Investment Advice for Beginners

Ideally, most people would like to earn money with as little effort as possible. Risk averse individuals, with sufficient liquidity, may consider depositing their money in Money Market Accounts (MMAs) that offer a rate of return that is comparable to the interest earned on a CD (certificate of deposit). Unlike a CD, there are no penalties for early withdrawal from a MMA. Moreover, the money that is deposited in a MMA is insured. Hence, people who are risk averse, have sufficient liquidity, and are interested in regular withdrawals would do well to deposit their money in a MMA in lieu of temporary financial investment.

How do Beginners Choose their Investments?

Stock Investments
Stock investment/trading confers upon the investor the opportunity to reap dividends and earn by way of capital appreciation. The preferred stock investing strategy, viz. capital preservation or capital appreciation, will determine the kind of (shares) investment that should be pursued by someone who intends to play the market. Investing in companies that are in the mature growth phase of the business cycle, and have been undervalued by the stock market, will result in the investor earning dividend income in addition to capital gains. In case of dividend-yielding stocks, the intrinsic value of a share is assessed using the Dividend Discount Model (DDM) while the return on investment (ROI) can be calculated using the following formula:

Return on Investment = (D1+P1- P0) / P0

D1 = Dividend Received
P1 = Selling Price
P0 = Purchase Price

Technical analysis may prove handy for those who are adept at reading graphs and charts, and looking for patterns and replications. Fundamental analysis, on the other hand, is useful for people who are comfortable with analyzing financial statements (10-Ks and the 10-Qs) in order to determine market timing. This is because investors relying on fundamental analysis believe that the price of a security may be mispriced in the short run, but will eventually correct itself over a period of time. Investors, who are solely interested in capital appreciation, should opt for growth stocks since value investing will not yield the desired results.

Mutual Funds Investment
Mutual funds are good investments for people who would prefer relying on the expertise of a fund manager. The latter raises money by issuing shares whose net asset value (NAV) is the difference between the fund’s assets and it’s liabilities. Price per share and NAV are equal if one invests in funds that do not have a front load. The money that is raised is invested in stocks, bonds, and other securities in accordance with the fund’s mandate, viz. capital preservation and/or capital appreciation. Interest from bonds and dividends from stocks, that are either distributed to the shareholder in the form of cash or additional shares, and capital gains from the investment fund are contingent on the ability of the manager to pick out appropriate investments.

Bonds
Investing in treasury bonds that are issued by the US government provides the bondholder the opportunity of receiving regular interest income. The government issues treasury bills, notes, and bonds; I Savings Bonds and EE/E Savings Bonds. Treasury Inflation-Protected Securities (TIPS) provides a hedge against inflation, so that the expected and the accrued ROI are the same. The aforementioned fixed income securities are exempt from state and municipal taxes but are federally taxed. In addition to these securities, municipal bonds, viz. General Obligation Bonds (GO) and Revenue Bonds are also worthwhile investments. It would behoove the investor to note that treasury bills are sold at discount to par, and the return to the bondholder is the appreciation in the value of the bill.

Alternate Investments
Investing in commodities in addition to investing in stocks and bonds is an excellent way of diversifying one’s portfolio, since the relationship between commodity price index and the price of bonds and stocks is generally inverse. In addition to commodities, options trading is also very profitable for experienced traders. However, these investments entail a great deal of risk and may not be suitable for a novice.

Hopefully, the above article would have provided useful investment advice for beginners. People who are uncomfortable with the aforementioned investments can try their hand at passive income opportunities, since leveraged and residual passive income opportunities are a dime a dozen.

Fundamental Analysis for Beginners

Fundamental analysis is the detailed assessment and analysis of a company’s future or growth, which gives a fair idea about its worth in the stock market. It involves careful study of the revenue, expense, sales, asset management tools, liabilities, and all the financial aspects dealing with an organization’s performance and survival. It’s the best way to determine whether the stock in question is valued, undervalued, or being traded at a fair price.

Need for Analysis

The elements that decide the value of a stock, keep fluctuating due to a variety of reasons. Ideally, it’s market value or current rate should almost be the same as its real value. But, the market price is either more or less than its original value. This deviation may prompt people to buy or sell a share. If the price is less than the intrinsic value of the stock, we ideally buy it, and if the stock is overpriced, we sell it. This is exactly where fundamental analysis comes in picture. In order to determine the real value of a stock, a number of parameters have to be scrutinized. Hence, it is all about evaluating a security’s value, based on an authentic set of information.

Stock Fundamental Analysis

Consider an investment of USD 100 in a stock which rises to USD 120. The profit gained is USD 20 or 20%. Now consider another company’s stock which has USD 1 as market price and it rises to USD 2 in the same trading session. This is a 100% rise in the value. If you invest in 10 stocks of this company, the earnings would double, in this case USD 20. Thus, it can be seen that a lower-valued tax can fetch better profit on a relatively small investment. There are many companies in a wide variety of sectors which don’t have much in common. All organizations listed on the market have some factors mentioned in the beginning as their ‘investment friendliness’ measures. Revenue, assets, and liabilities are some common aspects of any firm across different business segments. These factors gives us a broader perspective for comparison between various firms, and also highlighting the best deals on offer.

Technical analysis is many a time confused with fundamental analysis by the beginners. The former one is a type of stock research, which is based only on the market prices, their volatility, and the trends of a company’s performance graph concerning the rise or fall of its stocks. The most important difference between both is that, technical analysis never deals with the real value of a stock. It is essentially a study limited to the market positioning and behavior of a firm. The concept of fundamental analysis can be applied in many different areas. For example, its scope can extend to bonds and their assessment, based on the economic factors that govern it, such as credit ratings or the condition of the parent economy.

Techniques

– EPS ratio (Net earnings/Outstanding shares): If a firm earns USD 20 per share, and the outstanding share or divisions of earning is 4, each investor will earn USD 5. But, if the outstanding share is 2, then the earnings per share for an investor is USD 10. Thus, higher EPS ratio can be a basic analysis tool.
– P/E ratio: This stands for the price per share/earnings per share ratio. The price of a single share of a company as compared to its earnings on that share is decided by the market acceptability of that organization. If the firm’s share is valued much more than its earning, it signifies a rising stock. This factor clearly states the relative earnings of a company as compared to the other listed firms.
– Projected Earnings Growth (PEG): The P/E ratio divided by the percentage future growth over a defined period gives the projected earnings. A share with P/E ratio 20 and a growth of 10% for say next one year, has a PEG of 2.
– Price of a share/ sale price of that share (P/S): This factor is the market’s designated value for the sale of one share.
– Price of a share/ Book value of a company share (P/B): This states the theoretical value calculated for a share.
– Dividend yield and dividend payout ratio: Earnings of a firm/ stock value of the share gives the yield for a stipulated period; whereas, a payout ratio is the Annual dividends paid by a firm to its EPS.

A successful investment involves detailed market observation based on the above factors, which are incorporated in the analysis procedure. Warren Buffet of Berkshire Hathaway and Peter Lynch of Fidelity Magellan Mutual fund, are prime examples which tell us that fundamental analysis could play an important role in a person’s wealth creation.