At Youth Investment Group we believe that anyone should have the opportunity to learn to invest . So let’s break down the art of investing and how it can change your life. Investing in the most simple sense, is buying an asset that you predict will be worth more in the future. So let’s kick this off with one of my favourite speeches by Warren Buffet for motivation.
So what is the stock market? The stock market (equity market) is a financial system that lists publicly traded companies on an exchange whereby investors can buy and sell shares of the company. The companies are split into portions (shares) of ownership, and priced for each share. For example, one share of Apple is priced at $276.10. To make money on this share at $276.10, the stock value would need to rise above $276.10.
The Stock value will rise when more investors decide to buy Apple which increases the demand and hence the value of what each share is worth. So in theory, when this stock rises in value you can sell the stock leading you to making a capital gain. Eg. Bought at $276.10 and it rose to $350 and you sold – you’d make $73.9 (26% gain). Hopefully you’re still with me.
Now, let’s talk about how our emotions control the market and how to get started.
You might think the stock market is all about mathematics. Especially when Mathew McConaughey said in the Wolf of Wall Street, “You are dealing with numbers all day long, decimals points, and high-frequency digits.” In a perfect world, the market is about mathematics.
Unfortunately, our emotions, fear, and greed, control the market. Fear is lacking confidence in your investment. Whereas, greed is having too much confidence in your investment.
Investors are fearful when the markets are down (bearish) because your stock or portfolio may be decreasing in value. Thus, you are inclined to sell. Because you fear that you will lose more money if you let your shares keep decreasing (loss-aversion).
For example, if you bought Apple at $350 and it dropped to $300 you would likely sell. Because fear would convince you to sell Apple to avoid losing more money if the share fell further.
Investors become greedy when the markets are up (bullish). Because when markets are up, your portfolio value is generally is increasing. Thus, you are more likely to leave your cash in the company so you can make more money.
For example, if you bought Apple at $276 and it rose to $350, you would unlikely sell. Because greed would convince you to let Apple stock rise higher so you can capitalise on further gains in the future.
How to overcome emotions during COVID-19 and beyond
In a crisis, such as COVID-19, fear, and greed are on steroids. The fear of COVID-19 caused the markets to plummet from late February to mid-March 2020. The markets then surged from mid-March to mid-April causing more investors to buy shares and make money off rising prices. (greed)
If you put emotions aside when investing, you will make more money. So how can you put emotions aside?
1) Long-term investing
- Invest in businesses that will be around in the long-term.
- Start with businesses you know = Blue Chip stocks.
- Long-term investing overcomes fear and greed. Because fear and greed are most-alive in the short-term.
- Like Warren Buffet says, “What is going to happen in a day, month or even a year I don’t know, nor do I believe is important.”
2) Do not blindly follow what the banks, the media, or even your Uber driver tell you.
- “Smart Money” institutions and banks will capitalise on overreactions and execute trades based upon their valuation methods.
- The media creates fear by reporting the worst story.
- The Uber driver/retail investor is often following what the media/big Institutions are saying.
- Solution: “Only invest in businesses YOU understand”- Warren Buffet explains this solution between the 4-6 minute mark.
3) Do not drown yourself in COVID-19 news.
- You trade with information, not money. However, there is too much information.
- Keep it simple. Focus on the news directly impacting your investments.
- 1) Invest for the long term means the daily news becomes less important.
- 2) Read our stock research and articles to broaden your market knowledge.
Starting your investing journey can be the most difficult part, as today young people are flooded with different trading apps and micro-investing funds. So where do you begin?
Firstly, I started out with micro-investing apps as they can be accessed easily on your phone and may be a logical place to start as they are generally made up of ETF’s, managed by fund managers. This allows you to notice the correlation between hearing how the market is going and how your portfolio will change, without having to execute any trades and enjoy a diversified portfolio.
If you have some experience with trading, then you can follow our team’s articles on stocks that hold potential in 2022 to help you get a grasp on basic fundamentals and how key price-sensitive news impacts a stock’s price and value. From there, opening up a broking account to execute trades is the next step, but can be daunting at first. From my experience, I took my first trades on the stock market purely as a learning curve. Over time, you will be able to value companies based on the information available to the public, forming your own strategy as you navigate the world of investing.
This of course is different for everyone and you may need to consult with a financial license holder to determine what is right for you. The one thing certain in the financial markets is risk, and this of course is learnt by all that trade. With risk comes loss and there is no perfect formula to investing.
How can you start trading on the Stock market?
Open a brokerage account. A broker is someone who will buy and sell your shares. Once you have set up an account with a brokerage, you can begin your journey in the investment world. Follow our stock market articles to get access to high quality stock research and commentary.