Stock Investing Basics - 3 Simple and Easy Steps to Get Started

By: Zainul Anuar

Stock market investing gains its own popularity recently. But many beginners are losing money investing in stock than making any profits. The truth is, investing in stock doesn't have to be that complicated. In fact, it has a lot to do with simple common sense than a rocket science. Believe it or not, with these simple steps, everyone can invest in stock successfully.

Pick Quality Stocks

High quality stock must be supported by strong business performance. You can use some important financial ratios to discover the hidden gems. ROE, EPSGR and D/E are the ratios you can't invest without. However, you still need to evaluate the stock qualitatively before betting any money into it. For example, the stock must have great business model, serve profitable niche market and have unique selling point than its competitor. Else, consider buy other stocks.

Calculate Intrinsic Value

Intrinsic value is the actual value of the stock. It can be the same or different from the market price. It is your job to calculate intrinsic value so that you remain vigilant and always ready for the next opportunity. For example, if the current stock price was 90% less than its intrinsic value. You can either use dividend, cash flow or earnings discount model techniques to value stocks. I myself use combination of earnings and dividend discount model most of the time. The reason is, they are quite simple, straightforward and the data required are easily accessible.

Margin of Safety

Margin of safety is critical in reducing risk of losing money in stock market. The idea is to buy stocks when the market price is much cheaper than its intrinsic value. It can be either 40%, 60% or even 80% discount from its intrinsic value. It helps you made profits from the day you buy the stock, just like when you buy real estate properties for rental income. Besides, you'll be getting huge compounded return if you manage to buy the stock much cheaper than it should be as you able to maintain the initial investment at very low price.

Investing in stock is not something new, but so many novice investors just don't know how to invest in stock market the right way. If you stick to the steps mentioned above, you are not one of them. In fact, you can make more money than your fund managers did. However, it takes discipline and systematic approach to be profitable in stock investing.

Investment
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