Investing for beginners: 4 ways investing is like shopping
Choosing a great outfit is like choosing a great stock. You may be thinking “Candice, are you sure about that?” Yes, I am sure! Today I’m giving you another inside peak of a chapter if my investing book.
Although there are probably hundreds of questions you could ask yourself before choosing a stock to invest in, today I will be going over a few things I consider before deciding if I will invest my money into a company. Investing doesn’t have to be boring. If you think about it you’re already an investor. Everyday you are making a decision to purchase a product. Each time you purchase anything you are helping a company grow its profits.
What does the company do?
If you are looking for earrings to wear to a holiday party, you want to make sure you are shopping in the right stores that sell earrings. Many companies offer a wide range of products and services. Figuring out all the company has to offer is helpful because you can see where the company’s profits are coming from. Every company must submit a report of their company’s yearly and quarterly performance. This report is called a 10k and 10q report.
Diversify your closet.
Just like you need to diversify your closet, you also need to diversify your stocks. You wouldn’t wear the same outfit that you would wear to church to the club. So this is why you need to have a variety of outfits to choose from for different occasions. You need to buy different stocks from different industries in case something goes wrong in one industry.
If I only choose to invest in fashion then if something goes from the fashion industry and I only have money invested in fashion stocks, then I would lose a lot of money. However I have a one company devoted to fashion, another company that sells snacks, and another company that sells oil than I would be better off. When you hear the term diversify people usually refer to it as “not putting all your eggs in one basket.”
Is it worth the price?
I’m don’t know about you, but I love a good deal. The first section I go to in a store is the sale section. Just like you want to be sure you’re getting a good price for your clothes, you want to be sure you’re paying a good price for your stocks.
In order to figure out if you are paying a good price for a stock you need to figure out the company’s price earnings ratio (P/e). According to beginnersinvest.com “Simply put, the p/e ratio is the price an investor is paying for $1 of a company’s earnings or profit. In other words, if a company is reporting basic or diluted earnings per share of $2 and the stock is selling for $20 per share, the p/e ratio is 10 ($20 per share divided by $2 earnings per share = 10 p/e).
Confused yet? No need to be. Most stock-quote systems such as Yahoo! Finance will automatically figure the price-to-earnings ratio for you.”
A P/E is used when comparing different stock prices. Each industry will have a different P/E range that is high to low. “On the surface, a $50 stock may seem more expensive than a $20 stock but if the $50 stock earns $5 a share while the $20 stock earns only $1, using the P/E ratio, you will be able to see that the $20 stock is twice as expensive as the $50 stock. ” http://www.theoptionsguide.com/price-to-earnings-ratio.aspx
Staying away from trends
I’m not a fashion expert like my lovely friend Lay Summers (check out her blog for great fashion ideas), but you want to be sure that while you’re shopping you are choosing statement pieces for your wardrobe. Statement pieces tend to last longer and are generally great quality. You want to stay away from clothes that are trendy or clothes that will fade and won’t last long. Clothes that fade or rip after one time use or wash are a waste. You need classic and timeless clothing. The same is true when deciding which stocks to invest in.
I try to avoid trendy stocks. These stocks are like one hit wonder songs. You know the groups who came out with one song and then years later you wonder what happened to them. Or imagine the popular/trendy stock being the fast, popular, and sexy girl at school. Everyone talks about her; all the other guys are already after her and in 5 years who knows where this girl will be. You don’t want that girl. You want the smart one who’s into her studies and focused on her career for the long run. This is the girl you need to be building your friendship with. It’s the same thing when it comes to stocks. If it’s a new and trending stock don’t invest in it. If it seems like a fad and the company hasn’t been around for very long. Remember you only want to put your money into great solid businesses that have been around for a while.
Does the company offer dividends?
When you buy a stock you are buying a tiny piece of a business called a share. Once you buy a share you now own a piece of the company. Which means if the company grows, so do you. A dividend is a payment made by a company or corporation to its shareholders. If you invest in stocks that have dividends the company will pay you quarterly. (Usually every 3 months) That’s right the company will pay you for being an investor in their company. Keep in mind that not all stocks pay dividends. The companies that do pay dividends, the more shares you own of a company the more you will be paid in dividends.
There are other questions that people consider when investing, but these are a few questions that I ask myself. I encourage you to do your own research on each company before you start investing in it. Are there any other ways that investing a choosing a great outfit are similar? Let me know!
Ready to learn how to start investing? I created this book that will walk you through step by step. Get yours here.
With all my love,