Stock Market Investing for Beginners

The term trading and investing are sometimes use interchangeably, however they mean different things.  When you trade, you buy something at one price and sell it later on at a higher price - at least that’s the goal. In contrast, when you invest, you purchase assets and hold them for over long periods of time.  I like to think about trading in terms of Stock Prices, while Investing in terms of Value.   When you trade, you only care about the price you buy and sell, when you invest you mainly care about the accumulated value over time. 

Whether you are just graduating from school, just recently got married, are expecting kids, or are just a few years away from sending your own kids to college, it is time to start saving and investing for your financial goals. Although, it can be tricky to put away some money every month while you start taking more responsibility of your bills. It is very important to start saving for a rainy day or invest to build wealth for your future. And if financial independence is a personal objective you want to attain, learning financial literacy and investing is a must.

As you educate yourself financially you should also start considering learning the basics of investing in the stock market, and getting a financial advisor or consulting a Prosperity Leaders Financial Coach to develop and implement your own personalize financial strategy. To get started in your investing journey, this comprehensive article will teach you what no other financial guru’s have done; the essence of stock market investing for beginners.

Basic of Investments

An investment is an instrument that holds a value in the market and can be traded or exchange for another instrument of value such as cash (currency). When you invest, you are spending money with the hope of earning more in return. Whether it’s buying stocks, bonds, real estate, or other investment vehicles, an investment has a value, an advantage, and a risk.

When beginners start investing, most investment advisors and financial coaches discourage the investing of individual stocks. Investing in individual stocks requires a lot of time and research and can be extremely risky. They instead suggest you to start with mutual funds on a 401k or individual retirement account. A mutual fund is a type of investment that pools money from many investors and invests it into a number of stocks, bonds, or other assets. You can invest as little as $100 or as much as $1000, and the mutual fund is managed by an investment company. Many of those investment vehicles can be great financial decisions to achieve your long-term goals.  

However, what if you are like many of our readers?  Independent individuals seeking financial independence and prosperity?

What if you are someone who prefer to be involve in the process of investing? Well, then you have come to the right place to start building your own investment strategy. We will not give you investment advice, but rather we are going to show you how to make investment choices and build a diversified portfolio that can help you achieve your investment goals.  

Trading or Investing? 

The term trading and investing are sometimes use interchangeably, however they mean different things.  When you trade, you buy something at one price and sell it later on at a higher price – at least that’s the goal. You make a profit when there is a change in prices over time. This type of transaction is called “trading” because you are changing positions. If you do not like the current position, you may decide to take profits by selling before the price goes down further. In contrast, when you invest, you purchase assets and hold them for over long periods of time.  I like to think about trading in terms of Stock Prices, while Investing in terms of Value.   When you trade, you only care about the price you buy and sell, when you invest you mainly care about the accumulated value over time. 

In this article, I cover the basics of investing in the stock market, and the word trade or trading may only be use to refer the action of buying or selling a particular stock.  We will not cover here advance strategies for trading such as intraday trading, swing trading, etc.  We will also not cover investment products, financial products, indexed funds or exchange traded funds.  

Although there are many investment vehicles out there you can choose, before you start investing is essential to understand the type of investor you are.

What Type of Investor You Are?

Knowing what type of investor you are is the most important aspect of investing, please never make an investment without understanding your investor personality.  Specially if you are trying to make your investment decisions without expert advice.  There are 5 types of investor personalities based on the profiles of risk tolerance, objectives, and time horizon.

The first type is a very conservative and will never risk losing their money. The second type of investor is conservative but if they see a good opportunity to make money, they will invest a small to a decent portion. The third type of investor is a balanced investor; someone who typically seeks the most diversification looking to reduce risk, while still taking opportunities. The fourth investor is a moderate aggressive, and is someone always looking for the next big thing. The fifth investor is the Aggressive type who will try anything that will give them a return on their investment.

You don’t know what type of investor you are yet?

Take the Prosperity Investor Personality Quiz here!

Once you know what type of investor you are, you are ready to start building your portfolio thru the guidance of a  model portfolio designed for your specific type of investing profile. 

Build Your Own Investment Portfolio

To build your personal investment portfolio you must already know what type of investor you are, and what model portfolio is suitable for your type of investor profile.  A model portfolio is also known as an Asset Allocation Model, and they will help you identify the asset diversification and the percentage of money you should allocate to different types of assets (types of investments instruments).  

Asset Allocation

Finance 101 teaches us that an asset is an instrument with an economic value that can be exchange for money and or provides and improves cashflow to an individual or company. There are many types of assets you can invest. The dieversification of your money between different assets is known as asset allocation. As you start your investing journey, we suggest you learn the most common and basic asset types, and start building a portfolio with their guidance.

The 5 basic types of assets

These five assets you must commit them to memory: Cash and equivalents, Fixed Assets, Large Capital Growth Stocks, Low Capital Opportunity Stocks, and Foreign or International assets. When you know what type of investor you are, a prosperity financial coach can help you figure out what percentage of your money should you diversify between the 5 asset allocations. But before you start investing make sure you understand the elements of all asset type.

There are 3 components that makes an asset, and that you must consider before you invest in.

  • VALUE: All asset class have a value that allows it to be traded or exchange for other assets in the economy.
  • FUTURE BENEFIT: All asset class have a unique advantage or benefit that increases it’s value in the future. In a stock it’s the opportunity for Appreciation and/or Dividends, and in other types of asset it might be in the form of Interest, Rate of Return, safety, guarantees, or liquidity.
  • RISK: All asset class have a risk that impacts it’s value in the economy. The higher the risk, the higher is the opportunity for growth. The lower the risk, the lower the opportunity.

The following will bring you up to speed on the different types of assets and specific, Value, Future Benefit, and Risk of each:

Cash and equivalents:

They have a fair market value: for example what is the value of a dollar? This is not a trick question. The value of a dollar is = $1.00 – and that is the value of cash in the U.S. Other alternative to cash can be Gold, and Silver. The unique advantage of cash and equivalents is the ability to safely maintain it’s value, but they offer little to no growth. Although, cash and equivalents can help you hedge your portfolio in a downside market, they risk losing purchasing power against inflation, and other risks of this is simply losing it, or being robbed.

Fixed assets:

They can be some of the safest; holding it’s value typically guaranteed by the government or a financial institution such as a bank or insurance company. Fixed assets offer some opportunity for growth; mainly focusing on keeping up with inflation and ins some cases even beating it. Fixed assets biggest risk is the sacrifice of short term liquidity as well as fees or loss of capital if sold or redeemed before it’s maturity. These hold true for both government bonds and certain fixed banking products, and even fixed indexed insurance products. Some examples of these are; U.S. Treasury Bonds, Notes, Bills, TIPs, Corporate Bond, Preferred Bond, Certificates of Deposit, Saving Account, Fixed Indexed Annuity, and Fixed Indexed Cash Value Insurance.

Large Capital Stocks or Growth Stock Funds:

As an investor, it’s important to know that you’re investing in something that is likely to generate return. Large capital growth stocks can provide you more decent returns with a balance risk management.

The basic value of a stock is it’s equivalent to the value of the company’s present value, although market perception influence it’s price at all times. Large capital stocks typically belong to well establish companies; such as AAPL, ADBE, AMZN, MELI- and for this reason the return on investment will usually be modest but as such the risk of this assets is less volatile. Many of these companies have enough funding to survive a crisis and that is why the risk is not as large as it is with small cap stocks.

Small Capital Stocks or Opportunity Funds:

Small Capital Stocks are some of the most risky – but they offer the most potential for reward. Some examples are ADT, AMCX, APRN. The value of small capital stocks are easily influence by market speculations. Therefore, small cap stocks have the potential to provide the highest returns, in exchange for higher risk and volatility. If your model allocation portfolio suggest that you can invest in small cap companies, make sure you do not surpass the percentage of allocation suggested, and typically only opt out to invest in companies that you believe in. As the brokerage Public slogan says: put your money where your heart is.

Most small cap companies if ever grow to large capital, do so very quickly. Giving you only a small timeframe of opportunity to earn a big gain. The biggest error for people investing in these types of company’s is they only invest in them after the company stock has fire up it’s value; and typically right before their price fall and consolidate at a mid-range price. This is why we suggest to only invest in companies you believe, and you have done your proper research and found the company has an edge over the market. Maybe they are bringing innovative business models, products, services, and / or technology that are currently trending and suggest growth for the market need of that specific company.

International Stocks, or Foreign Investments:

When it comes to foreign investments, the opportunities are endless, but so is the risk. These not only includes international stocks, but it also includes assets that are not regulated in the united states such as Crypto, Forex, and investing tools. The potential for growth of this asset type is large, but such is the risk. Take Crypto for example, when you are investing in crypto you are not only facing the usual risk of investing that we mentioned in all other asset classes, you are also confronting the risk of losing your money to scams, pyramids, even higher market manipulation, all of these risk without having any government agency or financial regularoy authority protecting you.

Your Model Portfolio:

Each investor personality have a model portfolio that will suggest the percentage of money that should be allocated between the five different assets mentioned above.  Your financial advisor, or your Prosperity Leader Financial Professional can help you follow a model portfolio or even develop a  unique portfolio based on your investor profile.  Whether you let a professional help you or you do it yourself, never invest more than the percentage suggested on your model portfolio provided by your Prosperity Leaders Financial Professional.

Need to build your own portfolio and Identify your suggested asset allocation diversification?

Take the Investment Personality Quiz, and / or set the meeting with a Prosperity Leaders coach here!

Opening an Investment Brokerage Account

To get started in your investing journey, you will need to open an Investment Brokerage Account. There are many brokerages to choose from. The most simple and easy to use online broker is Public.com [Remember to use the code ProsperityKids] to get a FREE Stock slice when you sign up and support our Prosperity Kids movement of educating parents and kids about finances. Another one is Robinhood, and Webull.

Other online brokers listed below are best accessed thru a PC / Laptop, but also have their own app. – These are TD Ameritrade -E*Trade -Charles Schwab -and Fidelity.

Opening a brokerage account is similar to opening a Bank Account, you will be asked for almost the same identification requirements. If you need help setting up this brokerage consult with your financial advisor or a Prosperity Leaders Financial Professional.

Ready with your Brokerage account? then let’s start building your portfolios and picking winning stocks.

Start Investing in Stocks

A Stock is an investment instrument that provides ownership of a company. It gives the investor voting rights and is able to receive dividends and company profits if the company does well. The purchase and sale of stocks and shares is done through the stock market. When picking stocks you must develop your own set of principles and philosophy for managing your own investment portfolio. They will guide you in making the right decisions and control your emotions when you don’t.

Picking a Winning Stock:

One of the biggest mistakes for people who start investing is taking positions (purchasing stocks) just because their friend told them it is a good pick. Or by following trends on their social media such as meme stocks. You can avoid that by developing your own philosophy or adopting one that will help you be a more independent thinker. Your investment philosophy will guide you how to make investments decisions and help you control your emotions. Even if a stock picks turns out to be wrong, your philosophy will ease out your disappointment. This does not mean that you should not consider others opinion on a particular investment, but knowing that you are in control will keep you in control at all times.  

There are 2 strategies you should utilize to pick the right stocks for you.

1- Your Investment Philosophy:

Do not complicate this, your investment philosophy can be as simple as “I invest in what I Know (understand), Like (believe in), and Trust (use or experience it). You can develop your own philosophy, or you can borrow ours. The point of this is to have a set of principles that will guide you on making the right decisions. Decisions during investments will not always be rewarded or bring a profit, but will help you be more peaceful with yourself. For example, your philosophy will help you avoid following advice from other people which may end up being wrong, and in the case when you lose by your own mistake you will not feel as angry or frustrated.

2- Fundamental Analysis:

Is an analysis of a company’s intrinsic value (also referred to as basic or real value).  In order to determine a fair market value of a company, Analyst research the company’s financial reports, cashflow, Assets & Liabilities, etc…. An analysis of a company or a stock can be extremely difficult, so here is where we recommend you to lean on the knowledge and experience of financial professionals.

Before you start complicating yourself; we promised you this will be a basic guide, and therefore, we got you a shortcut. This shortcut is to leverage the research other professionals and corporations have done. Instead of you having to do the analysis yourself, you can review the research of other professionals to help you decide if a particular stock is right for you. You do still need to know what type of research you should look into. So let us share what are those analysis.  

To get started you have to start researching what analyst are reporting on the five fundamental analysis of a stock. 

The 5 Fundamental Analysis of a Stock:

  • Valuation: This refers to the intrinsic (real value) of the company’s stock in direct correlation to the company’s fair market value. You want to look for companies that are undervalued.
  • Health: Refers to the company’s financial stability, including it’s cash reserve, cashflow, and ability to pay short term and long term debts. In finance this is know as DEBT / EQUITY Ratio. The analyst divide the Debt with the Equity, and the result is the Ratio, The bigger the ratio, the healthier the company. You want to look for companies with good financial health.
  • Profitability: looks at a company’s Return on assets. Basically what percentage of returns / gains was profit compare to the company’s net asset value. Look for company’s with good and high profits.
  • Growth: Analyst look at the growth in revenue year by year, as well as a the percentage ratio to each share – also known as Earnings Per Share. A growth of earnings per share per year, signals decent future gains. Look for company’s that have been growing and trending.
  • Dividend: This is the easiest analysis to do; just figuring out what is the dividend amount the company pays out if any. Although company’s typically pay dividends quarterly, you are looking for the annual average.

To help you with researching investment opportunities; at Prosperity Leaders we have develop a quantifying rating for each of the fundamental analysis you’ve seen here.  Contact one of our professionals to learn more about them, and how you can implement them on your research.  

How To Apply The Basics of Investing:

At Prosperity Leaders we train and coach families to develop their own investing strategies.  Our Prosperity Professionals help everyday people identify their investor personality and financial goals & objectives, evaluate their current financial situation, and design a personal financial strategy to achieve their goals.  Contact a Prosperity Leaders Financial Professional Coach to learn more about our investing coaching program and how you can learn to become an investor yourself.

If you don’t understand something or feel uncomfortable doing anything, then maybe its time to take some advice from someone who does.  However, if you decide to do this by yourself, make sure that you at least take our Investor Personality Quiz, and always make decisions based on your investor personality.  Also, before making investment decisions, always be aware of your risk tolerance, state and federal tax, management fees or expense ratios on investment funds.

We hope you found these fundamentals helpful and would love to hear back from you.

Please leave us a comment below and let us know what you think. Thanks again for reading and happy investing!

Sebastian Rodriguez
President at Prosperity Leaders!

One comment

  1. Aw, this was an incredibly nice post about stock market investing. Taking the time and actual effort
    to generate a top notch article… but what can I say? as a beginner
    I put things off a whole lot and don’t seem to get nearly anything
    done.

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