• Australian (ASX) Stock Market Forum

A short guide to stock investing for beginners

Discussion in 'Beginner's Lounge' started by dreamxite, Sep 6, 2016.

  1. dreamxite

    dreamxite Member

    Posts:
    11
    Likes Received:
    4
    Joined:
    Jul 13, 2015
    *I have only put up a part of the article here because I can't get the table formatting to work
    * Feedbacks will be greatly appreciated

    Learning to invest in the stock market is different from say, learning maths. Whereas everyone eventually reaches the same solution in the latter, there’s no one right answer on how to invest well. Nonetheless, there are overriding similarities between learning the both, or any sorts of skills. The fastest way to learn a skill is to deconstruct it by breaking it into pieces, strip down to their essence, and examine the fundamentals.

    Fundamentals provide a solid foundation, like a sturdy building holding up against shocks, so you won’t fall apart during a market panic. Investing is a slow learning process, same as everything you set out to do, like a car in first gear going uphill. And don’t worry about missing out opportunities. If the boat is not in the right direction, it doesn’t matter how fast it goes. Instead, aim for 1%, strive to improve yourself by 1% every day, it adds up over time. Build a long runway, and focus on what matters and ignore the trivial. When your knowledge compounds, your wealth follows.

    In the stock market, every share you own is a slice of ownership in the business, essentially, you are the owner. You are entitled to vote, receive a dividend, if there’s one, and participate in the fortune of the business as a shareholder. You grow your wealth through the dividends received, and share price appreciation as the business makes more money.

    Most investors watch their shares like a hawk, reasoned a drop in share price would impair investment capital. That is true if the shares are sold to realize the loss, but otherwise, flies in contrary to the mindset of an owner. If an asset can be acquired at a lower price, in this case, the whole business, isn’t that a positive thing? As opposed to a falling share price, the risk of an investor comes from not knowing what he is doing. If one buys a property but never take the trouble to inspect, or walk around the neighborhood, is it a surprise if the house is in a poor condition sitting in an unsafe neighborhood?

    Similar to doing research before getting a fridge, a car, or a house, a big part of investing lies in preparation, doing the work before buying, and spending the time to understand the business. These knowledge create a psychological edge, and the ability to think independently, a rare and valuable trait in investing during market panic. You can assess the situation with a calm head before making the right decision rather than rushing to the exit doors like everyone else.

    Your profession or things that surround your daily life are good starting points to learn more about a business and industry. If you work in the I.T industry, chances are you will be familiar with some software providers; if you are a car enthusiast, which stores do you always visit and for what reasons? Even if you’re a stay at home mom, you might have developed a good understanding where to find quality ingredients. By observing things around you, you have a good judgment on what’s selling, and what doesn’t. Look for the label, find out which company produce it and how well the business is doing.

    Given the choice between a wonderful and an average business, you’ll prefer to invest in the former. But how do you distinguish the former from the latter? Is there any characteristic that defines a company as wonderful?

    If one of your friends comes to you with an idea of starting a business together, you will ask questions like:
    1. What kind of business is it?
    2. How much investment do I have to put into the business?
    3. How much money can the business make every year and how fast?

    The first question focuses on having a good grasp on what the business does. If your friend is going to start something that you can’t get your head around, never ever get involved.

    The subsequent two questions are the litmus test to see how attractive an investment can be, or how wonderful the business is. To start with something simple. If you decide to open a savings account, you would prefer a bank that offers a better rate, say 2% instead of 1%.

    To express it in an equation:
    The savings account earns you $2,000 / You have to put in $100,000 = You earn 2% return

    or put it another way:
    How much money can the business make / How much investment to put in = X% return

    To simplify it:
    Profit / Shareholders Equity = X% return (Return on equity)

    Shareholders equity means the total amount of money that have been put into the business. Return on equity or ROE for short, expressed in percentage, measures how well the business is generating a return on its investment. In the savings account example, you get a 2 cents return for every dollar of investment or a ROE of 2%.

    A business can report they made 1 million or 100 million in profit but that information has little value without knowing how much investment had been put in. The ROE decides how attractive a business is. In running analogy, a runner’s performance is determined by the time required to achieve an X amount of distance. In investing, it is the investment required to generate an X amount of profit that determines the share price & business performance.

    *Please find the remaining of the article here
     
  2. JessaFrance

    JessaFrance New Member

    Posts:
    3
    Likes Received:
    0
    Joined:
    Sep 13, 2016
    Thanks for sharing! It is worth reading but I would prefer more information on how stock markets operate in general
     
  3. ReXXar

    ReXXar Well-Known Member

    Posts:
    52
    Likes Received:
    0
    Joined:
    Sep 16, 2016
    Does anyone know what is the best way to directly short stocks on the ASX (not using emulated products like CFDs)?? I recently started trading with Directshares through St George, and same E*Trade, it doesn't allow shorting :(
     
  4. cynic

    cynic Well-Known Member

    Posts:
    2,122
    Likes Received:
    1
    Joined:
    Feb 25, 2011
    It might not necessarily be the best way, but if there's an options market for the shares one is looking to short sell, then one need only buy a put and write a call at identical (and preferably close to the underlying market) strike levels to create a synthetic short position.
     
  5. ReXXar

    ReXXar Well-Known Member

    Posts:
    52
    Likes Received:
    0
    Joined:
    Sep 16, 2016
    Hmm, very interesting indeed.. Have you tried this yourself? I never tried options before, but if this is the only way to directly short stocks then I'll have to start to learn...

     
  6. cynic

    cynic Well-Known Member

    Posts:
    2,122
    Likes Received:
    1
    Joined:
    Feb 25, 2011
    No. I normally only short indices (and sometimes commodities).

    Shorting the underlying via a direct short sale is generally the cleanest way to achieve short exposure provided it is practicable to do so.
     
  7. ReXXar

    ReXXar Well-Known Member

    Posts:
    52
    Likes Received:
    0
    Joined:
    Sep 16, 2016
    How you doing with your trading? You do this full-time? I basically give up doing this as I started a day job after uni, and lost quite a bit as I was trying to hide my day trading activities from my boss lol! It is far too stressful to do this while also having a day job..

     
  8. cynic

    cynic Well-Known Member

    Posts:
    2,122
    Likes Received:
    1
    Joined:
    Feb 25, 2011
    I was doing okay until recent years.

    The two years prior to this one just happened to be my most accursed trading years ever.

    This year is travelling a lot more smoothly, but it is going to take some time to rebuild my capital before I am able to take on enough exposure to extract a liveable income.
     
  9. dreamxite

    dreamxite Member

    Posts:
    11
    Likes Received:
    4
    Joined:
    Jul 13, 2015
    Thanks JessaFrance, mind to elaborate?
     
Loading...

Share This Page