The stock market for a layman is both a complex jungle and an opportunity machine.
Someone who is opposed to stock markets because of a basic understanding of the markets can look to start here.
The problem with the layman who chooses to stay away from the stock market lies in the former perception mentioned above.
The ones who give it a try but do not succeed are the ones who also stop at the former perception mentioned above. They are influenced by the latter but throned by the former perception.
The author urges people to invest in themselves. He wants them to study to understand what stock markets are and how they work.
Why Do Stock Prices Keep Changing?
I’m sure you would have approached reading this book as if you knew little or nothing about stocks and the markets. The author elaborates in simple terms and analogies on how stock prices are derived.
A simple brief about why stock prices move up or down is given. The author says that stock prices are influenced by both investors and traders alike. They trade or invest based on the information they have about the stock and its future potential.
Stocks are bought and sold at the stock exchanges through brokers who act as middlemen who give you access to the exchanges. Both buying and selling of stocks happen online when earlier they were done physically.
Buying, Enjoying Dividends, and Value Investing
Matthew elaborates on how stocks are combined in a basket to form the index in which they are traded or invested. Different indices are bifurcated to differentiate between large-cap stocks, mid-cap, or small-cap stocks. Traders and investors buy or sell individual stocks based on the information they have access to.
Make money with ETFs
Some people chose to trade or invest in the Index rather than in individual stocks. An index is simply a collection of stocks. Stocks in the US with the largest market capitalization are included in the basket of the top 500 stocks forming the S&P 500.
He says investing in Index traded funds or the ETFs, as they are called, is the simplest form of investment. It saves you time and energy studying and analyzing a pool of stocks to invest in. Instead, you invest in an Index, a collection of the top stocks.
Passive income with dividend stocks
Investing in dividend-paying stocks is another way of creating wealth. It is the best way to earn passive income, and you can choose to reinvest them into dividend-paying stocks. Thus, repeating these over the years can leave enormous wealth.
The author cites the example of Ronald Reed, who left behind $8 million in fortune. All of his investments were in dividend-paying stocks, and he was a man who led a simple life. It is a good reminder that you don’t have to be earning a high salary to become a millionaire.
Some Dividend Aristocrats include Coke, Colgate-Palmolive Company, and McDonald’s, who have increased their dividends every year for the past 25 years. You are bound to create wealth if you remain invested and re-invest your dividends as well.
Value Investing
Who better than Warren E Buffet can an author give a reference to when it comes to value investing? Buffet’s investing principles may sound too simple to be true but they work wonders. Choosing the right stocks at a fair value is not everyone’s cup of tea.
The author explains that value investing does not mean that the value of the stock is low and you choose it. Value investing does not even mean choosing a stock with a value of less than 10 PE.
Investing like Buffet is going to be hard, but you can think like Wayne Gretzky a former Canadian Ice Hockey player. He says, “I skate to where the puck is going to be, not where it has been.”
You can use this analogy in investing that you must “skate” to where earnings will be, not where they have been.
Investing in Growth Stocks
If you are a value investor by advice, then you will probably stay away from growth stocks. Growth stocks always trade at high PEs as they are expected to rapidly grow their revenue and earnings. Some of them might not even show profits for years, but their growth potential is immense.
The author explains companies with high PEs will be priced high on prospects of gigantic earnings and profitability. Growth stocks like Amazon, Microsoft, Starbucks, and Home Depot have gone on to make their long-term investors very rich.
Can IPOs make money?
One way to invest in IPOs is for the long term, only when you have done a fair study of the company being listed. Stocks mentioned earlier in the book concerning growth stocks would have created enormous wealth for its investors if they had just held on to their shares from listing day.
Another way to make money from IPOs is to trade them. Only a portion of the total outstanding stocks is available for trading. Big institutions are bound to hold on to their stocks for at least 6 months, allowing you to make money while they protect their investments.
You have to be very careful when trading/investing in IPOs if there is poor institutional buying in them. They usually give the initial investors the to exit their investments. IPOs are sometimes giant transfers of wealth from smart money to dumb money (Retail public).
Advice for the Newbies
The author shares some tips for a newbie in the stock markets that will save them big losses and misery. You can stay way ahead of the pack if you avoid common mistakes when getting started.
Don’t buy stocks that are hitting 52-week lows.
Don’t trade penny stocks.
Don’t short stocks.
Don’t trade on margin.
Don’t trade on other people’s ideas.
Conclusion
You only need to do a few things right to be successful in the stock market. Never forget that anyone can learn to play this game.
If you are ready to play this game, get your copy of the book now to get more insights from the book.
(Amazon paid link)
Guest Post - Written by Mr. Lal Bajaj, Bangalore
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