Knowledge and information are two critical success factors in stock investing. (Isn’t that true about most things in life?) People who plunge headlong into stocks without sufficient knowledge of the stock market in general, and current information in particular, quickly learn the lesson of the eager diver who didn’t find out ahead of time that the pool was only an inch deep (ouch!). In their haste to avoid missing so-called golden investment opportunities, investors too often end up losing money.
For the best approach to stock investing, build your knowledge and find quality information first so you can make your fortunes more assuredly. Before you buy, you need to know that the company you’re investing in is
Financially sound and growing
Offering products and/or services that are in demand by consumers
In a strong and growing industry (and general economy)
Where do you start, and what kind of information do you want to acquire? Keep reading.
Looking to Stock Exchanges for Answers
Before you invest in stocks, you need to be completely familiar with the basics of stock investing. At its most fundamental, stock investing is about using your money to buy a piece of a company that will give you value in the form of appreciation or income (or both). Fortunately, many resources are available to help you find out about stock investing. Some of the best places are the stock exchanges themselves.
Stock exchanges are organized marketplaces for the buying and selling of stocks (and other securities). The New York Stock Exchange (NYSE; also referred to as the Big Board), the premier stock exchange, provides a framework for stock buyers and sellers to make their transactions. The NYSE makes money not only from a cut of every transaction but also from fees (such as listing fees) charged to companies and brokers that are members of its exchanges. In 2007, the NYSE merged with Euronext, a major European exchange, but no material differences exist for stock investors. In 2008, the American Stock Exchange (Amex) was taken over by (and completely merged into) the NYSE. The new name is NYSE American.
www.nyse.com) and Nasdaq (www.nasdaq.com). Technically, Nasdaq isn’t an exchange, but it’s a formal market that effectively acts as an exchange. Because the NYSE and Nasdaq benefit from increased popularity of stock investing and continued demand for stocks, they offer a wealth of free (or low-cost) resources and information for stock investors. Go to their websites to find useful resources such as the following:
Tutorials on how to invest in stocks, common investment strategies, and so on
Glossaries and free information to help you understand the language, practice, and purpose of stock investing
A wealth of news, press releases, financial data, and other information about companies listed on the exchange or market, usually accessed through an on-site search engine
Industry analysis and news
Stock quotes and other market information related to the daily market movements of stocks, including data such as volume, new highs, new lows, and so on
Free tracking of your stock selections (you can input a sample portfolio or the stocks you’re following to see how well you’re doing)
Grasping the Basics of Accounting and Economics
Stocks represent ownership in companies. Before you buy individual stocks, you want to understand the companies whose stock you’re considering and find out about their operations. It may sound like a daunting task, but you’ll digest the point more easily when you realize that companies work very similarly to the way you work. They make decisions on a daily basis just as you do.
Think about how you grow and prosper as an individual or as a family, and you see the same issues with businesses and how they grow and prosper. Low earnings and high debt are examples of financial difficulties that affect both people and companies. You can better understand companies’ finances by taking the time to pick up some information in two basic disciplines: accounting and economics. These two disciplines, which are discussed in the following sections, play a significant role in understanding the performance of a firm’s stock.
Accounting for taste and a whole lot more
Assets minus liabilities equals net worth. In other words, take what you own (your assets), subtract what you owe (your liabilities), and the rest is yours (your net worth)! Your own personal finances work the same way as Microsoft’s (except yours have fewer zeros at the end).A company’s balance sheet shows you its net worth at a specific point in time (such as December 31). The net worth of a company is the bottom line of its asset and liability picture, and it tells you whether the company is solvent (has the ability to pay its debts without going out of business). The net worth of a successful company grows regularly. To see whether your company is successful, compare its net worth with the net worth from the same point a year earlier. A firm that has a $4 million net worth on December 31, 2020, and a $5 million net worth on December 31, 2021, is doing well; its net worth has gone up 25 percent ($1 million) in one year.
Income minus expenses equals net income. In other words, take what you make (your income), subtract what you spend (your expenses), and the remainder is your net income (or net profit or net earnings — your gain).A company’s profitability is the whole point of investing in its stock. As it profits, the business becomes more valuable, and in turn, its stock price becomes more valuable. To discover a firm’s net income, look at its income statement. Try to determine whether the company uses its gains wisely, either by reinvesting them for continued growth or by paying down debt.
Do a comparative financial analysis. That’s a mouthful, but it’s just a fancy way of saying how a company is doing now compared with something else (like a prior period or a similar company).If you know that the company you’re looking at had a net income of $50,000 for the year, you may ask, “Is that good or bad?” Obviously, making a net profit is