Content

• Steps
• Method 1 of 3: Goals and Expectations
• Method 2 of 3: Investing
• Method 3 of 3: Monitor and Maintain Your Portfolio
• Tips
• Warnings

It is no coincidence that the richest people invest in the stock market.While big money can be made and lost, investing in stocks is one of the best ways to achieve personal financial security, independence, and family support for generations to come. It doesn't matter if you currently have a stockpile for a rainy day or are just starting to save, your money should be working as best you can for you, just as you once labored to earn it. However, to be successful in this endeavor, you need to start by understanding how the stock market works. This article will guide you through your investment decision making process and show you the path to investment success. This article will only talk about buying shares. There are separate articles on WikiHow about exchange trading and mutual funds.

Steps

Method 1 of 3: Goals and Expectations

1. 1 Make a list of what you want. To set goals for yourself, you need to understand what you want to achieve with money. For example, how do you want to live in retirement? Do you love travel, beautiful cars, delicious food? Are your needs modest? This list will help you formulate your goals in the next step.
   • The list will also be helpful if you are saving money for the kids. For example, do you want to send your children to prestigious schools or universities? Do you want to buy them cars? Are you comfortable with regular schools? Are you ready to spend the extra money on something else? A clear understanding of what is important to you will allow you to set financial goals and understand how you need to save money and how to invest it.
2. 2 Decide on your financial goals. To develop an investment plan, you need to understand why you are going to invest in something. In other words, how much money do you want to make and how much are you willing to invest to achieve this? Your goals should be as clear as possible so that you yourself know what you need to achieve them.
   • Often people set goals for themselves such as buying a house, paying for children's education, creating a financial cushion, saving money for retirement. The goal should not be general (for example, "have housing"), but specific: "Set aside $ 63,000 for the first installment of a $ 310,000 apartment." (As a rule of thumb, to get a good mortgage interest rate, your down payment on your home must be at least 20-25%.)
   • Usually, financial advisors recommend saving at least an eighth of your maximum monthly income for retirement. This will allow you to accumulate about 85% of your pre-retirement income per year. For example, if your annual income is 600 thousand rubles, you should try to set aside money so that in the first years of retirement you can spend about 480 thousand annually.
   • Calculate the cost of education for children, taking into account all possible expenses and financial assistance to children, based on your income and savings. Remember that the cost can be different - it all depends on the place and type of educational institution. Also remember that you may have to pay not only for the education itself, but also for housing, transportation, meals, and children's textbooks.
   • Consider the time factor. This is especially important if you plan to save money for something for quite a long time (for example, retirement). For example, Mikhail starts saving money for an individual retirement account at the age of 20 at 8% per annum. Over the next 10 years, he saves 25 thousand a year, then stops replenishing the account, but retains the opportunity to invest this money. By the age of 65, Mikhail will have an amount of 5,350,000.
   • On the Internet, you can find special calculators of the profitability of investments for a certain period of time when applying a certain interest rate. A calculator like this will not replace the work of a financial advisor, but you will at least know what to expect.
   • Once you've decided on your goals, decide how much separates you from your desired financial situation. This will allow you to understand what kind of return will help you achieve the desired financial position.
3. 3 Decide how much risk you can take. In order to generate income from capital, you need to take risks. The ability to take risks is a combination of two variables: your ability to take risks and your willingness to take risks. Before you do anything, you should ask yourself a few important questions:
   • Where are you in your life now? In other words, are you closer to the maximum or minimum of your financial potential?
   • Are you willing to take serious risks for the sake of serious profits?
   • What is the time frame for your investment plans?
   • How much liquidity (that is, the ability to convert capital into cash) do you need to meet short-term goals and maintain a certain amount of cash in reserve? Don't start investing in stocks until you save enough money for 6-12 months of your life if you lose your job. If you give up stocks in less than a year, it will not be investment, but speculation.
   • If the risks associated with certain stocks do not match your expectations of what is acceptable, this option is not suitable for you. Discard it.
   • The choice of stock should depend on the period of life. For example, in youth it is permissible to invest more in the securities market. If you have a stable job that brings you good income, it can also be considered a bond - you get a steady income from it in the long run. This allows you to allocate more funds to buy stocks. If you have a fickle job with unpredictable income (for example, an investment broker or stockbroker), you should spend less money on stocks and more on stable bonds. Stocks allow you to quickly build up profits, but there are more risks associated with them. As you age, you will be able to move towards more stable investments like bonds.
4. 4 Study the stock market. Try to read as many sources as possible about the stock market and macroeconomics. To understand the state of the economy and which stocks are profitable, study the opinions and forecasts of experts. There are several classic books to start your acquaintance with the securities market with:
   • Intelligent investor and Analysis of securities Benjamin Graham are excellent sources of information on investing for beginners.
   • Analysis of the company's financial statements, by Benjamin Graham and Spencer Meredith. This is a concise and comprehensive guide to analyzing a firm's financial statements.
   • Investing with expectations, by Alfred Rappaport, Michael Mobussen. This book describes a new approach to the analysis of securities in an accessible language, and this work perfectly complements the books of Benjamin Graham.
   • Ordinary Shares and Extraordinary Earnings (and other works) by Philip Fisher. Warren Buffett noted that he is 85 percent Graham and 15 percent Fisher, but he likely underestimates the importance of Fischer's influence in shaping his thinking about investing.
   • Warren Buffett's essays is a collection of Buffett's annual letters to shareholders. Buffett has made his fortune by investing and can provide some helpful advice to people who would like to follow in his footsteps. You can read them here completely free of charge: www.berkshirehathaway.com/letters/letters.html.
   • Investment value theory John Barr Williams is one of the best books on stock valuation.
   • Peter Lynch Method and Replay Wall Street Peter Lynch, two books by a successful investment manager. Lynch's works are easy to read, as well as informative and interesting.
   • The most common misconceptions and madness of the crowd Charles McKay and Memories of a stock speculator William Lefebvre.These books provide real-life examples of the dangers of being overly emotional and greedy in the stock market.
   • You can also take online beginner investing courses. Some financial companies put them out completely free of charge, including Morninstar and TD Ameritrade. Similar courses can also be found on the websites of some universities.
   • Finance courses are also available at some schools and organizations. They are usually inexpensive or free of charge, and you will learn a lot about investing there. Look for suitable courses in your city.
   • Practice trading on paper. Imagine buying and selling shares using the closing prices. This can be done on a piece of paper or in an account with a dedicated online service like How the Market Works. This will allow you to practice your strategy and apply knowledge without risking losing money.
5. 5 Formulate what you want from the stock market. It doesn't matter if you are a beginner or a professional, it is always difficult because it is both science and art. You must be able to put together a large amount of financial market data. You also need to learn to feel what the data is for and what it is talking about.
   • For this reason, many investors buy shares in companies whose products they know and use. Think about the things you use at home. You have reliable information on these products, from living room furniture to fridge contents, and you can rate the quality of these products against the competition.
   • If you are considering household goods, try to imagine the economic conditions under which you can abandon those goods or replace them with better or worse quality goods.
   • If economic conditions are such that people are willing to buy a product with which you are very familiar, stocks in these firms will be the right choice.
6. 6 Focus on details. Of course, it is very important to assess the general state of the market and select the companies that are most likely to succeed in the current or expected economic conditions, but you should also formulate your main expectations in specific areas:
   • Trends in interest rates and inflation, and how these factors may affect fixed income and non-fixed income securities. When interest rates are kept low, more consumers and businesses have access to money. Consumers have more money to buy and will buy more. This translates into higher profit margins for companies, which allows companies to invest in business expansion. Thus, low rates lead to higher share prices. High interest rates drive down the value of stocks. At high rates, it becomes more difficult or more expensive to take out loans. Consumers spend less money and companies have less money to invest. Business growth may stop or recession may begin.
   • The cycle of the economy, including taking into account the macroeconomics. Inflation is the overall rise in prices over a period of time. Moderate (or controlled) inflation is generally considered beneficial to the economy and the securities market. Low interest rates combined with moderate inflation have a positive impact on the market. High rates and deflation usually cause the stock market to crash.
   • Favorable conditions within certain sectors of the economy, as well as specific indicators at the microeconomic level. During periods of economic growth, some industries usually thrive - automotive, construction, air travel. In strong economies, consumers are confident about their future, so they spend more money making more purchases. Such industries and enterprises are called cyclical.
   • Other industries thrive in poor or declining economies. As a rule, the economy does not have such a strong influence on these industries and enterprises. For example, utilities and insurance companies are less susceptible to change due to consumer confidence, as electricity and health insurance have to be paid under all conditions. Such industries and enterprises are called defensive or countercyclical.

Method 2 of 3: Investing

1. 1 Decide how the funds will be allocated. In other words, you need to understand how much money you want to invest in each type of product.
   • Determine how much money you will invest in stocks, bonds, riskier options, and how much money you will leave in cash or cash equivalents (certificates of deposit, short-term treasury bills (if you are in the US), and so on).
   • At this stage, you need to determine a starting point based on your expectations and the degree of risk that you can take.
2. 2 Decide where you will invest. Your expectations regarding the percentage of profit and the possible risk will exclude a large number of possible options. As an investor, you can buy shares from companies (for example, Apple or McDonald's). This is the easiest way to invest. There is an approach in which you can buy and sell each share separately, based on your forecast of the future value and possible dividends of these shares. If you buy shares directly, you do not have to pay a commission to an open-ended mutual fund, but you will need to deal with risk diversification.
   • Choose the promotions that best suit your needs. If you pay high taxes, have few short- to medium-term expenses, and are willing to take a lot of risk, choose a stock that is going up in price. They usually do not pay dividends or bring very little profit, but they are constantly growing in value.
   • An index fund usually charges a lower commission compared to actively managed funds. It is safer to invest in this way, since investments are based on well-known and reputable indices. For example, an index fund might choose a benchmark consisting of stocks in the S&P 500. The fund will buy roughly the same stocks to match (but not exceed) the index's performance. It is safe to invest in this way, but not very interesting. Proponents of active stock picking do not find this way of working worthy of attention. Index funds are a good starting point for newbies. Buying and holding low-cost index fund stocks with no load and building up capex by investing a fixed dollar amount at regular intervals allows you to outperform other more active open-ended mutual funds over the long term. Choose index fund stocks with the lowest cost and annual turnover. If you plan on investing less than $ 100,000 (or RUB 8,000,000), there is little in the long run that compares favorably with index funds. Read articles on stocks and mutual funds to find out which is right for you.
   • An exchange traded fund is a type of index fund that can be used for all the same operations as with ordinary stocks. Such securities are an unmanaged portfolio (that is, stocks are not bought and sold all the time, as is the case with actively managed funds) and can often be bought and sold without commission. You can buy stocks that are based on a specific index, industry, or commodity (for example, gold). It is also a suitable option for a beginner.
   • You can invest in actively managed mutual funds. These funds collect money from many investors and invest it mainly in stocks and bonds.Individual investors buy stocks from this portfolio. Fund managers tend to create portfolios with a specific goal in mind, such as long-term growth. However, due to the fact that these funds are actively managed (that is, managers regularly buy and sell shares to achieve the goals of the fund), fees can be higher. The costs associated with such funds can lower your return on investment and slow capital growth.
   • Some companies offer special portfolios of stocks for investors who are saving money for retirement. These are the so-called asset allocation funds, or funds with a specific date, which automatically change the type of your investment depending on your age. For example, when you are young, most of the common stocks accumulate in your portfolio, and as you get older, some are replaced by fixed income securities. Simply put, they do for you what you could do yourself as you get older. Remember that fees will be much higher than ETFs and ETFs, but you will get a service that others cannot offer.
   • When choosing a stock, you should consider the cost of operations and all commissions. These payments can seriously reduce your bottom line. It is important to know what fees will be required to buy, own and sell shares. As a rule, commission fees, the difference between the seller and the buyer prices, slippage, local commissions, capital income tax are paid for these operations. In the case of funds, you may need to pay broker fees, broker fees when buying or selling mutual fund stakes, selling or divesting fees, exchange fees, account management fees, local fees, and escort fees. ...
3. 3 Determine the actual market value and the price you are willing to pay for all the stocks you are interested in. Actual market value is the true value of a stock and may differ from its current price. As a rule, a good price is a fraction of the actual price, which gives a certain margin of safety. The margin of safety varies from 20 to 60% (it all depends on the degree of your confidence or uncertainty in the real value of the stock). There are several techniques for assessing the value of stocks:
   • Dividend Discounting Model. The value of a share is the present value of all of its future dividends. Thus, the value of a share is the dividend per share divided by the difference between the discount rate and the dividend growth rate. Suppose company A pays an annual dividend of 1 ruble apiece, and the dividend is expected to grow 7% annually. If your personal cost of capital (discount rate) is 12%, the value of company A shares is 1 / (. 12-.07) = 20 rubles per share.
   • Discounted cash flow model. The value of a share is determined by the present value of the future cash flow of that share. Thus, discounted cash flow = cash flow 1 / (1 + r) ^ 1 + cash flow 2 / (1 + r) ^ 2 + ... + cash flow n / (1 + r) ^ n, where the flow cash flow n is the cash flow for a certain period of time n, and r is the discount rate. Typically, these calculations calculate the increase in the annual cash flow rate (cash from operations minus capital costs) over the next 10 years. The growth is calculated and the long-term growth rate is projected, which allows calculating the residual value in the post-forecast period. The two sums are then added to get the value of the discounted cash flow. For example, if the cash flow is RUB 2 per share, and the expected growth is 7% over the next 10 years and 4% in subsequent years, at a discount rate of 12%, the shares will rise in price by RUB 15.69, and the residual value will be RUB 16.46. This means that the value of the share will be 32.15 rubles per share.
   • Comparison methods. Using these methods, the value of a share is calculated based on its value relative to actual income, book value, sales, or cash flows.The current price of a share is compared with the relevant criteria for evaluation, as well as the historical average of the share, which allows you to calculate the price at which the share should be sold.
4. 4 Buy stock. When you decide which stock you want to buy, proceed to buy. Find a brokerage company that suits your needs and place an order.
   • You can enter into an agreement with a brokerage firm with low commission fees, which will simply order the necessary shares for you. You can use the services of a full-fledged company. It will cost more, but you will get more information and helpful tips. Research the websites of such firms and read reviews on the Internet - this will help you find the right broker. The most important thing to consider is the amount of commissions and all kinds of payments. Some firms offer a free sale or purchase of shares if a client's portfolio of shares meets the minimum portfolio value requirement, or if the client invests in certain shares for which the companies pay transaction fees.
   • Some companies offer special direct buy programs that allow you to buy their shares without a broker. If you are looking to buy and hold certain stocks, or plan to build capital by investing a fixed amount at regular intervals, this is likely the option that suits you best. Search for such offers online, or contact the company whose stock you want to buy and ask if you can do it directly. Pay attention to the possible commissions and choose programs in which there are no commissions or they are the minimum amount.
5. 5 Build a stock portfolio of 5-20 different stocks for diversification purposes. Choose stocks in different sectors of the economy, in different industries, countries, companies. Stocks should be of different types (some will be aimed at growth, others at preservation of value).
6. 6 Hold stocks for a long time - from 5 to 10 years and longer. Try not to sell stocks when something goes wrong in the stock market for a day, month, or year. In the long term, the securities market is constantly growing. At the same time, do not try to speculate in stocks, even if they have risen in price by 50% or more. If the company is doing well overall, do not sell the stock (unless you have an urgent need for funds). However, the stock should be sold if its price has fallen below its actual value (discussed in the third section of this article) or if the conditions for doing business in the company itself have changed since you bought its shares and the company is unlikely to become profitable again.
7. 7 Invest money regularly and systematically. If you intend to invest a fixed amount at regular intervals, you will need to buy stocks low and sell high. Whenever money comes in, set aside some of it to buy stocks.
   • Remember, people buy in a bear market. If the market drops at least 20%, invest more cash in stocks. If the market drops 50%, invest your spare cash in stocks and replace bonds with stocks. This may seem like a risky move, but the market is always reviving, and this happened even after a period of strong decline in 1929-1932. People who were able to make a lot of money from stocks bought them when they were selling at a low price.

Method 3 of 3: Monitor and Maintain Your Portfolio

1. 1 Develop assessment criteria. It is important to adopt criteria that allow you to measure the success of a stock and compare the result to your expectations. Decide how much of a stock gain would be right for you, so you decide to keep those stocks.
   • As a rule, the criteria should be based on the dynamics of various market indices.This will let you know if your stock is making at least the same profit as the market average.
   • It may sound strange, but just because a stock has gone up does not mean it is a good investment, especially if it is going up more slowly than similar stocks. And vice versa - not all stocks that are falling in price will bring a loss (especially if similar stocks get cheaper even more).
2. 2 Compare the result with your expectations. To understand the value of an investment, you should compare the result for all investments with the expectations that you had when buying stocks. This also applies to assessing how you have allocated money between stocks.
   • If some stocks do not meet your expectations, they should be sold and money invested in something else, unless you have serious reason to believe that the situation will soon change for the better.
   • Give your investments time to start working for you. The result of one or three years means practically nothing to an investor who invests money in long-term projects. The stock market works like a vote in the short term and a scale in the long term.
3. 3 Always be on the alert and adjust your expectations. After buying a stock, you will need to regularly monitor how it behaves.
   • Circumstances and opinions are subject to change. All of this is part of the investment process. It is important to properly comprehend and evaluate new information and make timely changes, adhering to the principles described above.
   • Consider if your expectations were correct. If not, why not? Adjust your expectations and stock portfolio according to the information you receive.
   • Consider whether your stock portfolio matches the degree of risk you are willing to take. Your stocks may have performed well, but turned out to be more volatile and risky than you thought. If you are not satisfied with the level of risk, it is better to replace stocks.
   • Think about whether you can achieve the goals that you set for yourself. Your investments may be within the acceptable level of risk, but are generating profits too slowly. In this case, they should also be replaced.
4. 4 Try not to be tempted to buy and sell too often. After all, you are an investor, not a speculator. In addition, every time you make a profit, you have to pay tax on that profit. In addition, each transaction involves the payment of a commission to the broker.
   • Try not to heed investment advice. Study the information on your own and do not follow the advice of others, even if it came to you from internal sources. Warren Buffett states that he throws away all the letters in which he is recommended to pay attention to certain shares. He believes that the people who send these letters are paid to advertise the stock so that the company can capitalize on it.
   • Don't take press information too seriously. Aim for long-term investing (at least 20 years) and don't try to roll over money quickly.
5. 5 If necessary, consult a trusted broker, banker or investment professional. Try to constantly study the information you need and read as many books and articles from experts who have achieved success in the market in which you are interested. You should also read the literature on the emotional and psychological aspects of investing - this will help you to properly relate to success and failure in the securities market. You must be able to make the right decisions, and even if you do everything right, you must be prepared for losses.

Tips

• Buy shares of those companies that have few competitors or no competition at all. Air travel, retail, and the automotive industry are generally not considered to be the best investment sectors, as competition is fierce. Proof of this is the low level of profit in the annual reports of the respective companies.Stay away from seasonal or fashion industries (retail), regulated industries (utilities), and airlines, unless their value and revenue have grown consistently over time. This is rare.
• Be mindful of your biases and don't let your emotions influence your decisions. Trust yourself and the process itself, and you will have every chance of becoming a successful investor.
• Information is the backbone of successful trading in equities and the fixed-rate market. It is important to regularly conduct market research and evaluate financial performance by tracking stocks and making adjustments.
• The task of a financial advisor / broker is to ensure that you remain his client, and he can earn money for you. You will be prompted to diversify your investments so that your stock portfolio is in line with the Dow Jones and the S&P 500. Thanks to this, the broker will always have an explanation if the stock price falls. The average broker has limited knowledge of the hidden economic processes in business. Warren Buffett is famous for his quote: "Risk is for people who don't know what they are doing."
• Look for an opportunity to buy quality stocks at temporarily low prices. This is the foundation of value investing.
• Remember that you are not buying and selling sheets of paper that are getting more and more expensive. You buy and sell shares in a business. The success and profitability of the venture, and the price you have to pay, are the two factors that should guide your decision.
• Understand why it is worth investing in blue chips (highly liquid stocks). Their quality is based on the constant growth of income and profits in the past. If you know how to find these companies before everyone else does, you can make a lot of money. Learn to invest in promising stocks that can rise in value.
• Don't value your portfolio more than once a month. If you are overwhelmed with emotions, you will quickly sell stocks, which could be a great long-term investment. Before buying a stock, ask yourself, "If these stocks lose value, would I want to sell them or buy more?" Don't buy them if you feel like selling them.
• Invest in shareholder-focused businesses. Most businesses choose to spend their earnings on new private jets for CEOs rather than paying out dividends. Long-term executive salaries, investing in stock options, prudent capex, fair dividend distribution policies, growing earnings per share and book value are all signs that the company is targeting equity holders.
• Before you buy stocks, try trading "on paper" for a while first. This is an imitation of stock trading. You will need to track stock prices, record your purchases or sales that you would have made if you were actually trading. This way, you can check if your decisions are profitable. When you manage to develop a system that works, and you understand how the market works, move on to real buying and selling.

Warnings

• Only invest money that you can afford to lose. Stocks can go down dramatically in the near term, and even relatively safe investments can bring you a loss.
• Work with stocks and stay away from options and derivatives - they are instruments of speculation, not investment. With stocks, there is a better chance of success. In the case of options and derivatives, the likelihood of losing money is much higher.
• When it comes to money, people can lie to maintain their self-esteem. If someone gives you advice, remember that this is just an opinion. Consider if you can trust this person.
• Do not buy shares with only a fraction of the price paid. Stock prices can fluctuate widely, and using credit for financial transactions can be disastrous. You don't want to buy stocks on credit, see a 50 percent rise, lose everything, and then watch the market return to its previous state. Buying shares on debt is not an investment, but speculation.
• Don't rely on technical analysis - it is a tool for traders, not investors. The usefulness of this analysis in the investment decision-making process is highly questionable.
• Do not engage in one-day, medium-term or other transactions that generate profits. Remember that the more often you trade, the higher your commission costs will be, which in turn will reduce your profits. In addition, short-term income is taxed more than long-term income (more than one year). It is best not to get involved in very quick deals, as success in this area requires a lot of skill, knowledge and effort, not to mention luck. This activity is for experienced players.
• You shouldn't buy stocks that have low returns and seem cheap. Most cheap stocks are worth little for a reason. Just because the stocks currently trading at the dollar were once traded at $ 100 apiece, it doesn't mean they can't fall further in value. Any stock can drop to zero in value, and that's exactly what happened with many stocks.
• Avoid impulse investments, that is, do not buy stocks that are in high demand and whose price has been rising all the time. This is pure speculation, not investment, and this growth will not be permanent. Just talk to anyone who tried to do this with tech stocks in the late 90s.
• The return on capital investment can be completely different in different years. The S&P 500 index for the period 2000-2015 was 4.2%. Don't expect your profit to reach 8-10%.
• Do not engage in insider trading. If you trade stocks using confidential information before it is released, you could face felony charges. No amount of money is worth the legal problems you might face.