How to Invest in Stocks (with Pictures)

2024 Author: Jason Gerald | [email protected]. Last modified: 2023-12-16 10:50

It is no coincidence that most wealthy people invest in the stock market. While you may still lose money, investing in the stock market is one of the best ways to achieve financial security, independence, and wealth that will last for generations. Whether you're just starting to save or are already setting up a retirement fund, your money must work as effectively and diligently as you did when you tried to earn it. However, to succeed in the stock market, you must start with a solid understanding of how the stock market works. This article will walk you through the process of making investment decisions and on the right path to becoming a successful investor. This article aims to discuss how to invest in the stock world specifically. For guidance on trading stocks and joint funds, look for related articles.

Step

Part 1 of 3: Setting Your Goals and Expectations

Step 1. Create a wish list

To set goals, you have to think about the things or experiences you want and will cost money to do. For example, what kind of lifestyle would you like to have after you retire? Do you just want the usual stuff? Use this list to help you set goals for the next step.

Making a list will also help you if you want to save money for the future needs of your children. For example, do you want to send your children to a private school or university? Do you want to buy a car for them? Would you prefer a public school and use your excess money for something else? Setting a clear picture of what you want will help set goals for saving money and investing

Step 2. Determine your financial goals

To create an investment plan, you must first understand why you want to invest. In other words, what kind of financial target do you want, and how much do you have to invest in order to meet that target? Your goals should be as specific as possible, so you know what to do to achieve them.

Popular financial goals include buying a house, paying for your child's university education, setting up an emergency fund, and saving for retirement. Instead of setting a general goal like “owning a house,” choose a specific target: “Save IDR 600 million for a down payment on a house of IDR 3 billion (most mortgage loans require an upfront payment of 20 to 25% to get the best interest rate).
Most investment advisors will recommend that you save at least eight times your salary for retirement needs. This will ensure that you can retire with 85% of your annual income. For example, if you retire with a salary of IDR 8 million, you will have to strive to collect at least IDR 64 million every year to support yourself in early retirement.
Use a tuition calculator to determine how much money you should save for your child's education, how much you hope to contribute, and the different types of financial aid your child might get - based on your income and the total value of your assets. Keep in mind that these fees will vary greatly depending on your location and the type of school you want (eg private, public, etc.). Also remember that expenses during college do not only cover the cost of education, but also other costs, such as the cost of boarding houses, transportation, books, and college supplies.
Take the time factor into account when setting your goals. This is especially true for long-term projects such as pension funds. For example: John started saving money at the age of 20 using a retirement account, with an interest rate of 8%. He can save IDR 30 million a year for the next 10 years, then stop saving but still leave the money in his account untouched. When he is 65 years old, his total money will amount to IDR 6.4 billion.
Many sites provide “savings calculators” that can show you how much your investment will grow over a certain period of time and interest rates. While these websites are no substitute for advice from a financial professional, their calculators can give you a rough idea to get you started.
Once you have set a target, use the difference in your current financial position and in the future you want, to determine the interest rate needed to achieve that target.

Step 3. Define your risk profile

The action you take to earn interest equals the risk required. Your risk factor has two variables: your ability to take risks, and your willingness to do so. There are some important questions you should ask yourself at this stage, for example:

What stage of life are you at? In other words, is your income lower or closer to the peak of your potential?
Are you willing to take more risks to get more returns?
How long is your investment objective?
How liquid (liquidity is talking about things that can be immediately converted into money) assets do you need to achieve short-term targets and maintain sufficient savings? Don't invest in the stock market until you have an emergency fund of six to twelve months of daily living expenses. This is just in case you lose your job. If you have to liquidate a stock after holding it for less than a year, this means you are only speculating, not investing.
If the risk profile of a potential investment doesn't match your tolerance level then it doesn't suit you. Just forget it.
Your asset allocation will vary based on your life stage. For example, you may have invested a higher percentage in the stock market when you were younger. Also, if your career is stable and paying a fairly good salary, then your job will become like a bond: you can rely on it for a stable long-term income. This allows you to allocate more in the stock market. On the other hand, if your job does not generate a stable income, for example you are a stock trader or investment broker, you will have to allocate less money in the stock market and more money to achieve stability from mutual funds. While stocks make your assets grow faster, they also carry more risk. As you get older, you can move to more stable investments, such as mutual funds.

Step 4. Learn about the market

Spend as much time as possible reading about the stock market and the world of the economy at large. Listen to expert input and predictions to develop a sense of the state of the economy and the types of valuable stocks. There are some classic investing books to get you started:

Benjamin Graham's The Intelligent Investor and Security Analysis is an excellent investment book for beginners.
The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith. This book contains a short and quick way to read financial statements.
Expectations Investing by Alfred Rappaport, Michael J. Mauboussin. This highly readable book provides a new perspective on security analysis and is a great complement to Benjamin Graham's books.
Common Stocks and Uncommon Profits (and other titles) by Philip Fisher. Warren Buffett once said that he is 85 percent Graham and 15 percent Fisher. It could be that he is playing down Fisher's influence in shaping his investment style.
"The Essays of Warren Buffett," which is a collection of Warren Buffett's annual letters to shareholders. Warren Buffet's entire fortune comes from investing, and he has a lot of useful advice for those who want to follow in his footsteps. Buffett has made these letters available to read on the internet for free: www.berkshirehathaway.com/letters/letters.html.
The Theory of Investment Value by John Burr Williams, which is one of the best books when it comes to discussing stock prices.
One Up on Wall Street and Beating the Street, both written by Peter Lynch. Peter is a successful financial manager. These books are easy to read, informative, and entertaining.
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Reminiscences of a Stock Operator by William Lefevre. Both books use real-life examples to illustrate the dangers of emotional overreaction and greed in the stock market.
You can also take basic or beginner investing courses offered on the internet. Sometimes, these courses are available for free, offered by companies like Morningstar and T. D. Ameritrade. Certain universities, such as Stanford, offer online investing courses.
Community and adult education centers may also provide finance courses. The courses they offer are usually free or low-cost, and can give you a solid overall view of the investing world. Search online to find courses in your area of residence.
Practice “on paper.” Pretend to buy and resell stocks using the closing price each day. You can actually do it on paper, or you can sign up for a free online practice account at sites like How the Market Works. Practicing will help train your strategy and knowledge, without having to risk losing real money.

Step 5. Formulate your expectations for the stock market

Whether you are a professional or a beginner, this step is difficult, as it involves both an art and a science aspect. You must develop the ability to collect large amounts of financial data about market performance. You also have to develop a “feel” of what the data shows and doesn't show.

This is why many investors buy stocks from products they know and use. Consider the products you have at home. From what's in the living room to what's in the fridge, you're sure to know these products very well and can judge their performance quickly and intuitively, by comparing similar products from competitors.
For home products, try to imagine the economic conditions that could prevent you from buying them, or make you look for better/worse quality products.
If economic conditions allow people to buy products that you know, this might be a consideration that you can invest in these products.

Step 6. Focus your thoughts

When trying to develop general expectations about market conditions and the types of companies that are likely to be successful in current or future economic conditions, you should make predictions in a number of specific areas, including:

The direction of interest rates and inflation, and how these can affect fixed income or equity fund purchases. When interest rates are low, there will be more consumers and businesses with money. Consumers have more money so they can buy more goods. This makes the company's income increase, so the company can invest to develop its business. Thus, lower interest rates will result in an increase in stock prices. On the other hand, rising interest rates can reduce stock prices. High interest rates make borrowing money difficult or expensive. Consumers will save more and companies will have less money to invest. The growth rate may stop or decrease.
The economic cycle, including a broad macroeconomic view. Inflation is a general increase in prices over a certain period of time. Moderate or “controlled” inflation is usually considered good for the economy and the stock market. Low interest rates, combined with moderate inflation, will have a positive effect on the market. High interest rates and deflation will usually cause stock prices to fall.
Desired conditions in specific economic sectors, including a microeconomic outlook. Certain industries are usually considered to have performed well in periods of economic growth, such as automotive, construction, and aviation. In a strong economy, consumers are more likely to feel confident about their future, so they spend more money and buy more goods. These industries and companies are considered “cyclical” companies.
Other industries will perform well in a bad or declining economy. These industries and companies are usually not affected by economic conditions. For example, basic necessities and insurance companies, which are less affected by the level of consumer confidence in the future, because they still have to pay for electricity and health insurance. These industries and companies are referred to as “defensive” or “contracyclical” companies.

Part 2 of 3: Making Investments

Step 1. Determine your asset allocation

In other words, determine how much money you will spend in different types of investments.

Decide how much money to invest in stocks, precious metals, how much to allocate to more aggressive alternatives, and how much you will keep as cash and its equivalents (e.g. certificates of deposit, treasure certificates, etc.).
The goal here is to determine a starting point based on market expectations and risk tolerance.

Step 2. Choose your investment type

Your "risk and payoff" goals will help eliminate some of the choices. As an investor, you can choose to buy stock in individual companies, such as Apple or McDonalds. This is the most basic type of investment. The bottom-up approach occurs when you buy and sell each stock independently based on your projections of its future price and dividends. Investing directly in the stock market will not involve the cost of a mutual fund, but it does require more effort to ensure a good level of diversification.

Choose the stock that best meets your investment needs. If you are a high-income person, have few immediate needs, and have a high risk tolerance, choose stocks that do not or pay little dividends, but have an expected growth rate at above average levels.
Low-cost index funds are usually less expensive than actively managed funds. This fund offers more security because its investment model is based on indices that are trusted and used as references. For example, an index fund might choose a performance level that contains shares of companies in the S&P 500 index. This fund will be used to purchase most or all of the same assets, so the result will be equal to (but not exceed) the performance on that index. This option is considered quite safe but not very attractive. Active stock advisors usually don't recommend this type of investment. Index funds can be very suitable for novice investors. Buying and holding "no-load" on medium-cost index funds and using a cost averaging strategy have proven to work better than many active mutual funds over the long term. Choose the index fund with the smallest annual expense-to-profit ratio. For investors who have less than IDR 1 billion to invest, index funds are one of the best ways to invest long term. However, if you have more than $1 billion to invest, individual stocks are usually a better choice, as all of the funds involve costs that are proportional to the size of your assets.

Even very low-cost index funds, which charge only 0.05% of the annual expense ratio, will spend large sums of money over time. If we assume the annual profit is 10%, the expense ratio of IDR 10 billion will cost about IDR 2.36 billion in 30 years (compare with the investment balance of IDR 31.5 billion after 30 years). Learn about buying stocks or mutual funds for more information on whether individual stocks or mutual funds are a better fit for you.
An exchange-traded fund (ETF) is a type of index fund that trades like stocks. ETFs are unmanaged (whereas stocks are always bought and resold with an active managed fund) and can usually be traded without commission. You can buy ETFs that are based on a specific index, or on a specific industry or commodity, such as gold. ETFs are another option that is also suitable for novice investors.
You can also invest in actively managed mutual funds. This fund collects money from many investors and invests it in two main areas: stocks and precious metals. The individual investors will then buy the shares of the portfolio. Fund managers usually create portfolios with specific targets, such as long-term growth. However, because these funds are actively managed (meaning managers are always buying and selling shares to reach their fund targets), they can be more expensive. The mutual fund spending ratio may outweigh the benefits and hinder your financial growth.
Some companies offer special portfolios for retirement investors. These are “asset allocation” or “target date” funds that will automatically adjust based on age. For example, your portfolio may contain more equity when you are younger, and will automatically transfer more to fixed-income mutual funds when you are older. In other words, these companies do what you would do for yourself as you age. Be aware that these funds typically generate higher payouts than simple index funds and ETFs, but offer services neither of these types offer. the investment.
You should take into account fees as well as transaction fees when choosing your investments. Fees and charges can eat away at your profits and reduce your financial growth. It is important to know what fees you will incur when you buy, hold, or sell shares. Common transaction fees include commissions, offer-question spreads, slips, special taxes, and state taxes. For fund investment options, the costs may include management fees, sales force, redemption, exchange fees, account management and operating expenses.

Step 3. Determine the intrinsic value and the right price to pay for each stock that catches your eye

Intrinsic value is the price of a stock. This value can be different from the current stock price. The right price to pay is generally a fraction of the intrinsic value, to provide a margin of safety (MOS). MOS may range in value from 20 to 60&, depending on the level of uncertainty in your estimate of intrinsic value. There are many techniques used to value stocks:

Dividend discount model: the value of a stock is the present value of all its future dividends. Thus, share value = dividend per share, divided by the difference between the discount value and the dividend growth rate. For example, PT A pays an annual dividend of IDR 10,000 per share, which is expected to grow at 7% per year. If your initial cost of capital (discounted rate) is 12%, then PT A's shares are worth Rp10,000,00/(.12-.07) = Rp20,000,00 per share.
Discounted cash flow (DCF) model: the stock value is the present value of all future cash flows. So, DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n, where CFn = the flow of money over a period of time, and n and r = discount rate. DCF calculations generally project the growth rate of free flow of funds (meaning the flow of operating funds minus capital expenditures) over the next 10 years, to calculate the growth rate and estimate the growth rate of the terminal, after which it is used to calculate the terminal value. These two values are then added together to get the value of DCF shares. For example, if PT A owns an FCF of Rp20,000.00/share, with an expected FCF growth of 7% over the next 10 years and 4% thereafter, and a discount rate of 12%, its shares will have a growth value of Rp15,690, 00 and a terminal value of Rp. 16,460, 00 and a value of Rp. 32,150.00 per share.
Comparison methods: these methods value a stock based on its price relative to earnings (P/E), book value (P/B), sales (P/S), or cash flow (P/CF). This method compares the ratio of the current stock price to a certain appropriate level as well as the historical average ratio of the stock, to determine the selling price of the stock.

Step 4. Buy your shares

Once you've decided which stock to buy, it's time to make it happen. Find a brokerage firm that meets your needs and start ordering.

You can buy a discount broker, who will order the stock you want to buy. You can also opt for a full service brokerage firm, they may be more expensive, but a firm like this one will provide information and guidance. Do your part by checking out their site and seeing people's online ratings of its performance to find what's best for you. The most important factor to consider here is how much commission is requested and what other fees there may be. Some brokers offer free stock trading if your portfolio reaches a certain threshold value (e.g. Merrill Edge Preferred Rewards), or if you invest in a preferred stock list with companies that pay the transaction fees (e.g. loyal3).
Some companies offer direct stock purchase plans (DSPP) that allow you to buy their stock without the services of a broker. If you're planning on buying and holding average costs, this might be your best option. Search online or call or write to the company whose stock you want to buy, to find out if the company has a DSPP plan. Pay attention to the cost schedule and choose a low-cost or no-cost plan.

Step 5. Build a portfolio of 5 to 20 different stocks for diversification purposes

Diversify across sectors, industries, company sizes, and styles ("growth rate" vs. "value").

Step 6. Hold on for the long haul, five to ten years, or longer

Avoid the temptation to sell when the market is having a bad day, month, or year. The long-term direction of the stock market is always on the rise. On the other hand, avoid the temptation to make a profit (sell) if your stock has gone up 50 percent or more. As long as the company's fundamentals are still good, don't sell (unless you really need the money). However, you can still sell when the stock price actually rises by a high percentage (see step 3 of this section), or if the fundamental conditions involved have changed drastically compared to when you bought the stock, making the company appear to be out of profit.

Step 7. Invest regularly and systematically

Cost-averaging investments require you to buy low and sell high. This method is a simple strategy that is effective. Set a certain percentage of your salary to buy shares.

Remember that a down market means a buying opportunity. If the stock market is sluggish, by at least 20%, turn more money into stocks. If the stock market drops by 50%, move all the money and precious metals to the stock market. This may sound daunting, but the market has always managed to bounce back, even during the recession between 1929 and 1932. The most successful investors bought stocks when they were "on sale."

Part 3 of 3: Monitoring and Maintaining Your Portfolio

Step 1. Define milestones

Determining the exact milestone is necessary so that you can measure the performance of the stock when compared to your expectations. Set a standard for how much growth you need for each specific type of investment so that you can maintain your investment.

Usually these points are based on the performance of various market indices. This allows you to determine whether your investment is performing as well as general market conditions.
The results may be counterintuitive, but just because a stock is rising in price doesn't mean it's a good investment, especially if it's rising more slowly than similar stocks. On the other hand, not all declining investments are bad (especially when other similar investments are performing much worse).

Step 2. Compare performance with expectations

You should compare the performance of each investment with the expectations you set to determine how valuable your choice is. This also applies when you want to make a decision on the allocation of other assets.

Investments that do not meet expectations should be sold so that your money can be invested elsewhere, unless you have good reason to believe that your expectations will soon be fulfilled.
Allow time for your investment to grow. One or even three years of performance means nothing to long-term investors. The stock market is a voting engine in the short term and a valuation engine in the long run.

Step 3. Be aware and renew your expectations

After you buy shares, you should monitor your investment performance regularly.

Circumstances and opinions are always changing. Both of these are part of the investment. The key is to properly process and analyze all the new information and implement the changes written down based on the guidelines in the previous steps.
Consider whether your market expectations are correct. If not, why? Use the answers to update your expectations as well as your investment portfolio.
Consider whether your portfolio is performing within your risk parameters. It's possible that your stock is performing well, but the investment is more shaky and risky than you might expect. If you are not comfortable with this risk, it may be time for you to change your investment type.
Consider whether you are capable of achieving the goals you have set. Perhaps your investment is growing within acceptable risk parameters, but is too slow to meet your goals. If this is the case, it's time to consider a new investment.

Step 4. Beware of the temptation to over-trade

Remember, you are an investor, not a gambler. In addition, every time you make a profit, you have to pay state taxes. Don't forget also that each trade will have a certain broker fee.

Avoid stock tips. Do your own research and don't just trust any stock tips, even from insiders. Warren Buffet says he discards all letters sent to him suggesting a particular stock. He says these tipsters are paid to say nice things about a stock so that the company that owns it can earn money.
Don't take media coverage of the stock market seriously. Focus on investing in the long term (at least 20 years), and don't be distracted by short-term price changes.

Step 5. Consult a trusted broker, banker or investment advisor if necessary

Never stop learning, and continue reading as many books and articles as you can by experts, who have successfully invested in the type of market that interests you. Also read articles that help you on the emotional and psychological aspects, so you can cope with the ups and downs of participation in the stock market. You must know how to choose the best when investing in the world of stocks, and even when you make wise decisions, you still have to be prepared for possible losses.

Tips

Wall Street focuses on the short term. This is because future predictions are difficult to make, especially in the very long term. Most analysts project earnings over ten years and use discounted cash flow analysis to determine target prices. You can only take advantage of the market if you hold the stock for years.
The goal of a financial advisor/broker is to keep you as a client so they can still make money from you. They will advise you to diversify so that your portfolio follows the Dow and S&P 500 indices. That way, they will always have an excuse to evade when your stock price drops. Most brokers/financial advisors have little knowledge of the economics of this business. Warren Buffet is famous because he said, "Risk is only for people who don't know what they are doing."
Buy from a company that has no or little competition. Airline companies, retailers, and automotive manufacturers are often considered bad long-term investments, because the industry is very competitive. This is indicated by the low profit margins in their income statement. In general, stay away from seasonal or trending industries such as retail and tight industries such as basic necessities and airlines, unless revenue and revenue growth are consistent over the long term. There are very few like this.
Information is the lifeline of a successful investment in the stock market and fixed income. The key is to remain disciplined in conducting research and analyzing its performance through monitoring and adjustment.
Consider your biases and don't let emotions guide your decisions. Trust yourself and the process and you will be on your way to becoming a successful investor.
Remember, you are not trading paper at an ups and downs. You buy shares of a business. However, health and business benefits and the price you will pay should be the two factors that influence your decision.
Look for opportunities to buy high-quality stocks when they are low. This is the essence of investing.
Don't look at the value of your portfolio more than once a year. If you get caught up in the emotions of Wall Street, you will only be tempted to sell investments that may be very profitable in the long run. Before you buy a stock, ask yourself this question, "If the price goes down, will I sell it or will I buy more?" Don't buy it if your answer is the first one.
Understand why blue chip stocks are considered a good investment: their quality is based on consistent earnings and revenue growth. Identifying companies in this area before anyone else will result in greater profits for you. Learn how to become an investor bottom up.
Big name companies are a good choice. Examples include Coca-Cola, Johnson & Johnson, Procter & Gamble, 3M, and Exxon.
Invest in shareholder-oriented companies. Most businesses would rather spend their profits on private jets for their CEOs than pay dividends. Some of the evidence that shows that a company is shareholder oriented are long-term executive compensation, issuance of stock options, sound capital investment, fair dividend policy, and constantly growing EPS and book value per share.
Consider and find out about legal financial plans that can help you save on taxes.
Before buying a stock, try trading "on paper" for a while. This is a stock trading simulation. Pay attention to the value of the stock, and note the buying and selling actions you would take if you actually started trading. Check to see if your investment decision was successful. Once you've found an effective and seemingly successful system and you're comfortable with how the market works, try trading real stocks.

Warning

Only invest money that is not really needed. Stock prices can drop drastically in the short term, so even an investment that looks smart can turn out badly.
When it comes to money, people may lie to save their pride. When someone offers an interesting tip, remember that it is just an opinion. Consider the source.
Don't try to time the market by guessing when the stock will reverse direction. No one (except liars) can do this.
Don't day trade, swing trade, or trade stocks just for short-term gains. Remember, the more you trade, the more commission you spend, the less your profit will be. In addition, short-term gains are taxed more than long-term (over one year). The best reason to avoid short-term trading is that success in the world of stocks requires a great deal of skill, knowledge, courage and luck. This trade is not for the inexperienced.
Don't buy margin stocks. Stock prices may fluctuate drastically without warning, and using upgrades could put you out of business. Don't buy a margin stock and see the price drop by 50 percent or more, leaving you at a loss, only to make a profit when the price goes up again. Buying margin stocks is not an investment, it is speculation.
Don't trade blindly. In other words, don't buy stocks that offer little profit and look cheap. Most stocks are underpriced for a reason. Just because a stock that was trading at a price above $100 is now worth $1, doesn't mean it can't drop further. All stock prices can drop to zero, and many cases like this have happened.
Stay invested in stocks, and avoid options and derivatives. These things are speculation, not investments. Your best chance of making a profit is with stocks. You are more likely to lose money through options as well as derivatives.
Do not use technical analysis, which is a technique for traders, not investors. Its effectiveness as an investment tool has long been fiercely debated.
Don't take investment advice from anyone just like that, especially from someone who will earn money from your trades. These people include brokers, advisors, as well as financial analysts.
Avoid "momentum investing". This investment is the practice of buying the best-selling stock that has recently been most valuable. This method is pure speculation, not investment, and will not work consistently. Just ask everyone your own question who has tried to trade the stock of the top-selling tech companies of the late 1990s.
Do not engage in insider trading. If you trade stock using inside information before the information is made public, you may be prosecuted for conspiracy. No matter how much money you can make, it's not worth it when compared to the legal issues that could come your way.