Stocks For Beginners

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One of the best ways to ensure your financial future is to invest in the stock market. If you want to know why feel free to read the following article on how to stop living paycheck to paycheck.

Today we are going over the book "The Intelligent Investor" by Benjamin Graham. Warren Buffett said that this is the best book ever written about investing. If you have not read this book I highly recommend that you find time and read it. This post I will try to provide the key learnings from the book and my hope is it will spark your interest in reading the book in full. After all, if one of the richest men on the planet says that a book is a great read, it is worth investing your time in the book.

First let’s break down what investing actually is. All you need to know to get started is that there are three big types of investments called asset classes and they are: Stocks, Bonds and Cash.

Stock is just ownership in a company, and there are 2 ways to make or lose money in the stock market. When you own a stock, you actually own a piece of a company and as the value of that company increases, the stock price goes up. But If the value of the company decreases, the stock price goes down as well. These ups and downs determine the amount of profit or loss. The second way to make money is when the company shares its yearly profit with you in the form of dividends. Stock prices can go up and down dramatically for all kinds of reasons as a result stocks are the riskiest types of investments.

However, there is a way to invest in the market that does not leave you at risk of losing everything and it is called Intelligent Investing. There is a lot of money to be made through investing but also a lot to lose. Finance history is full of success stories of investors like Warren Buffett, who, by investing in the right companies, earned large amounts of money in return. On the other hand, there are just as many stories of misfortune, in which people place the wrong stakes and end up losing it all.

Do Your Research

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There are three principles that apply to any intelligent investor. First, intelligent investors analyze the long-term development and business principles of the companies in which they are looking at investing before buying stock of such companies. A stock’s long-term value is not arbitrary and it depends directly on how well the company performs. It means thorough examination of the company’s financial structure, the quality of its management and whether it pays steady dividends or not. Intelligent investors use such deep analyses in order to secure safe and steady returns. This is very different from speculating where investors focus on short-term gains made possible by market fluctuations and based on pure luck in many cases. Speculations are thus very risky because nobody can predict the future.

Let’s consider the following example: a speculator might hear a rumor that Tesla is going to release a new car and would be motivated to buy a lot of Tesla stock. If that person is lucky then this knowledge will pay off and they will make money. At the same time if the rumor proved untrue then that person will lose a lot.

In contrast, intelligent investors focus on pricing. These investors buy stock only when its price is below its true value. It is important not to fall into the trap of only looking at short-term earnings. You should be looking instead at the big picture by examining the company’s financial history. These steps will give you a better idea of how well a company performs independent of its value on the market. It could be a company that is not currently popular and therefore has low share price but at the same time shows promising records, i.e. has earned consistent profits and is likely undervalued, which would make a prudent investment.

Diversify Your Investments

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Second thing that intelligent investors do is protect themselves against serious losses by diversifying their investments. Never put all your money in a single stock, no matter how promising it looks. Imagine for a second the horror you would feel if the promising company that you poured all your investments into is sued based on a tax fraud scandal. Your investment will lose its value immediately and all that time and money will be lost. Diversification ensures that you won’t lose everything at once and improves your financial stability. It is also important to remove yourself from the emotional stress of investing with the market by always sticking to a strict formula and discipline when investing.

Graham, in his book, calls it formula investing but it is more widely known as dollar cost averaging. In reality it simply means that you set a fixed budget you are going to invest every month or quarter and then invest that into the stocks you have previously picked no matter the price.

Stay Consistent

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Third and the last principle, intelligent investors understand that they won’t pull in extraordinary profits but safe and steady returns. The target for the intelligent investor is to meet their personal needs instead to outperform the professional stockbrokers on Wall Street. It is really hard to compete with and do a better job than those who trade for a living. Remember that you are an intelligent investor and you should not be aiming for fast money. As long as you stay consistent in your investment strategy and stick to it for a long time, you will be successful.

In summary, I wanted to say that it does not matter whether you are just starting out or you have been investing for quite some time, you always want to be on the path of the Intelligent Investor. It could be true that you won't become a millionaire in a week but I guarantee you will turn your investments into modest and steady profits which is far more advantageous than speculative ups and downs.