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Hi Reader,
Welcome to the first edition to Stockstartr. Today it is all about a company behind stocks and why you should have patience in the stock market.
- Walter
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Fundamental
A Business behind the stock
Most investors are obsessed with the stock price. They want to know what their favorite company (maybe Amazon?) currently sells for. One Google search away, and the search engine provides you with the current price and the price chart. Option "Max" above the chart displays the price movement over a decade or two.
The trend is up, with some wiggles up and down. What makes Amazon's stock move up (or down) over this long period?
To answer this, we have to look at what's behind the stock. A business. The answer is obvious now. However, most investors forget this during large price movements.
Stocks are certificates representing an ownership share of a business. Think of the business' ownership like a pie and its shares as slices. Assuming a company has 10 shares, the pie is divisible in 10 slices. You own 1 slice, which corresponds to 10 percent. Going back to the business, you own 10%. Other investors own 9 shares or 90%.
Great, why should I know: the stock price correlates with the business' performance, the cash it can return to owners now and in the future. In the short-term (months or even a year), the stock price may not reflect the value of a business. In the long-term it usually does.
What you should do: understand what the business behind the stock does. What product or service does it sell? Become the customers more or less over time. Will the company be profitable in the future?
Let's go back to Amazon for a moment. Amazon's primary business is selling or letting others sell products on the website. As Amazon expands its products and services, more people will likely use it. With a growing customer base comes usually a growth in profits.
Conclusion: a business has many owners. When you own stock, you own a fraction of a company. Thus, from now on, think of yourself as owning a piece of a business rather than owning a piece of paper with a fluctuating price attached.
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Principle
Have Patience
Usually, people look for quick ways to achieve financial freedom, and investing isn't one of them. Don't be discouraged right away. Investing is a slow but solid way to wealth building. Have long-term goals, like building up for early retirement or a house.
When you look at the stock market in general, you will always see ups and downs. But the general trend of the market is up.
The S&P 500 index represents approximately 70% of the American economy. The economy has been growing over time, and so has the stock market. When you lose out on patience, look back at this chart ;). Get the confidence back to hold on.
What you shouldn't do: trading may generate quicker profits but, more often than not, result in losses fairly quickly. It is rare for inexperienced traders to consistently be profitable. It is nerve-racking.
What you should do: ride the wave of economic growth. You will build up wealth and sleep peacefully at night knowing that the economy will prosper.
Look out for: the most challenging part of investing is in the event of an economic crisis. The stock markets are down, the news is negative. But the moment you notice this, it is too late to sell. The best is to keep your investments.
Most companies are cheap or on sale, as we like to call it. We love discounts! During this time, your patience is tested the most. If you feel tempted to sell, consider that everything will come back up, and now is the chance to get more for far less.
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Glossary
Earnings
The net income of a business after taxes. A business deducts expenses, like materials, advertising, rent, and salaries, from the sales to come at earnings. Synonyms are profit, bottom line, or net income.
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Question
What is the best way for new investors to get started?
First and foremost, get yourself acquainted with investment fundamentals. Books written by former investors are a good start. And this newsletter, of course. Preparing yourself is the key to a successful investing. Unpreparedness can prove costly for the one who doesn't take the time to get acquainted with the investment process.
We can recommend the following two books. They give you a broad idea of investing:
- One up on Wall Street by Peter Lynch.
- The little book of common sense investing.
The first goes through the process of investing in individual stocks. This book is valuable for a basic understanding of investing. However, the examples are old, as the book was written in the 80s. Therefore, some companies you probably never heard of.
The second book educates the reader on investing in the broader market. It tells you what an index is, what funds are, how this type of investing consumes less of your time, and why index investing works best for the average investor.
Next: in other editions we'll explain how to determine your investment goals, reduce expectations, and find a suitable broker.
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Thanks for reading Stockstartr. For questions, suggestions, or feedback, please reply to this email. We will gladly take the time to listen to you. Please ask your friends and colleagues to sign up. |
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No investing advice is given at any moment. The newsletter is purely for informative purposes only.
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