Investing on The Stock Market
The Fundamentals of Investing in the Stock Market
Hi! If you’ve clicked on the blog post you must be interested in investing in the stock market or want to strengthen your current investing mindset. This is fantastic news and today is your first step towards financial freedom and building wealth. This post is the first in an investment series, follow along to learn more about learning to value a company, making sound investment decisions and identifying which companies are winners.
Investing in the stock market can seem intimidating at first, but with the right approach, it can be a powerful tool to grow wealth and achieve financial independence. Whether you’re saving for retirement, launching a business, or building generational wealth, understanding the basics of investing is essential. This guide walks you through the fundamentals, including the strategies behind value investing—a time-tested approach championed by Warren Buffett.
What Is the Stock Market?
The stock market is a platform where shares of publicly traded companies are bought and sold. When you purchase a stock, you’re buying a small piece of ownership in that company. Stocks can earn you money in two ways: through capital gains (selling shares at a higher price than you paid) and dividends (a share of the company’s profits).
Investing in the stock market has historically offered higher returns compared to other investments like savings accounts or bonds. Over time, consistent investments and reinvested earnings can lead to compounding growth, which amplifies your wealth.
Understanding Value Investing
One of the most successful investing strategies is value investing, popularised by Warren Buffett. Value investing involves identifying undervalued stocks—companies that trade for less than their intrinsic value. The goal is to buy these stocks at a discount and hold them until the market recognizes their true worth, resulting in a higher share price.
Key principles of value investing include:
Analyzing Fundamentals: Focus on financial metrics like earnings, cash flow, and debt levels to assess a company’s health.
Seeking a Margin of Safety: Invest in companies that trade significantly below their intrinsic value to reduce risk.
Thinking Long Term: Value investing is not about quick gains; it requires patience to let the market correct undervaluations over time.
Steps to Start Investing
Getting started with investing is easier than you might think.
Define Your Goals: Identify why you want to invest. Are you saving for a specific goal, like retirement, buying a house, or funding education? Your goals will determine your investment timeline and risk tolerance. For instance, long-term goals might allow you to take on more risk compared to short-term objectives.
Understand Your Risk Tolerance: Assess how much fluctuation in your investment’s value you’re comfortable with. If you’re risk-averse, consider a portfolio with more well-established and consistently performing companies. If you can handle volatility, growth stocks might suit you better. It is also important at this point to identify industries and business models that are within your circle of competence. The circle of competence is used to describe areas that we are confident in understanding. For example, I am confident in investing in consumer discretionary companies as I find the business model easy to understand (think Flight Centre, GYG, Lovisa, and Myer). And because I understand my circle of competence, I can play to my strengths and invest in the industries I know the most about.
Choose an Investment Account: Open a brokerage account to start trading stocks. Choosing your investment platform is entirely specific to your preferences. Self-wealth is a good platform if you are just starting out. Be sure to check the brokerage fees that each platform has before making your decision (this is the fee charged with every transaction made on your account).
Start Small and Diversify: You don’t need a fortune to begin investing. If you are just starting out you might like to start with a smaller amount of capital to begin testing the waters. As you progress you will notice that diversification the practice of spreading your investments across different sectors, industries, and asset classes is a good way to mitigate risk. Whilst diversification is a good strategy for de-risking an investment…the ultimate way to re-risk an investment is education. This means reading as much about a company as possible before committing to an investment and reading key books to develop your thinking. I will provide some of my favourite books further in this guide.
Learn the Power of Dollar-Cost Averaging: Commit to investing a fixed amount of money regularly, regardless of market conditions. This method helps reduce the emotional stress of timing the market and averages out the cost of your investments over time, minimizing the impact of market volatility.
Common Pitfalls to Avoid
When starting, steer clear of these common mistakes:
Timing the Market: Even experts struggle to predict market movements. Focus on long-term growth instead.
Overreacting to News: Emotional decisions can derail your investment strategy. In fact, there can be opportunities to buy exceptional companies at a low price when the market is busy overracting to bad news. The key is to know the kind of bad news that represents an opportunity and can be recovered from.
Ignoring Diversification: Putting all your money in one stock or industry increases risk.
Neglecting Fees: High fees can erode your returns over time. Opt for low-cost funds and platforms.
Resources for Further Learning
To deepen your understanding, explore these resources:
Books: "The Intelligent Investor" by Benjamin Graham, “Warren Buffet and the Interpretation of Financial Statements” by Mary Buffet and David Clark
Websites: Investopedia, Australian Financial Review, Yahoo Finance
Final Thoughts
Investing is not just about money—it’s about creating options and opportunities for your future. By embracing strategies like value investing, maintaining patience, and staying consistent, you can build a portfolio that aligns with your goals. Remember, the journey to financial independence starts with a single step.
Ready to begin your investing journey? Follow @foundherclubb for more resources and inspiration tailored for women in business and finance.
Follow along with this series if you want to learn more about investing on the stock market.
