When you buy stock, this means you are buying a small part of the company. Twenty years ago, the main way of buying stocks was based on the advice of a broker. Now, anyone with a computer can buy or sell shares through the services of a stock firm. If you are new to buying stocks, it may seem too confusing. However, with a little knowledge, you can buy your own stocks as well as benefit from investing.
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Part 1 of 3: Defining a Framework for Investing
Step 1. Define your goals
Take some time to think about why you are considering investing in the stock market. Are you investing in developing a future emergency fund, buying a house, or paying for university expenses? Are you investing for retirement?
- Motivational writing is a good idea. Try to calculate it in rupiah values, taking into account the amount of money needed to achieve the goal.
- For example, buying a house might require a down payment and closing costs of $4,000,000.00. Meanwhile, retirement costs might be $1,000,000.00 or higher.
- Most people have more than one investment goal. These goals usually vary in terms of priority and timing. For example, you might want to buy a house in three years, pay for your child's education in fifteen years, and retire in thirty-five years. Documenting these investment goals will clarify your thoughts and help you focus on them.
Step 2. Determine your timeframe
The investment objective will determine the investment time. The longer the investment lasts, the more likely it is to make a profit.
- If your goal is to buy a house in three years, then the timeframe, or "investment horizon" needed is fairly short. If you want to invest in managing your retirement fund 30 years from now, this means your investment horizon is much longer.
- The S&P 500 index is a collection of the 500 most traded stocks. There were only four ten-year periods from 1926 to 2011, when the S&P 500 as a whole suffered losses. In a holding period of fifteen years or more, these shares do not suffer losses. If you bought and held these stocks over the long term, you would have made money.
- In contrast, holding the S&P 500 for only one year resulted in a loss of 24 times over an 85-year period, from 1926-2014. Stocks are very volatile in the short term. Consequently, short-term investments are riskier than longer-term ones. You can earn more money if you invest well, but lose it all if you invest poorly.
Step 3. Understand your risk tolerance
All investments are risky. There is always the possibility that you may lose some or all of your money, as well as stocks. You never get a guaranteed return on investment, or initial capital back. How much you can afford to risk is referred to as your "risk tolerance."
- Before making any investment, ask yourself the question, “If something bad happens, how prepared am I to lose money and to what amount?”
- In most cases, the riskier something is, the higher the potential return. However, the possibility of loss also increases.
- For example, an investment that you expect to double in value in a month is riskier than an investment that grows to the same value in ten years.
- Know that any investment is not worth the loss of sleep at night. If reaching a goal requires you to feel uncomfortable, review your goal. Then, adjust the timeframe or goals.
- For example, imagine your goal is to save enough money to get a $400 down payment to buy a $250 million home in 3 years. You can revise this goal to reach IDR 300,000,000.00 for a house worth IDR 2,000,000,000 in 3 years. Or, consider a longer timeframe. For example, a goal of earning $400,000 to buy a $250 million home in 5 years might make more sense. You can also combine methods of reducing the goal as well as extending the timeframe.
- One of the main investment rules is to avoid losses whenever possible. Don't take unnecessary risks to achieve your goals.
Step 4. Calculate the investment required to achieve the goal
Use one of the free retirement or investment calculators you can find online. Calculate the rate of return you should earn and the investment required to achieve your goals.
- For example, imagine that you need $300,000 in three years, but can only invest $500 each month. You have to earn 38.2% rate of return on this investment every year in order to reach the target. This means, you have to accept a very high risk. Most people usually consider this kind of investment a bad decision.
- A better option is to increase the term to four and a half years. This target is more reasonable and can generate a safe profit rate of 4.8% per year.
- You can also increase your monthly investment from IDR 5,000,000,00 to IDR 7,750,000,00. Thus, the goal of IDR 300,000,000, 00 through a profit rate of 5.037% per year will be achieved.
- Alternatively, you can reduce your financial goal of IDR 300,000,000.00 in 3 years to IDR 196,2100,000.00 in the same time, while still investing IDR 5,000,000, 00 per month. To achieve this goal, your profit rate will only need to be 6% annually.
Part 2 of 3: Choosing Investments
Step 1. Understand the different types of investments
The next task is to choose the type of investment that is most suitable for you. An important first step is to understand the different types of investments available.
- You can buy shares of certain companies. Buying stock in a company means that you are also the owner of the company. As a result, the profit you receive will be the same as the owner of any business. If the company gets an increase in sales, profit, and market share, the value of the company will normally increase. This is very true, especially over a long period of time.
- In the short term, the market price of a company depends on how people feel about a company's future. Emotions, rumors, and perceptions can trigger a change in values. The purchase and sale price will determine whether you make a profit or not.
- You can also invest in mutual funds. Mutual funds enable many people to invest together in many different types of stocks. The result is lower risk, but also smaller returns, especially in the short term.
- In recent years Exchange Traded Funds (ETFs) have become a popular choice. Many people refer to it as an “index fund”. Funds like this are like mutual funds. Mutual funds are stock portfolios that are usually not supervised by managers. Most try to copy the price movement of an index, such as the S&P 500, Vanguard Total Stock Market, or the iShares Russell 2000.
- Like individual stocks, ETFs are traded in the market. The value of this ETF can change in a day.
- Some ETFs trade stocks in specific industries, commodities, bonds, or currencies.
- One of the advantages of index funds is that their investments are varied. Investments here reflect the various instruments that make up the index. Some index funds can also be purchased for little or no commission. Thus, an index like this is an affordable way of investing.
Step 2. Understand key terms
Many people rely on financial news to understand the performance of various stocks or the market in general. To make the most of these sources of information, you should understand a few key terms.
- Earnings per share /earnings per share: part of the company's profits paid to shareholders. If you're hoping to get dividends from your investments, this is important to know!
- Market capitalization ("market cap"): the total value of all shares of a company. This value represents the overall value of a company.
- Return on equity/profitability ratio: the amount of income earned by the company, relative to the amount invested by shareholders. This number is useful for comparing different firms in the same industry, to determine which one is the most profitable.
- Beta: a measurement of volatility (market volatility), relative to the market situation as a whole. This is a useful measure for examining risk. As a general rule, a beta number below 1 indicates fairly low volatility. A reading above 1 indicates higher volatility.
- Moving average: the average price per share of several companies, over a specific period of time. This is useful for determining whether the current stock price is a good price for the transaction.
Step 3. Pay attention to the analyst
Analyzing stocks can be time-consuming and confusing, especially for beginners. Therefore, you can take advantage of research from analysts. Usually, analysts watch certain companies closely to check their performance.
- There are several trusted free sites, which provide synopsis of analyst opinions on several companies.
- Analysts often provide advice, in short form (a word or two), for each specific stock. Some of them are self-explanatory, such as "buy", "sell", or "hold". Others, such as "sector underperformers", are not very intuitive.
- Different analysis firms use different words to make suggestions. Financial sites usually provide a guide explaining the terms used by each firm.
Step 4. Determine your investment strategy
After gathering the information, it's time to think about an investment strategy. All investors have a different approach, and there are several factors to consider.
- Investment diversity. Diversity, or diversification, is the degree to which money is divided between different types of investments. Investing all the money in just a few companies can bring good results if those companies perform well too. However, this means that the risk you face is also greater. The more diverse your investment, the lower the risk.
- Compounding (revenue from previous earnings). This is a consistent reinvestment of all the income you receive. If you invest earnings, you will get more revenue based on the original dividend. Some companies have programs that allow you to do this automatically.
- Investing against trading (trading). Investment is a long-term strategy that aims to earn money based on a long-term growth rate. Prices will fluctuate, but are expected to rise over a longer period of time. Meanwhile, trading is a more active process. This process involves trying to pick a stock whose price will go up in the short term, then quickly resell it. This "buy low, sell high" approach can result in big returns, but requires constant attention ad higher risk.
- Traders (people who trade) try to play with people's emotions about a company, by discussing price movements based on its history. Their goal is to buy when the price goes up and sell it back before the price starts to fall. Short term trading is high risk and not for novice investors.
Part 3 of 3: Buying the First Shares
Step 1. Consider using a broker that offers a full service
There are many ways to buy stocks. Each of these methods has its own advantages and disadvantages. If you have no experience buying stocks, start with a firm that offers a full service. Firms like these are more expensive, but include expert advice services.
- For example, a broker's job is to guide you through the process of buying shares. He is there to answer questions. You can ask some questions, for example, “What stocks would you recommend based on my risk tolerance?” and “Do you have a research report on the stocks I want to buy?”
- There are many full-service firms to choose from, so ask for advice. For example, friends or family may know a broker they trust or have used for a long time. Otherwise, there are several larger and more reputable full-service firms. Some of these include Edward Jones, Merrill Lynch, Morgan Stanley, Raymond James, and UBS.
- Keep in mind that if you use the services of a broker like this, you will usually pay a higher commission. Commission is the fee you pay each time you buy or sell a stock.
- For example, if you buy Disney stock for $50,000,000, the broker may ask for a commission of $1,500,000 for this transaction.
Step 2. Consider a discount broker
If you don't want to pay higher commissions for activity in the stock market, take advantage of the services of a discount or online brokerage firm.
- The downside of discount brokers is that you won't get the kind of advice you can get from a full service brokerage firm. The advantage is that you won't pay too much and can buy stocks online.
- Some reputable discount brokers include Charles Schwab, TD Ameritrade, Interactive Brokers, and E*Trade.
Step 3. Check out the direct purchase options they offer
These plans allow investors to directly buy shares of the company of their choice. There are two variations of options here: the direct investment plan (DIP) and the dividend reinvestment plan (DRIP).
- These plans allow you to buy stocks without a broker.
- Both are inexpensive and easy ways for investors to buy stocks for less money at regular intervals. Not all companies have these options.
- For example, John follows a DRIP plan that allows him to invest $5000.00 in common Coca Cola stock, once every two weeks. At the end of the year, he will have an investment of IDR 12,000,000.00 in the stock market and pay no commission.
- The disadvantage of investing through the DRIP or DIP method is the management of the files. If you invest in multiple companies, you will need to fill out the forms and review the statements for each company.
- For example, if you invest in 20 DRIP or DIP programs, this means you will receive 20 statements per quarter. On the other hand, if you invest IDR 10,000,000 every two weeks, this means that there is a lot of commission saved.
Step 4. Open an account
Regardless of which option you choose, the next step is to open an account. You will have to fill out several forms and possibly deposit money. The specific details will vary based on the type you choose to buy the stock for.
- If you use the services of a full-service firm, choose a broker that makes you comfortable sharing personal financial information. If possible, meet face-to-face so you can explain personal needs and goals in specific detail. The more information the broker gets, the more likely he is to solve your needs.
- If you are using a discount brokerage firm, you will need to fill out some files online. You may also need to send letters in other forms that require a physical signature. You may also need to deposit funds, depending on the capital value of the initial trade.
- If you invest through the DRIP or DIP method, first fill out the online and physical documents before buying the first stock. You should also deposit money for all transactions that have not yet taken place.
Step 5. Order something
Once your account is ready, the first purchase should be made quickly and easily. However, again, the details will vary based on how you made your first purchase.
- If you choose a full service firm, just contact the broker. He will buy shares for you. Your account must have been opened, so the broker will ask for the number. He will then confirm that you are one of the account holders, then confirm the order before he enters it into the system. Listen carefully. Brokers are human and they can also make mistakes when placing an order.
- If you have chosen a discount firm, it is likely that the trade will be done online. While doing this, make sure you follow the instructions carefully. Don't confuse stock prices with the amount of money you want to invest. For example, if you want to invest IDR 50,000,000.00 in the stock market at a price of IDR 450,000,00 per share, this means DO NOT order 5,000 shares. If so, the price would be $2,250,000,000, 00 instead of $50,000,000.00.
- If you are using a DRIP or DIP, you can find the enrollment paperwork on the company's website. Otherwise, you can call the company's shareholder division and request that they send the paperwork to you.
Step 6. Watch your investment
Remember that the stock and its market are an unstable entity. Value will continue to rise and fall, especially in the short term. If one of your investments continues to bring consistently poor returns, it may be time to change your portfolio.
- Existing prices reflect human emotions. Humans will react to rumors, misinformation, expectations, and concerns, whether valid or not. There's almost no point in watching stock price movements in a day or a week if you invest for a year or more.
- Paying too much attention can lead to impulsive decision making, which in turn can amplify losses. See how your stock is performing in the long term.
- At the same time, be aware that one of the companies you own could be in trouble. For example, if the company loses a lawsuit or has to compete against a new competitor in the same market, its share prices may fall drastically. In a case like this, consider selling the stock.
Tips
- There are many useful books, magazines and websites about stocks and their markets. Do your own research before you buy anything.
- Before buying stocks, try paper-trading for a while. This is a simulation of how to trade stocks. Watch stock price developments and note the buying and selling decisions you would make if you were trading. Check to see if your investment decisions will work. Once you are familiar with the functions of the market, try trading real stocks.
