A Beginner's Guide
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Investing and Trading Effectively A Beginner's Guide >> INTRODUCTION << INVESTING AS A KEY TO FINANCIAL FREEDOM In this day and age, it is not enough to simply rely on your paycheck in earning money. You may have a constant source of income, and this might be enough to pay the bills and put food on the table, but there are better ways to keep your money. If you want to be financially free someday, then you have to learn how to invest. Investing is perhaps the best way to make your money grow. Here, what you do is you buy and sell stocks - you trade stocks - of companies you select. This makes you part-owner of that company, since stocks are ways by which businesses fund their operations, and this means that you are practically helping run the business. When your selected company earns profit, you earn money as well, and so on until you eventually store up a considerable amount of money in the long run if all goes well. In the world of buying and selling stocks, the only possibility is for your money to grow exponentially in the long run - that is, if you stick to a profitable company and master the art of trading stocks. However, investing does not come without risks. In investing, the risks are high because there are many uncertainties surrounding it. There are sudden economic downturns here and there, and stock prices are constantly fluctuating. You never know when stock values will dip or skyrocket. In some ways, 1 investing may seem like a guessing game, but a calculated one which can be won through a bit of math and some strategies. The upside of being a high-risk venture though, is that investing is also a high-return endeavor. When investors find that a stock has a high rate of return, they know that it is also very risky, which means that its value can rise or fall at any time and no one can predict it. You will learn more about risks and returns later, but all you have to know now is that investing promises returns that are potentially much larger compared to your original investment. The world of stocks is definitely worth your time and money. Why? It’s probably one of the wisest decisions you can make regarding your finances. More importantly, investing sends you well on your way to financial freedom - provided that you are careful and you put enough thought to how you go about your investing transactions. You will learn that from this book. If all goes well, however, financial freedom is yours for the taking, thanks to investing. Financial freedom essentially means that you are not hard-pressed to earn money to satisfy your needs. You are free to do things other than consciously trying to earn. Being financially free means different things for different people. For some, it might mean just having enough to pay the bills and have some left for enjoyment. For others, it means being free from a job they don’t enjoy but which they keep because they need to put food on the table. Still, for most people, financial freedom means having enough wealth to cover both wants and needs. No matter what financial freedom means to you, investing is a path you can take to significantly 2 grow your finances. What you do is you essentially make others work hard for you. Your money, the company you invest in, the people employed there - they all work for you when you invest. In investing, you do your thing while others grow your money for you. With an income source that is not tied to your job or business, you are not burdened by having only an 8-5 job to support yourself or your family. It’s like putting your eggs in more than one basket. You can never go wrong with treading lightly on precarious ground like investing. It’s always better to have something to back you up, especially when it comes to financial matters, so investing is the way to go. Sun Life Financial insurance advisor Raymund Camat provided a nifty illustration of the difference between putting your money in a bank and putting your money as an investment in a company. He said, “Turning P1,000 into P1,003 is called a bank. Turning P1,000 into P1,300 is called an investment.” This clearly shows what you get from a bank and what you get from an investment. When you put your money in a bank, you make it earn less than one percent per year. Sounds great? Not so much, no. Doing this will make your money grow little at best and stagnate at worst. In the simplest terms, what the bank does is it safeguards your money and makes sure that what you deposit will be there in the future. The downside is that the money you initially deposited will be just that: the money you initially deposited, with the slightest incremental increase. On the other hand, when you put your money in a company and make yourself a part-owner of that business, you make your money grow more than it 3 could in a bank. It depends on the amount of your deposit, yes, and the number of shares you buy, but ultimately, you earn more from that company than in a bank. You see, it is never the bank’s job to grow your money for you; this is your duty. And you can do that best by investing in profitable corporation. Is investing beginning to seem like the solution to all your financial problems now? Don’t get your hopes up too much, because investing can only reap benefits for you if you know how to manage it. Investing does not always guarantee profit; neither does it always promise periods of increasing stock prices. Sometimes, the value of your chosen stock falls, either because of the volatility of the economy or some social issue or government decision. When this happens, take a deep breath and do not panic. There are various tried and tested strategies to adopt when dealing with bad investing seasons, and these are what you will learn later in this book. Don’t be afraid of economics downturns or sudden dips in stock prices. These will pass, and someday, you will see that even if your stock went through bad times, it will eventually be a source of great profit for you. The key to getting the most from investing is in finding the right company to invest in. The rule of thumb is to pick a business or an industry that earns a lot of money no matter what the season. Don’t invest your money carelessly, because you will suffer later on. You need to figure out which companies earn money consistently, and then you must stick with them. Half of your investment future depends on the amount of money you put in (Of course, the greater your deposit, the better your stock profit is); the other 4 half depends on the company you become part of, so choose well. Before you learn about the basics of stocks and investing, you first have to develop the right attitude in investing. In this endeavor, you can never go wrong with two things: discipline and strategy. Luck may play a part in how well your investing venture goes, but these two things can do the trick. The discipline part comes in when you find that you constantly have to monitor your stocks to see how they are doing in the market. This is important so that you know when to buy and sell them (something you will learn more about in the next chapters). Of course, you can choose to keep your stocks as they are, but buying and selling stocks - the “trading” part - can work wonders for your financial growth. Meanwhile, the strategy part comes in when you choose the company you invest in, and when you actually buy and sell shares. In investing, you can’t get by with just luck. It rarely happens that all the stocks you buy will do well all the time. However, you can emerge a richer person if you employ strategies in trading stocks. These you will learn later. As with all endeavors, you have to be careful too in investing your money. Be careful when you make a deposit, when you buy stocks, when you sell stocks, and when you generate profit from them. You can never go wrong with being careful. It might even save you from great losses. Now that you know how investing can contribute to your overall financial freedom, let’s proceed to learning about how stocks work. 5 CHAPTER 1 The Basics of Investing 6 STOCKS & HOW THEY WORK It is impossible for businesses, especially large companies and corporations, to readily have all the funds they need for their operations. When a company is formed, it involves a group of people who are called incorporators. These people cannot possibly have all the money in the world to finance the business and run it completely by themselves. Therefore, companies cannot survive without investors. What investors do for the company is they fund its activities so that the business can carry out activities from which it will earn profit someday. Investors purchase units of ownership called shares or stocks. Because they help run the business even without actually taking part in its operations, investors are considered part-owners of the company.