for a small investor since it is difficult to get a truly diversified portfolio with limited funds without brokerage taking a hit on your funds.

While fund managers are no guarantee that they will outperform the market, they do on the whole perform on average better than most novice individual investors. While there are many managed funds to choose from, ranging from growth funds, balanced funds to funds concentrating on specific market niches like a China Fund or Small Caps fund they all enable the investor to pick and choose the one best suited to their needs.

If all the options are giving you a headache a simple option is to select an Index Fund. An Index fund doesn’t employ a fund manager to try and beat the average, rather it is set up to mirror a specific market index. The advantages of an Index fund is that they offer lower fees than a retail managed fund since they aren’t as much involved and less transaction costs are incurred by the fund manager.

The disadvantage of managed funds are the upfront fees you pay and the ongoing fees for funds under management. If you were to invest directly in shares yourself you only pay the brokerage on entry and exit. If you are a buy and hold investor for instance then your overall fees over the lifetime of your investment will be less than what it would have been through a managed fund.

If managed funds doesn’t take your fancy then you are probably wanting to invest in stocks directly. The first decision is to find yourself a broker which acts as an intermediary for you to buy and sell stocks. In this day and age discount brokers have really become the popular choice enabling the novice investor to buy and sell stocks from the comfort of their PC with an Internet connection. While full service brokers are still around they are generally reserved for the arena of those who have been well endowed with a large net worth and are time poor.

2. Investing in Stocks
If you are going to buy quality stocks in large well known companies and want to keep it for the long haul then you want to get familiar with the basics of fundamental analysis. The basic premise behind fundamental analysis is to determine the long term valuation of a company based on key indicators rather than trying to time market psychology which day traders attempt to do.

Fundamental analysis aims to find prospects that will make for sound investment over the longer term regardless of price volatility in the short term. Warren Buffett is one of the most famous proponent of fundamental based value investing in which the companies performance and management is more important than supply and demand exhibited by the market towards the stock. Buffett has been famously documented to have sat on the sidelines during the meteoric rise and earth shattering fall of the Technology stocks during the late 90’s.

Thankfully for the beginning investor you don’t have to these days work out all of the financial ratios for companies yourself. Every online broker will provide all this information for you when you open your account. It will provide company data, information and financial performance usually over a 10 year period.

The key to fundamental investing is to understand and be able to read the balance sheet and profit and loss statements. You are looking for underlying reasons for long term price growth which can be exhibited through such indicators as earnings growth, net profit growth, strong market share, well managed debt to equity ratios and controlled spending.

3. Trading In Stocks
If you are more inclined to trade stocks irrespective of the fundamentals of a company then you have a few options. Your time line you pick will largely be determined by your level of participation. For someone willing to put in full time effort then day trading is an option which is out of the question if you have a full time job unless your boss is open to you staring at a trading screen hours on end.

For others they may like to put in trades in the evening or pre-market open and thus look at trading over a longer time period. Generally day traders open and close their position within a single trading day whereas long term traders can keep a trade open for days, weeks or months depending on your system.

Traders regardless of their trading preference generally rely on technical analysis to determine the buying and selling of stocks. Traders are less concerned with fundamental price information and what a company actually does. Rather they have determined that all available market related information concerning a stock is reflected in it’s current share price. So traders are trying to predict using probability what direction the share price will move in the short and medium term. Technical analysis presents price action of stocks in the form of charts. In its most basic form they consists of either line or bar charts which displays the open, close, high, low and volume of the stock over a period of trading days.

As a trader your aim is to make money from buying and selling stocks rather than trying to be a part owner in the company you are investing in. This is the main difference between an investor compared to a trader. The investor is in a sense shopping for quality companies that they want to own and will give them a financial return over the term of their ownership while the trader is looking to buy an item and looking to someone to sell it to at a higher price than they paid for it.

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