The only reason to have your hard-earned money put towards an investment is for you to one day realize a profitable return. It might seem as if there’s some witchcraft or “genius” needed for this, but that notion is completely false.
There are three questions that you need to ask yourself before putting money into the stock market. Remember, everyone wants to win and make money in the stock market, so it’s important to remember what a stock actually is.
I present Investopedia’s definition. (Hopefully, that’s okay with them.)
What is a ‘Stock’
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
Ownership..? That’s right, if you were able to purchase all 481,870,000 shares of Amazon.com, Inc you would own the e-commerce EMPIRE! That’s extremely unlikely, considering that Jeff Bezos founded Amazon.com and became the wealthiest man in the world by owning just about 17% of all outstanding shares of AMZN. Also, I don’t suppose anyone has 600 Billion dollars lying around someplace to actually make that happen?
Nonetheless, if you own ONE share of Amazon, you own approximately 0.0000002% of the company at the time of writing.
I say this because it’s a major mistake to think about a stock as some ticker symbol that randomly bobs up and down. Companies become more valuable as their earnings and assets grow, which means as the company earns more in net profits and therefore their stock price will rise as well. If earnings decrease or news breaks that potentially threatens the company’s ability to grow earnings in the future, the price will go down. Great companies tend to overcome the “bad press” over time.
So companies hire, create new products and improve their services for customers in order to increase their earnings. More profits for the company means more profits for shareholders as well through stock appreciation and dividends. However, no two companies are exactly the same, even if they’re within the same sector. Which is kind of like how no two human beings are the same, even if they’re from the same country.
It’s important to be knowledgeable about what you’re investing in. So ask yourself these questions, and if any of these make you feel hesitant, or perhaps a little nauseous, we’ll have to continue to work on getting you ready to invest. Just remember that anyone can get there, no matter from where you start from.
The most important thing is to start. So without further ado, here are the questions.
“Three Required Questions for a Profitable investment”.
#1) Will I require the money that I’m going to invest FOR ANY PURPOSE in the immediate future (next 6 months to a year)?
Numero Uno. Don’t invest money that you’re going to need for the essentials. Food, shelter, transportation, or paying off existing debt are essential expenses that must always be prioritized and never overshadowed by the potential gains to be made in the market. Never.
#2) Do I understand the company or index I’m investing in?
You must understand what exactly you’re investing in and have a strong conviction that the company will continue to grow its earnings for many years to come. For example, if you don’t understand what a biotechnology company does to make money and what their market is, pass on the company. Avoid “stock tips” from trading “professionals and analysts” as they’ll always tell you about why you should buy, but never when you should sell. The really great investors buy shares when they see a great opportunity using their own knowledge and intuition, which is why you’ll never see Warren Buffett come out with his “Top 5 Stock Picks”.
#3) Would I be comfortable if I lost all the money I put towards this investment?
Any asset class is fundamentally unpredictable in nature. Take Bitcoin (BTC), for example. However few asset classes are more unpredictable than stock equity. So that means no one, and I mean no one, knows what exactly will happen with a company in the future and thus how the stock price will perform. It’s a prediction, not a guarantee that most company stock prices tend to rise in value. No one knows when exactly a stock price will drop as these really are living, breathing, firms dealing with internal “politics”, competition, changing consumer interests, and other factors such as government regulation which all threaten whether or not they will be successful. Throughout all the uncertainty, you never want to be uncertain that you’ll ever get your money back and you definitely don’t want to find yourself in a financial bind because your stock prediction was wrong.
Do not invest or speculate with money you cannot afford to lose. So yes, question #1) and #3) are similar but it’s very important to understand your financial position and how stocks fit in with your plan in order to benefit you.
Hope you enjoyed these posts on investing! It might seem like we have covered a lot, and we have, but in reality, this is really just the tip of the iceberg when it comes to investing. Don’t let that discourage you, because any successful investor was once.. not as successful. By owning equity, we grow our net worth as do the amazing companies (or assets) become more valuable. That’s why it is my view that holding stock equity are essential in order to achieve financial independence!
Until Next Time!