By: Oliver Hibbard
Everyone has difficulty at first understanding the stock market. Taking the first leap into the investment world can be a bit intimidating. However, once you know what kind of stock you want to invest in; and know how to evaluate if a stock is worth investing in, the whole process seems rather elementary. The process of investing may seem simple but you must always keep in mind the risks you take with every investment. Here are five simple tips to better navigate the stock market.
Make a Plan
When deciding which stock to invest in you must first make a plan of how you want to invest. First, you must decide what company industry you want to invest in. Choose an industry that you already have an interest in or a general knowledge of. Second, you must ask yourself what your investment goals are and factor in the amount of risk you want to take to achieve that goal. Finally, determine the amount you want to invest based on the return over time.
Trust Your Gut
When choosing a stock to invest in do not be afraid to invest in a business who supplies something that is popular or trendy for that month. Remember to factor in what social pressures or political movements are going on that month and how it will affect the stock market. For example many companies that provide delivery services, offer outdoor sporting goods, and materials for home improvements have been doing especially well in the stock market since the pandemic started. While looking at what the public is interested in at the moment is a fruitful endeavor, you should also talk to your family members and friends to find out what they consider to be trending at that moment.
Visualization
Visual aids can help even the most hopeless investors pick the best stock to invest in. Trying to evaluate the rows of data for a stock market site can always be difficult, especially if you are a novice to the investing world. Making a graph is easy, but picking which type of graph can be difficult. When looking at a company’s liquidity level compared to its liabilities we would use a tree map graph. This type of graph gives the viewer a clear view of how much assets would remain if they paid off their liabilities. When we want to look at a company’s stock price trajectory, we would use a simple line graph. Having these visual aids will drastically improve your investment skills as well as develop a better understanding of how a business operates by isolating each aspect of a company.
Ratios
Every expert investment analyst will use formulas with every stock they evaluate to ensure that their predictions from the data are correct. One example of these formulas is the acid test ratio; this ratio shows how a company’s trajectory to success is going and if they will have enough assets to cover the accumulation of liabilities. If it has less than 1 it means the stock does not have enough assets to pay off their liabilities. This ratio is helpful for buy and hold investors. The formula is cash + marketable securities + accounts receivable divided by current liabilities. Another ratio is the working capital ratio, this shows the company’s abilities to pay off their current liabilities and or debt within a year. This is helpful for investment analysts, to determine if a company must maximize their assets to pay their liabilities or eventually go out of business. If the company scores less than 1 it may indicate that the company does not have enough assets to cover their liabilities. However if the company scores above a 1, that is not necessarily good either because that score indicates that the company doesn’t invest their assets very well and therefore may not be a worthy investment. This ratio is helpful for a day trader investor who is looking for a quick buck. The formula is current assets divided by current liabilities. The last ratio that is vital to calculating a stock’s success is the price to book ratio or the p/b ratio. This ratio shows what the market predicts the future cash flow of this company will be divided by the book value of the company, which is determined by the stock’s assets subtracted by intangible assets and other liabilities. If the stock scores one or under then that means that the stock is undervalued, but if the stock scores a 3 then the stock is overvalued.
Keep In Mind
When investing in stock, it is very important to realize how much you are risking and there is no such thing as a fool proof investment. If you are worried about your first investment, you should do a mock investment where you do all the necessary steps and research for investing in a stock but never actually buying anything. This will help you understand what kind of investor you are and take away some of the anxiety of making a bad first investment. When you eventually make that first investment and it does not go as planned please do not be discouraged, a part of investing is learning from your mistakes. Remember patience is a virtue in the world of business and investments. The legendary Warren Buffet once said “The stock market is designed to transfer money from the active to the patient.”