basics of investing

How to Find the Best Companies to Buy Stock In

January 17, 2020 By Susan Paige Leave a Comment

The hardest bit about stock trading for greenhorns is identifying the appropriate companies to buy stock in. It is a lot like looking for a car to buy. You have to consider the technical specs of the car, the opinions of past and current users of the model, and the reputation of the manufacturer. For traders, this is called fundamental analysis and it involves scrutinizing a company’s financials, competition, leadership and a range other factors to determine if a stock is worthy of a place in your portfolio. Read on for four easy steps to finding the best stocks to buy.

Step #1. Create a List of Prospective Companies

Select all the companies you would like to invest in and put them in a list. You could base your choices on any set of factors, but it is wise to choose established companies in industries you are familiar with or have an interest in. Create a list of at least 10 and not more than 20 companies and get on with your filter-down procedure.

Step #2. Find Important Stock Research Documents

Start by reviewing the financials of each company separately. This is referred to as the quantitative research phase, and it involves finding and going through official documents that companies are supposed to file with the SEC. The two most important forms are:

SEC Form 10-Q: A report on a company’s financial position and performance that must be submitted quarterly to the SEC.
Form 10-K: This is a report submitted annually to the SEC containing a set of audited financial statements, which include the balance sheet, the company’s income sources, and documents showing how it has handled its revenues, cash, and expenses over the past financial year.

If you don’t have the time to find and review all important documents of all the companies in your list of options, you can find the filings simplified in brokerage websites. If you don’t have a trading broker either, consider visiting dedicated review sites such as www.trusted-broker-reviews.com for some of the highest rated brokers in the industry.

Step #3. Focus on Specific Aspects

Financial reports hold tons of numbers and details about a company, and aspiring investors may struggle reviewing all their options. Here are the most important things to focus on:

Revenue: This refers to the money received by a company during a financial period. It is sometimes called the “top line” because it appears first on a company’s income statement. Check the figures against both the “non-operating revenue” and the “operating revenue”, if those sections exist. Operating revenue refers to money that comes from daily business transactions while non-operating revenue is the money from one-time transactions such as asset sales.
Net income: Also, known as the “bottom line”, net income appears at the bottom of the financial statement. It is the figure that is arrived at after subtracting depreciation, taxes, and operating expenses from a company’s total revenue.
Earnings per share (EPS): EPS is what you get when you divide a company’s income by the total number of shares. This is the best aspect to use when comparing a company with other investment alternatives.

Step #4. Conduct Qualitative Research

Qualitative research gives you useful insights into the operations of a business and the chances of its stock going up. Look to understand the following:

How the company makes its money: Companies make money differently, and some such as sports franchises do not have obvious income channels. Always consider “common-sense” businesses, whose operations you have a nodding acquaintance with.
The element that gives the company a competitive advantage: Find that thing that gives the company the edge on its rivals. It could be anything from patent ownership and research capabilities to monopoly powers and scale. Competitive advantage is determined by these factors, and the harder it is for competitors to access them, the likelier it is that the company’s success will be long-lived.
The risks that the company faces: Look at the foreseeable changes in the market and company’s structure that may take a toll on its success in the long run. Sometimes a patent is nearing its expiry or there is a new rival company on the rise. Be sure to understand the company’s state and everything that could go wrong on the way before investing.

Conclusion

There are many documents and research resources that can help you find a suitable company to invest in, but the most important thing is being able to see what the future has in store for the company. That is what separates the good from the great when it comes to stock trading. The above tips can help you narrow down your list of options to that one company that truly suits your interests. From there, try to understand the company better by reading financial journals, browsing the internet, and consulting experts before committing.

Reasons To Consider Investing In Savings Bonds

Investing In Art and Antiques For Fun And Profit

Paying Off Debt Or Investing

Photo credit: GotCredit, via Flickr.

How To Invest With No Commission

October 8, 2019 By Flanice Lewis Leave a Comment

Investing is now more inexpensive than ever. With the most popular firms reducing trade commissions to zero, investing is more accessible to everyone. Or it would be if everyone knew how to invest.

Choose Your Investment Firm

First, you have to pick a brokerage firm. This company will be your avenue to the stock market, and its website will process your transactions. The largest firm with no commission fees is Charles Schwab. Other commission-free firms are TD Ameritrade, Etrade, and Robinhood, with Robinhood being mobile-only. With these firms, you can buy shares of stocks, funds, and commodities. Most new users will start with stocks, exchange-traded funds, or mutual funds.

Choose a Percentage or a Whole

Any of the four would be good to buy and sell whole shares of stock. If you want to buy a percentage of a share, you can use applications such as Stash, Acorns or Stockpile. Also, there is a new option from SoFi called Stockbits. While Acorns and Stash may be mobile-only like Robinhood, they have a monthly fee. Stockpile has a cost of $0.99 per trade. Stockbits is free to use, and you can start investing with $1.00. Stockbits also offers access to financial experts.

Open an Account

Once you’ve chosen the firm or firms, you will apply for a new account. The process includes selecting your account type, funding the account, and gaining approval based on your answers on the application. They are similar to opening a bank account with additional questions related to the firm and what time of investing your plan to do. Additionally, they will ask if you are a stockbroker or if you’re related to anyone that works for the company. Also, don’t be alarmed that the firms will require your social security number. Investment firms, like banks, have to report any interest or dividend income for tax purposes.

Place Your Trade

To place a trade, you choose the stock or fund that meets your criteria, e.g., price, dividend yield, trend, etc. and complete a buy order. In most scenarios, you can click buy or sell, choose a quantity, set your desired dollar amount, and set any limits or expiration dates. You will confirm all of the details then submit your purchase order. Since the stock market fluctuates, your order may execute at a different amount than ordered. By setting limits, you can minimize the variance or cancel the order before it gets too high or low.

Invest in a Portfolio

If you purchase stock using Acorns, you won’t choose a stock or fund. You will assess your risk, and the app will choose a fund for you based on their current offerings. It will also automatically invest for you once you reach $5.00 in roundups or any figure you’ve allotted to transfer for extra investments. Essentially, you set up everything on your phone, and it rounds your purchases on connected cards up to the next dollar. This app is excellent if you want to start investing, but you don’t have a lot of money yet.

Other ways to invest in a ready-made portfolio are the Stash app, Ally Invest, SoFi Invest, and Etrade Core Portfolio. These may be great alternatives if you roll over an old 401(k) from a previous job but don’t want to pick individual stocks. Ally has a $100 minimum but no advisory fees. SoFi Invest has no fees if you have a loan with them, and you can start investing with only $1.00. Etrade has the highest minimum at $500. However, it has more educational tools if you see the value in those.

Whichever you choose, make sure you are comfortable. Read user reviews to gain insight into controls, customer service, and other important topics.

The Pros and Cons of Investing in ETFs

Stash App: Investment App Review

How to Invest in Online Gaming

Dave Ramsey Financial Peace University Review: Week 9

April 15, 2010 By Maggie Ellis 4 Comments

This week was about the basics of investing. Once you’re out of debt and have your emergency fund, it’s time to move on to creating serious wealth. You do that by investing (or winning the lottery, but Dave doesn’t advocate that method). Obviously in a one-hour lecture Dave can’t touch on all of the intricacies of investing. This lesson was a good primer, though, on the basic types of investments and the theories behind successful investing. Dave admits that you need to seek additional knowledge to become a successful investor, he merely intends to set you on the right path.

His first rule of investing is to never buy something you don’t understand. Only invest in companies and products that you can explain to a seventh grader. There is no such thing as getting rich quick and most investing schemes shroud themselves in complexity so you have no idea you’re getting taken for a ride. Stick to things that are simple and easy to understand.

Dave begins by covering the basics of risk versus return. In other words, the safer and more liquid that you want your money to be (low risk), the lower the potential return will be. Safe investments are typically CD’s and money market mutual funds. Riskier investments include single stocks, bonds, mutual funds, and real estate. Real estate requires particular care because it requires a lot of money both to get in and to stay in. You not only have to buy the property, you also have to maintain it. You also have to be able to weather the times when you don’t have a renter or when the property isn’t appreciating. It’s not a liquid investment and should never be used for short term gains.

He spent a good deal of time talking about diversification, which is investing your money in many different products, industries, and sectors. You don’t want to have all of your money in one company’s stock (even if it’s the company you work for), or one mutual fund. If that product crashes, you will lose all of your money. Investing in multiple funds, stocks, and industries makes sure that even if one product tanks, your others will take up the slack. Dave’s standard mutual fund diversification is as follows:

25% in Growth (mid cap): These are mid-sized companies that still have a lot of room for growth.
25% in Growth and Income (large cap): These are big, well established companies that grow a little but mostly stay stable.
25% in International: These are overseas and foreign companies.
25% in Aggressive Growth (small cap): These are small companies and emerging markets that have a lot of potential to go big, but they may also go bust.

Dave then tells us that your money will need to earn at least a 6% return in order to compensate for inflation and taxes. He claims that if you invest in “good growth stock mutual funds” you can expect an average rate of return of 12%. This is the one piece of this class I don’t agree with. Most investing experts allow for an average 8-10% return in the market. Earning 12% consistently over many years is not common. Granted, during the boom times we just went through 12% or more was easy to achieve. However, when you factor in the down times that make up an “average” return, 8% is probably more realistic. Dave throws this 12% around in this class and on his show like it’s readily achievable, but I know no one (who’s last name isn’t Buffett), expert or average investor, who gets that kind of return consistently over a period of thirty years.

Related Articles

Dave Ramsey Financial Peace University: Week One

Dave Ramsey Financial Peace University: Week Two

Dave Ramsey Financial Peace University: Week Three

Dave Ramsey Financial Peace University: Week Four

Dave Ramsey Financial Peace University: Week Five

Dave Ramsey Financial Peace University: Week Six

Dave Ramsey Financial Peace University: Week Seven

Dave Ramsey Financial Peace University: Week Eight

Dave Ramsey Financial Peace University: Week Nine

Dave Ramsey Financial Peace University: Week Ten

At the end he talks about some terrible investments which include gold, commodities, futures, day trading and viaticals (buying the beneficiary position on someone else’s life insurance policy, betting that they will die within a certain amount of time). These investments are either too complex or risky for all but the most experienced investors (and even they don’t always understand them). There are also a lot of scams surrounding these investments so you have to be very careful.

All in all it was a good lesson, but there was very little actionable in it. Yes, you have to invest, but how you really go about that isn’t covered here. Maybe in later lessons we get to that, I don’t know. If you want to know exactly how to go about investing and how the market works, you need a different course. This lesson is simply an overview of the most popular types of investments and some general investing theory.

Our small group didn’t really talk about much this week. I think that most people in the group are intimidated by investing and don’t really know much about it beyond their 401k options at work. We did talk a little bit about the value of educating yourself on the topic and not letting an advisor do all of the work for you. One man shared an advisor horror story. He had put about $10,000 with an advisor and it was all lost during the economic meltdown. The advisor had talked him into putting all of the money into three stocks which were all in the same industry. They all crashed in value. He was not diversified at all. He said that, at the time, he felt uncomfortable with it but thought, “This guy is the expert, so I’ll trust him.” He learned two things. First, diversification is important. Second, you can’t trust an advisor to do the right thing just because they are an advisor. The advisor might be motivated by a commission on a product or some other type of kickback, not your best interests. You have to know about investing and make your own decisions. An advisor can help, but don’t let them be the last word. Others in the group concurred, having
horror stories of their own to share.

Most people in the group agreed that investing doesn’t have to be complicated, but it can be intimidating and hard to learn. For that reason, many people just check out when the subject comes up. As one woman said, “I have so much to do everyday, I just don’t have time to learn what amounts to a foreign language to me.” Another one said, “I’m afraid of messing up and losing all my money.” These are valid concerns, but we talked about how a simple savings account will never earn enough to outpace inflation and how, if you’re well diversified, you might lose money in the short term, but you’ll gain in the long term. We tried to explain to the second woman that a loss is rarely permanent, unless you have all your money in one thing. We tried to explain to the first woman that yes, it’s time consuming to learn about investing, but you have to do it if you want to be financially successful. There just isn’t any other real way to earn the kind of returns that will protect your money from inflation and taxes. In other words, she can’t afford not to take the time to learn. Both didn’t seem convinced when class ended, so I don’t know if they’ll ever get involved in investing.

Homework roundup: This week we’re supposed to calculate how much our debt payments are taking away from our retirement. Dave provides a chart for this that shows your monthly debt payment and then how much it adds up to at 5, 10, 15, 25, and 40 years assuming a 12% annual return. For example, $600 in debt payments a month would be $49,002 in five years, all the way up to $7,058,863 in forty years. While I’ll never agree with his 12% return, the chart does illustrate the point that the money you’re paying toward debt could be used to fund your retirement (or other goals). I don’t have any debt so I can’t really do this exercise, but I’m hopeful it will come up in small group next time. I’d like to hear if anyone had a realization about just how much debt is costing them once they did this exercise.

Lastly, if you aren’t interested in attending the course yourself, consider purchasing the Dave Ramsey Financial Peace University DVD Home Study Kit (9 Week Course) 2012 Release. It sells for under $200.00 on Amazon.

Next: Dave Ramsey Financial Peace University Review: Week Ten

This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week one — week two — week three — week four — week five — week six — week seven — week eight