The young investor who has limited capital needs to choose his or her investments wisely. Most people out there are speculators. They see Coca Cola is well-known and sells a lot, so they purchase the stock at any time. This is speculation. Although, there is no definite way to know if you are investing in the right company at the right time, there are ways to determine whether or not an investment in particular will be detrimental to your portfolio. There are three topics that you need to be familiar with; financial statements, resources that are free and full of useful information, and alternative investments (investments other than the stock market).
Financial statements play a key role in investing. There are three statements that every company releases that can be accessed at finance.yahoo.com. There are many complex things you can accomplish with statements, but for now, I’ll discuss some basics in regards to the Balance Sheet and the Income Statement.
The balance sheet shows you the value of the company’s assets (cash, buildings, accounts receivable, etc.). It also shows how these assets are financed (Liability or Owners Equity). Liabilities make up the money that the company owes to banks or any other institution that allowed the company to borrow the money. Owner’s equity is the money that the company receives from stock holders and the money retained from the previous year’s earnings. The important thing to look for here is a balance between Owners Equity and Liabilities. The more money coming from the Owners Equity section the safer it is to invest in that company. When a company has most of its assets and operations financed by owner’s equity, it is said to be a conservatively financed company. That’s the kind of company I like to see. Although people will tell you that you’re young and you can afford to take risks, I believe that because you are young you have limited capital and you can’t afford to take risks. The lesson for the balance sheet is that you want to see at least 35% of the company’s assets financed by owner’s equity. You can figure this out by dividing the owner’s equity by the owner’s equity plus the liabilities and then multiplying the answer by one hundred. The income statement is much simpler. The only thing you need to do is look at the quarterly and yearly profits or loss. You don’t want to invest in a company that is consistently losing money.
There is so much more that you can learn from free sources. Investopedia.com is a perfect example. There are numerous ways in which you can analyze a stock and determine whether or not it is a good investment. Some of them are more complicated than others. However, if you go to Investopedia they offer free 20-40 page tutorials on numerous topics, including techniques and methods of analyzing stocks. You work hard for your money; don’t just throw it in any company that seems to be well-known.
Lastly, you need to know that there are alternatives to the stock market. The stock market is known to be volatile and involves a certain degree of risk. There are other investments that you can get involved with. Bonds are a perfect example. You can purchase either treasury bills (4-52 week investments), treasury notes (2-10 year investments), or treasury bonds (15-30 year investments). You can also purchase corporate bonds that are issued by companies. Some bonds have different procedures and policies as others, however, they generally are sold to the public at a given price and a percentage of that price is paid to the investor on a yearly basis. For example, you can purchase a $1000 at 5% and for the next 30 years you will receive $50 per year. At the end of the 30 years (when the bond has matured) you will receive the initial $1000 that you paid for the bond. The only other alternative that I am willing to say is safer than the stock market is Real Estate. Although, Real Estate requires more capital than investing in stocks and bonds, it is definitely worth it. Real Estate generally has a steady increase in value (when there is not a recession of course) and you also receive more for your money than a sheet of paper. You can then use the property you purchased to rent and receive extra income. They are my favorite investment.
Right now we are in a crisis. Stocks, bonds, and real estate have all devalued greatly. However, you cannot be fooled into thinking that this is how things always are going to be. Recessions happen, they are not permanent, and when they turn around, there is a window of five to ten years of prosperity where you can invest and see tremendous gains. Invest wisely, it is better to not invest at all rather than lose your shirt in an investment that you were not knowledgeable about. Visit websites like Investopedia. Good luck!