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How to invest in the stock market - a beginners guide

While ago when I decided to invest in the stock market I found myself very confused because there is so much information around, and many times competing against each other, so many people sharing bad tips without haven’t read a book on investing or not have read any companies balance sheet, and lastly the so-called robo-advisors/investors.

That being said I decided to create a personal and simple guideline on how to invest in the stock market.

This is based on Peter Lynch (former manager of the Magellan Fund at Fidelity Investments) work.

Questions to ask:

  • How the balance sheet looks like? good? bad?
  • How likely are they to continue to succeed in the next 10/15/20+ years?
  • Is the company innovative?
  • Are they a monopoly?
  • Are they a leader in the industry?

Quality stocks (fundamentals):

  • Great earnings growth
  • Undervalued
  • Cash Rich
  • Low Debt
  • Growing sales

Stock categories:

  • Fast growers
  • Slow growers
  • Cyclical
  • Assets play
  • Turnarounds

Fast growers:
Always slow their growth, they will run out places to go

Slow growers:
The market is already saturated with the product and there is not much space to grow

Cyclicals:
Experience long down cycles may become turnarounds once recovered but will probably be down again, good cash flow and low debt are reasonable enough to buy (and sell when high) because otherwise if the economy or industry is bad that can cause the company to go bankrupt.

Assets play (hidden assets):
Companies that have good assets that the stock market doesn’t know yet or is not well known to be a good asset, One example is Disney where they started a tv network, the park (which include the land), selling toys.

Other examples would be patents, company name (how big the company is).

Turnarounds:
Companies/Stocks that are “forgotten” or not so popular where prolonged periods of prices and the activities being low, there is not a huge amount of buyers but the company has potential to reverse its fortune determined by one or some things independent of industry or economy getting better. Always do a balance sheet check, do they have enough cash for the next 12/24 months? do they have debt due soon?

Things to take in consideration:

PE ration (Price Earnings):
The PE ratio can be thought of as the number of years the company will take to return the investment assuming the earnings stays constant. PE will tell if the stock is expensive or not, the higher the PE more expensive the stock relative to the company future earning power, The lower the PE the cheap is the stock.

A good rule for a fair price stock is: PE about the equal expected growth rate over the next 3 to 5 years if the PE is higher than the growth expected the stock is normally expensive if PE lowers the stock is cheap.

Dividends:
Dividends profits paid back to shareholders usually every quarter.

It’s a great way to measure a company success particularly slow growing company but this not always the case because if the company is spending all it’s earnings in the dividends the company has no money to invest in other areas.

Fast growers will likely not to pay dividends because they use the money to invest back in the company. Slow growers will likely to pay out profits and dividends.

Debt:
Another great way to know if a company is good for the long term. If the company has more debt they can’t pay it’s not a good sign. Now if the company has 3/4 times more cash than it’s debt it’s a good sign

Other tips

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Published 26 Jun 2018

Software Engineer focused in Javascript applications
Michael Lancaster on Twitter