Investing in Stocks - 1: Introduction
Thanks to the wealth of information and tools on the Internet, investing in stocks is becoming easier. As a result, more and more individual investors are taking a stab at managing their stock portfolio themselves.
At the same time, the amount of information is often confusing and overwhelming. Our goal in this series of articles is to streamline and simplify the process of stock investments. We look at both understanding stock investments and efficiently managing them. This article is the first in the series.
We're learn the basics and explore some important concepts, strategies, and techniques. Armed with this information, we will be able to research, and most importantly, understand the science and art of investing in stocks.
We'll start by defining our objectives for investing in stocks (so that all subsequent actions are driven by these objectives). Next, we'll create a high level strategy to get us there. Then, we'll cover the steps to implement the strategy.
It is important to remember that investing in stocks is a very complex subject. There are hundreds of companies whose only business is help their clients profit from the stock market. Our objective in this series is to understand the basics so that, even if we use a stock broker and an investment specialist to handle our stock investments instead of doing it ourselves, we learn enough to feel comfortable interacting with them.
Disclaimer
Any information here is for informational purposes only. Nothing here is meant to be or to be considered as investment advice. Any examples provided here are just that — examples. They are there to simply illustrate the concepts. Each of us have different investment needs and circumstances. To understand what's best for your unique situation, consult with your investment planner and tax specialist.
We also won't be recommending specific stocks to buy or sell. That's not the goal of this series of articles. Instead, we'll be learning how to evaluate stocks ourselves (from our own unique perspectives) to help us select the ones best suited for us.
Our Objectives
Our overarching objective when investing in stocks is to maximize our gain and minimize our risk and expenses. Having simple and unambiguous objectives helps us not get distracted by techniques and philosophies that masquerade as objectives. You may have heard some of them: sector trading; large cap vs small cap; foreign vs domestic stocks, etc. To be clear, we have nothing against any of these techniques and philosophies; in fact, we may use any or all of these as needed, to the extent that they help us achieve our objectives. We simply don't want to assume any such philosophy and limit our objectives.
The other component of our objective is to be efficient. We want to spend only a minimal amount of our time in the stock investment process; we don't want the process to consume our daily lives. To address this, we carefully select stocks that allow us to stay invested longest and avoid volatile ones. We also try to automate as much as possible.
Our Strategy
Let's take a look at what our high level strategy will be:- Learn to analyze and identify potentially good stocks and understand the events that occur during a stock price's life cycle. These help us make independent decisions, instead of blindly following others.
- Be data-driven, not impulse-driven. To do this, we create an investment profile that lists all our parameters (buy/sell thresholds, expected gains, total funds available, etc.; we'll explain what these terms mean as we go along). We make sure that all our actions and decisions are based on this profile. (For example, if we've decided in our profile that we should sell a stock that has dropped in price by 15%, we do just that; we don't panic when the stock price has dropped by 10%, nor hold on to it even after its price has dropped by 15% or more, hoping that the price will eventually go up.)
- Wherever possible, we automate the investment steps using computerized tools, to both save our time and to not miss important events. Unlike us humans, computers don't get bored or tired and miss events!
- Don't simply ape what famous investors do: We're not them. This is not a glib statement; at the amount of money they trade, the game is very different — their trades actually influence the companies whose stock they're trading in and, sometimes, even entire markets. Also, their losses, if and when they occur, are not a significant portion of their life's savings. Thus, they are usually better able to absorb the losses than we might be.
Implementation Steps
With our objectives and strategy clear, let's create a process (a set of steps) to implement our strategy. There are several stock investment strategies around; the ones we'll be describing are proven to be effective. As always, please use the concepts and strategies that make sense to you, and discard the ones that don't.
Here are our steps:
- Creating an investment profile: we create a profile of parameters to describe our investment preferences and to guide the investment process.
- Analyzing stocks: we use the above profile to start analyzing and picking stocks to invest in. This step answers the "which stocks to buy" and "when to buy" questions.
- Buying stocks (also known as "taking a position"): this is when we actually buy shares of the stock. During this step we decide on the "how many shares to buy" question.
- Selling stocks: we learn about the stock price's life cycle and when to sell a stock. This step answers the question "when/whether to sell a stock."
Summary
In this article, we just started learning about investing in stocks. We defined our objectives and created a very rough, high level strategy. Subsequent articles in this series will flesh out each of the steps in implementing our strategy.