Before we start exploring the idea of investing in the stock market and explaining how to invest it would make sense to understand what the purpose and fundamentals of the market are, and why companies go public.
What does investing in the stock market mean?
When one puts money in a company that is in the stock market he becomes a partner in that specific company. To understand why a company would go public, and why a company would have an interest to be public so that everybody should be able to invest in them, let’s understand what function the stock market has.
Let’s take a famous company, for example: Microsoft. Microsoft went public in the late 1980s. The reason it went public is, in order for them to grow the business, the company needed an infusion of cash, and the most efficient way to raise large amounts of money without loading the company with debt, is to take on equity partners. Obviously, selling a partnership in a company that is worth $200 million dollars is a hard thing and no company has so much cash laying around. So that’s the reason why companies sell shares on the stock market. It gives them the ability to pool a lot of money from ordinary people and together they all become small partners. This way the company gets its money.
The first thing is to understand that the stock market is not a casino. There’s an old saying that two people met in Shul and one asks the other “how was the market today?” The other guy gives a sigh and says “the market really fell heavy.” So the first guy’s response is “what can we do? It’s the only legal gambling that opens every day at 9:30 in the morning.” However, in a casino everyone knows the house always wins, you might score some wins, but in the long run, the market will win. The same goes for the stock market, you might win in the short term as a casino, however, in the long term the market will win.
There are many different strategies on how to invest. Some of it being: value, growth, momentum, dividend, etc. One of the key characteristics in investing is to have a game plan and staying true to it. Every investor that buys a stock needs to know what his exit strategy will be. Imagine investing in a real estate property and you have no idea how to monetize it, and what the exit strategy will be. Will I keep it for long term or for short term? Fix and flip? If there is no exit strategy at buying time, the investment is designated to fail.
The same should be said with investing in the stock market. Whatever strategy you have there must be a clear-cut strategy. What is the reason for my investment in this company? Is it undervalued? Does it have a strong growth catalyst? Will it be bought out? And finally, what will my exit strategy be when I am ready to sell? If you do not have a plan, it will kill your returns. Most of the money lost in the stock market is because people don’t stick to their plan.
In later articles, we will implore some strategies on how to implement them, and when to sell.
Now the question on how do I start? Which brokerage to use.
In the last couple of years investing has become very cheap. It was started by Interactive Brokers. and then Robinhood which allowed one to buy and sell for free. In the last year, Charles Shwab, Fidelity, TD Ameritrade all became basically free. In regard to which trading platform is better, there are pros and cons to every company but it makes sense to stay with one of the big companies, for example Charles Schwab or Fidelity.
What strategy should you use for the stock market? Check out this post!