Sunday, 11 October 2009

What is a Stocks Portfolio?

Have you ever heard experts on TV talking about a stocks portfolio and wondered what exactly that is? Well it's quite a simple concept. A stocks portfolio is simply the collective term for all the stocks that you own. Every investment you have made can be thought of as being in one big group which is your portfolio. Have you ever heard the term diversify your portfolio? This is simply in reference to the logic that you shouldn't put all your eggs in one basket. You want to keep the stocks you buy spread across different companies and industries so that if one takes a hit the rest of your shares won't be affected by a sharp decline in value. For example if you had a large amount of stocks three different airlines and one has an accident all three will no doubt be affected in their value. Industries tend to be affected by events like this even if it isn't the company you own who had the accident. Investor confidence is fragile at the best of times and all those affiliated with the airline industry would feel the after shock of this. So to diversify your stock is simply an insurance policy you can take out yourself to make sure all your bases are covered.

Warren Buffett
has a slightly different opinion to diversifying your portfolio. Rather than buying up stocks from 20 different industries he has tended to focus on those he is familiar with and ensure you're buying in to good companies in the first place. Anything major like my airline example above won't affect the companies profitability in the long run and can be seen as a minor blip in the chart. I've also read a few articles where he's recommended buying more stocks in a company you already own rather than branching out and investing elsewhere. Now by this I'm sure Warren Buffett isn't recommending that you don't diversify your stocks, simply that if you have a good company there's no reason not to invest more money in to it. We are after all trying to make money from buying stocks and shares. There's a lot of websites out there from people claiming to have stock guru portfolios and I'm not even sure what that term is. I'm always wary of taking advice from someone who's claiming to be a stock guru, the proof is in the pudding as far as I'm concerned. I'll listen to people who have proven themselves over decades such as Warren Buffett who could actually claim to have a stock guru portfolio!

I've recommended quite a few times on this site about trying out fantasy stock markets online to get a feel for buying stocks for beginners. It's a great way to try out the industry and see if you're getting the hang of it without putting any money out. No risk attached. It's also a great way to get your head around the idea of having a portfolio and managing it, it would be a mock portfolio or practice portfolio. Most of the fantasy stock market games will let you browse stocks by industry and you can then see if you've bought stocks which covers a wide variety of industries protecting you from any downturn. This way if you diversify your stocks you won't get hit across all your holdings. If you do eventually decide to buy stocks online for real you'll be able to manage them in much the same way. Many of the online brokers provide excellent stock management software where you can get at a glance figures and stats per industry. Remember Warren Buffett's tactic though, don't invest in an industry you don't have any knowledge of! It makes it much more difficult to work out if it's a valuable company to invest in. If you're interested in this have a look at how to work out the intrinsic value of a company.

Saturday, 10 October 2009

Looking at the Intrinsic Value of a Company

I don't think I've covered a basic introduction to the stock market or the intrinsic value of a company in any of my posts so far so I'll run through some simple terms so we're all comfortable! I know the stock market can be confusing for lots of people out there including myself. When I first started out buying stocks and shares I felt like there was no way I'd ever get a good handle on what all the terms mean and the TV shows move so quickly. The hosts often assume you know what they're talking about and so skip over what each term means and leaves viewers (like me) even more confused and disheartened by the whole process! How can I work out which stocks to buy if I don't know what they're talking about! I know a lot of people out there look at the stock market as a form of gambling. Take a leap of faith to today on a hot stock pick and then sell it again the next day making a nice little profit! Yes that is gambling and it's something I'm telling my readers not to do. There's no science behind this process you're relying on hunches and luck and to be brutally honest the market doesn't care about you or your money. There's no one out there determining if its your lucky day so do your research! Don't take any leap of faith with your cash. I know I don't, I like mine too much to throw it away on Jimmy McShoes warehouse stocks!

So we've agreed we're not going to gamble right? So we're looking for long term investments. The next question is how do we identify a long term investment. The secret to this is working out the real or intrinsic value of a company. By this I mean you should be able to look at a companies balance sheet and work out if it's worth $40 a stock or $1 a stock regardless of what the market is. Once you work out a companies true value you can spot bargains and snap up the hot stocks. You won't have to sit and listen to the TV hosts recommending whatever the buzz stock is as you'll have your own research and analysis to call on. It's much more satisfying knowing you've done the research and watching that share price rise and rise over the years. Yes I said years! Buy and hold. Buying stocks just to dump them the next day won't make you any serious money in the long term. You'll end up losing large amounts of it by all the trading fees the stock brokers charge you for each transaction. This is of course all relative to the amount of money you're investing but if you're just starting out I don't imagine you'll have bags of money to throw at this. That's why it's so important to have done your research and make your stock and share choices wisely. Oh and diversify your stocks portfolio!

The dividends a company is paying out each year is a good indication of what profit it is actually making. John Burr Williams is a famous investor who recognized that a companies intrinsic value is key to determining the worth of stock. He famously stated that earnings are only a means to an end, and the means should not be mistaken for the end. A stock derives its value from its dividends, not its earnings. In summary a stock is only worth what you can get out of it. If it's not showing any returns is it worth buying? A stock is only worth the returns it will generate for you. You can get all this information from the companies balance sheet which is available for free in most cases from the company itself. How to buy stocks for beginners can be confusing especially when starting out but companies balance sheets are generally easy to follow. Unfortunately calculating the intrinsic value of a company will spark a debate between investors as there is no 100% perfect way of doing it as some of it is based on projected earnings which as you can imagine is never going to be perfect. There is software out there that will do this for you but it won't be any more accurate than doing it yourself. It will only act as a time saver. Make sure you read up on the software before you buy it too as you never know how they are calculating the intrinsic value. It might be completely different from the way you have found to value a company and so you may end up buying stocks that are not worth the price. We're interested in value investing after all and looking for undervalued stocks to buy.

Thursday, 1 October 2009

Stock Market Trading

Stock Market Trading for beginners ties in with the whole theme of this site which is to educate newcomers out there to the world of stocks and shares. When people want to learn how to trade on the stock market they generally think that you have to start looking at charts and stock tickers to find the hot stock. This only one part of buying stocks for beginners and it's certainly not a place I would recommend someone should start. It doesn't matter what reasons you have for wanting to get into the stock market whether it be to boost your retirement fund or just for the fun of it I don't believe anyone should just jump in blindly without doing a bit of research first. I've always thought that buying shares is a bit like gambling. You should never gamble what you can't afford to lose so don't be out re-mortgaging your house to buy whatever the hot stock of the week is. The idea behind Ben Graham's Security Analysis and the development of the value investment approach so successfully applied by Warren Buffett is that they take the gambling aspect completely out of the picture. Research is done so thoroughly that it's as close to a sure thing as you're ever likely to get.

If you are a beginner to stock market trading then you might feel swamped with information at this point. There is so much of it out there that you'll be left wondering where on earth you can start. You can buy online stock so easily and quickly now. The cost of buying stock has come down considerably too with all the competition out there from online stock traders. This should not be seen as a green light to go nuts and buy every penny stock in sight! I would always recommend using the value investing techniques described by Warren Buffett. He describes buying shares as being more like buying into a business. Try to look at buying stock as becoming a partner, albeit a very small partner, in a business. That way you may stop yourself from acting emotionally and dumping your stocks at the first sign of trouble.

Stock market trading for beginners is also very tough because of all the investing jargon used out there. I've covered the differences between bull and bear markets in a previous post so that may be a good place for you start. It's one of the simplest concepts to learn but I always feel that if you get the basics learned it will help you later on with the more difficult concepts. Your brain will have some hooks with with to cling on to when I start talking about price to earning ratio and its like! Websites like MarketWatch are good places to start. I've also found a lot of useful information on the Motley Fool website which also as a great forum with lots of people willing to chip in if you're stuck with understanding some stocks term. I would never take direct advice from someone in a forum regarding hot stocks. You never know why someone could be recommending stocks to you and if it was so great believe me they'd be buying it themselves rather than offering you up the chance to share in the spoils. I'd always recommend spending a good few weeks just reading over these sites and familiarising yourself with the jargon. Introduce yourself in the forum and get to know the users. The library is also a great place to go for more in depth information. Please check out Ben Graham's Security Analysis as a starter. Yes it is a bit of a slog but its the closest thing we investors have to a Bible!

To help you stock market trading beginners out he's a few basic terms explained. First up, what actually is a broker? You'll have heard it a hundred times already. A broker is short for a stockbroker and that is simply someone who carries out stock transactions. This is buying or selling stocks. You get all different types including full-service, online and auto-trade. They work for you to buy and sell your stocks. Dividends are something you'll be hopefully be seeing lots of! If a company you own stocks for makes a profit, shareholders are entitled to receive a bonus payment which is a percentage of this profit. You as the stockholder can choose to keep this money or reinvest it back into the company which will increase your percentage of stock. Futures can be a bit tricker to understand. Futures are purchased with the price of future commodities in mind. If the price of a commodity a future is purchased on increases in time, the investor will earn money. Alternatively, if the price of the commodity drops below what the investor originally paid the investor loses money. Confused? Don't worry about it the penny will drop eventually! Day Traders are people who I don't really understand but if they're making a killing on the stock market who am I to argue. Rather than keep stocks for the long term they buy and sell constantly with the aim of making small profit margins which all add up to big profits. This totally goes against the grain of Warren Buffett's value investing theory and mine too! Too much risk involved in day trading for my liking. Trading on margin involves buying stocks for a for a small fraction of the total cost of the share. The balance of the price is paid when the share is sold or on a subsequent date. Trading on margin could be compared to stock trading, it's very similar, with the exception that borrowed money is used rather than payment in full at the time of purchase.

These are a few basic terms which should help stock market trading beginners out there. They are obviously pretty simplified but hopefully I've made it easier to understand but still with enough detail that it's still useful. The stock market is a complex thing so don't get too frustrated if you can't grasp all the jargon right away. Also don't try and read everything out there as you might find all the concepts contradict each other! You've seen it all ready with day trading and value investing. It's far more important at this stage that you understand the basic terms and then you can dive in to the different investing approaches and decide which one is for you. You might find that a combination of two works! It's entirely up to you how you approach stock market trading!

Friday, 21 August 2009

Fantasy Stock Market

Lets face it everyone’s sick of working for a living to the idea of making a killing on the stock market appeals to most of us. So how do you buy stocks. And how do you buy stocks online making enough cash that you can quit your job and live off your stock market picks? Is your imagined type of work to take it easy, sit back and watch the profits role in while your business grows with little involvement from you? Making money from the stock market can make these dreams come true. Beginners can make money in the stock market. Trading stocks is not just for a chosen few.

With the current economic climate there’s never been a better time to start buying stocks and shares. There are a lot of bargains out there. There is of course the question of how to invest in the stock market. The great thing about buying stocks online is that you can now practice without using any of your own money. There are what’s known as fantasy stock markets now online where you can sign up for a free account and use your knowledge you have learned from my previous posts to buy stocks. This will cost you absolutely nothing but it is a good way to learn techniques at work. You can also take risks with which stocks to buy safe in the knowledge that you won’t lose any of your own money. If you want to try the Warren Buffett style of investing then go ahead in the fantasy stock market. Try for yourself to see if these techniques work.

If you look around the Internet you’ll find stock market investment advice all over the place. Do you really want to take a risk with bad stock market investment advice and lose your own money not to mention the time you’ll waste. Fantasy stock market trading is excellent to get a feel for the market and find ways you can make money and make the stock market work for you. It is so important to understand what the market is- the stock market-and how this market operates. If you don’t understand the market there is absolutely no point in throwing your money away. Trading stocks in a fantasy stock market will act as a good guide. It will let you know what you do know and what you still have to learn. Your results should answer this question. The simplest definition calls the stock market as the public market where stocks and derivatives are traded at the set price. There are those securities that are listed on the stock exchange that are traded in private. All kinds of people trade in the stock market including individuals (no doubt like you) and private companies who trade in bulk and perhaps work for investment firms building hedge funds. These investors then indicate whether they wish to buy or sell the stocks they have or the stocks they are interested in buying.

There’s also different places that stocks and bought and sold. You may have seen the mayhem of a stock market trading floor on TV. Lots of paper flying around and people shouting. Trades are bought and sold verbally on the trading floor. What’s becoming more popular nowadays is the virtual trading environment where stocks are bought and sold online. Exchanges can be considered as physical locations and there is also the virtual exchange. The world's largest physical trading market is the New York Stock Exchange where listed securities can be traded. The typical orders will start from traders going to the floor broker up to the floor trading post specialist that trades the order. This specialist matches any buy and sells orders, and when trades are made this is reported on the tape and sent to the brokerage firm who is interested in buying the stocks. NASDAQ is a good example of a virtual exchange in the US where all the trading is done online. The process is similar; the only difference is that traders are matched electronically.

The stock market is simply a place for traders to trade. Hence the market! It’s often used as a barometer for the way an economy is performing. Queue pictures of traders with their heads in their hands on a bad day. It is much a part of culture as anything else today. There have been numerous movies made of it notably the Oscar winning Wall Street starring Charlie Sheen and Michael Douglas as the infamous Gordon Gekko which is well worth a watch.

Monday, 13 July 2009

Berkshire Hathaway

Yes I'm posting more about Warren Buffett! But then How to buy stocks for beginners would not be the same without constantly mentioning the daddy of all investors. Anyway, Berkshire Hathaway so if you're trying to learn how to invest like Warren Buffett then why not take a look at Berkshire Hathaway's holdings. The shear mention that this company is interested in another is enough to make a share price rocket in the stock market. So as a beginner what can you tell from looking at these companies? For a start you can see that Warren Buffett always stuck to the rule of investing in something you know or can easily understand. He doesn't own any tech stock because he doesn't know anything about it. He does own a large number of stocks in Gillette and Coca Cola. How hard is the razor and soda business to understand? Not very...hence he bought them. He did of course split up the stock to A and B stock to let others who don't have quite as much cash to jump on the Buffett gravy train. I've resisted the buffet gravy tie in I bet you're glad.

So if you fire up any tool I keep mentioning yahoo finance but anyone will do and look up BRK.A or BRK.B that's the stock symbols by the way, you'll be able to see a breakdown of the company. The stocks are quite expensive. Then he is very successful at this. You can also check out the Berkshire Hathaway website which is absolutely atrocious I have to say. This free rubbish from Blogger is a better template. I can't quite claim to have the same wisdom to bass on about how to buy stocks. That's the great thing about the Berkshire Hathaway site, you can read the letters than Warren Buffett sends out to his shareholders without being one yourself. . Like I said earlier, he's the best in the business so why not learn from him? I have to mention Charlie Munger as well. He's the Vice President of Berkshire Hathaway and widely regarded as Buffett's partner in the stock market. He's also just old. Anyway, he's someone worth looking up as he applies the same techniques that Buffet does taught by Ben Graham all those years ago. There's no point in telling you how much Berkshire Hathaway is worth at the moment because the nature of the business makes it clear it'll be out of date as soon as I post this. There's so much information out there on basics of stock market for beginners it's hard to know where to start...or stop.

In short, read up on Berkshire Hathaway and Charlie Munger. End of lesson for today folks!

Sunday, 12 July 2009

Keep Your Investing Head Clear!

The hardest thing I found about buying stocks and shares is keeping your head when everyone else around you is loosing theirs! It can be quite easy to get caught up with the herd and acting in the same way they do. When I first started trading I was obsessed with checking my stocks every day. Well that's a lie, it was all day every day. Having that little ticker in my browser at work became natural, a point here and point there would affect my mood. In the end it's not a big deal.

This is one thing that beginners in the stock market have a real hard time with. Warren Buffett has always said that the best time to sell stocks is....never! Forget about the 1 or 2 point gains. If you do your research properly in the first place you're buying into a good company. You just have to realize that buying stocks is a long term investment. To buy and sell constantly is foolish. You'd end up loosing more in commission to the stock brokers than you'd actually make in the sale.

So in summary, do your investment research properly at the start. Buy your stocks and hold...unless of course the business model changes...

Wednesday, 8 July 2009

My Investing Mission

Ok so lots of people have asked me why I'm creating how to buy stocks for beginners and there's several answers to that. Firstly I remember how daunting it was starting out with stocks and shares, what is the bull or bear market, how do you actually buy shares online? I thought I'd start this blog and offer up some of my own findings and save you the valuable reader some time! I can remember way back when I first started researching the stock market and all those books I read, the informative sites and the not so informative. If I can save you 5 minutes of research and wasting your time on some sort of get rich quick scheme then I've achieved something. Not that I'm saying I can give you all the answers I just mean to give you a little jump start.

Investing online is certainly here to stay and I've used a few online brokers which of course I will recommend. There's so many useful online tools to be used to. I absolutely love Yahoo Finance. The stats on offer are absolutely mind boggling and they can be searched and filtered anyway you require. There's also some fantastic online communities you can get involved with such as the guys at Motley Fool. There's so many experienced campaigners on there which is just a wealth of experience for you to use. Anyway enough about other sites back to my blog!

I love talking about Value investing and guys like Warren Buffett and Ben Graham and the contributions they have made to the industry. It can be quite hard to understand their concepts at first as it seems to go against the grain of what every other advisor will tell you. They love it when stocks are on free fall as it means bargains galore. You don't need to look for the stock tips, if you research a company and then hold your stocks you will hopefully end up making some money in the long term. So anyway I can spread the word about these guys the better. I know its not exactly a secret but people tend to get too caught up in the stock ticker and forget they're actually making an investment in a real company. It's not just about the numbers! Warren Buffett has modified Ben Grahams initial theory and puts a lot of value in the management of a company. If he believes in the person at the top then it adds to the value of the company.

The market is a tricky subject to keep contained, its so easy to go crazy with the information out there. Anyway if I can help any of you out there I'll be delighted.

Tuesday, 7 July 2009

Value Investing for Beginners Warren Buffett Style

Ever heard of value investing? How about Warren Buffett? He's only the single most successful person in the stocks game. When I was first learning how to buy shares I stumbled on this technique. Warren Buffett followed a technique known as value investing first coined by Benjamin Graham way back in 1934 with his book on Security Analysis but its probably his book titled The Intelligent Investor published in 1949 for which he is most famous. In this he detailed the approach of value investing. He would study a company in depth and look for shares where the price was lower than what he believed the company was worth. He determined this through different types of analysis and this is the basis of value investing.

So how can you determine the value of a company? The first step is to look for companies that trade at discounts to book value. Book value is the value of a company based on its balance sheet account balance. To determine this you'd have to get the companies annual report and get the total of the assets minus any liabilities. This is a good start now on to the next stage. Then also from the annual report check to see the dividend paid out to its share holders and ensure its high. Finally, look for shares which have a low price to earning ration. Many sites online now let you add this column in when searching for shares. Yahoo finance certainly does if you decide to buy stocks online.

Hopefully this guide is useful and provides you with a good introduction on value investing!

Sunday, 5 July 2009

Understanding Bear and Bull Markets

One of the terms you'll hear most frequently when trying to work out how to invest in the stock market is a bear and a bull market. So what does this actually mean? In it's simplest term, a bull market can be described as optimistic. Investors feel that prices are due to rise. A bear market can be described as pessimistic. Investors feel that stock prices are on the way down. As you can imagine a bear market is a self fulfilling prophecy as investors feel the price is coming down so sell shares rather than buying which adds to prices being driven down.

One of the most famous bear markets was the Wall Street crash of 1929 where 89% of market capitalization was completely wiped out. Marking the start of the Great Depression. In more recent times bear markets have occurred between March 2000 and October 2002 when the Internet bubble burst. Then of course depending on who you listen to we're living in a bear market right now with the current financial crisis!

Where did these names come from? One explanation is related to the way each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market: if the trend was up, it was considered a bull market; if the trend was down, it was a bear market.

As I mentioned earlier a bear market can be seem as pessimistic as the stock prices are tumbling. In a sense it can be seen as positive for the investor as its likely there will be bargains to be had with undervalued shares. It really depends on your point of view and what kind of investor you are! Hopefully this post clears up any mystery and act as a step in the right direction!

Saturday, 4 July 2009


Hi and welcome to How to Buy Stocks for Beginners! With the current credit crisis there are bargains galore in the stock market. There has never been so much value for money and with the web it's so easy to buy stocks online. Stock prices continue to tumble but this the best time to invest. But don't dive into your wallet right away! Good research is the key. Beginners at stock trading should take the time to get the education they need in order to succeed. It takes time and knowledge to be good at anything in life and this include buying stocks.

I will never tell you which stocks to buy but I will point you in the right direction of what to look out for. Hopefully through reading this blog you will be able to spot a bargain or two. One piece of advice I've always adhered to is 'buying what you know'. In other words if you're a bit of a geek and know about the tech market chances are you'll know what a good product is and if a company is worth investing in. Stick to what you're familiar with and it'll at least give you a head start on someone starting from scratch. How to buy stocks for beginners need not be a total stab in the dark if you follow some of the lessons I outline on this site. It should at least help you navigate your way through the minefield that is the stock market.

Like everything in life, the stock market can be a bit of a gamble but as long as you do your research and keep your head if the price dips you'll be fine! Stock market trading for beginners can be a straight forward process if you follow the guidelines!