My intro and guide for getting into investing:
Since I'm really bored after work today (lockdown, and Canadian winter), I wanted to revive this thread with some of my advice for those looking to get into the stock market, since it can definitely seem intimidating at first glance. I'll go over a number of things in this post since, but will focus on how to evaluate a stock or exchange traded fund (ETF), how to diversify your portfolio, and some recommendations for long-term and relatively low-risk growth, and some common FAQs or "do's and don'ts." I will not cover options or day trading, since those are too risky and not recommended for someone just starting out. Also, keep in mind that I'm not a genius financial expert, just some random guy on the internet who likes investing. Do your own research and do not take everything I say at face value.
1. Pick a simple trading platform with low brokerage fees:
I personally use Wealthsimple, since it holds your hand throughout the process of creating your account, and is definitely the most newbie friendly (minimalist interface which is easy to understand, lots of explanations). You are going to want to setup a trade account with Wealthsimple, since the "Invest & Cash" account just puts your money into a externally managed portfolio depending on your risk tolerance. Look to see what options you have depending on where you live (if you are Canadian, setup a TFSA, and calculate your contribution limit aka how much you can put in before you get taxed here:
https://www.moneysense.ca/save/investing/tfsa-contribution-room-calculator/). Trading fees refer to some combination of trade commissions (fee per trade), maintenance fee (cost to maintain your account), and account service fees (cost to withdraw money from your account), and other fees (broker dependent).
However, do your research and read up on other accessible trading platforms (notably Robinhood if you live in the US).
2. What is an ETF? How is it different from a stock?
An ETF is basically a "fruit basket" of different stocks lumped together in one category/theme. Each ETF is broken down into a holding of stocks with different levels of contribution (the amount of each stock in each ETF). For example, "XLK" is a "Technology Select Sector SPDR® Fund", so it has holdings in Apple, Microsoft, PayPal, Master Card, Adobe, etc. You can find ETFs for virtually any category. For example, you can find an ETF themed around green energy, which will have holdings in a wide range of green energy companies. Look at the monthly returns and 5-year chart for each ETF to see its performance, and research the larger holdings (both covered below). An individual stock is just the option to purchase a share for one company, not a whole portfolio. ETFs are great since they automatically diversify your portfolio, which reduces your risk (if one stock tanks, you will lose less since the ETF is made up of multiple stocks).
3. How to evaluate at a stock:
This is the hardest part of investing, since there is an overwhelming amount of quantitative and qualitative information out there, and your job is to work through irrelevant buzz/garbage and look at what matters. In general, valuation is determined by 5 main things: financial fundamentals, news releases/new company developments, "hype" or buzz surrounding the stock on social media (reddit, twitter, ticktock), and unpredictable world/political events that impact the market the company is in. Your job is think about the net impact of each of these factors before making each trade.
I personally like to use Webull (
https://www.webull.com/) to check out companies/ETFs (I'll explain an ETF later), since the interface is clean (unlike Yahoo Finance) and contains all the information I need.
i) Fundamentals:
There is a overwhelming of information here, so I'll break it down to the variables that are actually relevant. Most/all of these can easily be found online using the link I posted or other sources:
EPS (Earnings/Share) -- This tells you the value/return a company gets from each share sold. In other words, how effective the company is at using the money that you put into their stock. There isn't necessarily a "good" or "bad" EPS, just look at the trends across different 3-month periods. If EPS is increasing, the company is using its attracted investments to generate earnings; if decreasing, the company is likely bleeding money.
BVPS (book value/share) -- Think of this as the total value of the company per each share. A way to look at this is the total sum of assets+liabilities (how much the company owns and owes to others). An increasing BVPS means that the company is accumulating capital assets (assets that generate revenues -- an assembly line to make shoes for example) or is facing increasing liabilities (could be because the company is looking to expand, and needs the leverage).
P/E (price/earnings ratio) -- Calculated by taking share price/EPS. In general, a high P/E ratio means that a stock might be overvalued (people are paying a high price for lower earnings), while a low P/E means that a stock might be undervalued and the company is overperforming compared to what its price would suggest.
D/E (debt/equity ratio) -- This looks at how much the company relies on borrowing money in order to operate. In general, as the D/E ratio increases, the company becomes increasingly leveraged on borrowed money, which usually makes these stocks more unstable and risky in the long-run. A D/E>2 is usually a red flag, though smaller companies that are looking to expand often have higher D/E ratios since they need to take out loans in order to grow.
SOE/BS/CFS (income statement, balance sheet, cash flow statement) -- Lots to look at here, but honestly I just look at the cash flow statement to see if the company is hemorrhaging money over the past several 3-month periods.
Beta (B) -- A stocks "beta" measures the volatility or riskiness of that stock relative to all other stocks on the market. A beta=1 indicates a stock with the "most average" volatility compared to the market, with beta>1 and beta<1 meaning more and less risky, respectively. Another way to think about beta is how much the stock wildly swings over a long period of time. Look at the stock's long-term (5-year) charts to see this visually.
ii) Company news and press releases:
This is one of the more qualitative aspects of stock valuation, but is usually as if not more important than the raw fundamentals of a company. There is no way to talk about every possible type of company news that will impact stock prices, but here are some relevant examples:
Some company getting FDA approval for a drug, a clinical trial going well for a pharmatheutical company, an announcement of an attractive new product line or feature, release of encouraging annual/quarterly financial information, a company-sponsored event or conference going well, a merger between companies, a new board of directors/CEO, or other random company actions. For example, if Elon Musk tweet that "Tesla is too high", Tesla will probably fall.
Obviously, this depends on the industry to some extent, and each case is going to be different. But keep an eye out for stories that cover these topics, as they will have an impact on the attractiveness of a stock (look under "News" on Webull).
iii) Hype/buzz surrounding a stock:
This is the hardest to predict, follow, and make decisions on. There is a LOT of misinformation out there, or people intentionally trying to mislead you to buy a stock in order to pump-and-dump the price (buy a lot at once and sell all once the price hits a certain level). Following investing subreddits like r/wallstreetbets/, joining some investment discords, and maybe even asking your friends who invest are great ways to see how people are talking about stocks. Often, even if a company's fundamentals and news is garbage, enough people can follow some ticktock influencer and force the stock to increase.
Take all of the "hype" surrounding the stock with a grain of salt, since it's just random people posting random thoughts online.
iv) Other news and world events:
As you probably know, political events often have a significant impact on investor confidence. For example, invading US government buildings tends to not be encouraging for investors. Anyways, this category is a combination of political, legal, cultural, and global factors. To give some concrete examples, with Joe Biden's election win, green energy and electric vehicle stocks are up, since investors are anticipating tax subsidies and investments into green energy companies. Similarly, New York State recently loosened restrictions for online gambling, which increases the demand for stocks for companies involved in that market.
In general, with this, you are
betting on how society will change in several months/years down the line. Consequently, investors are expecting certain parts of society to change in a way that will make certain companies/industries more demanded. For example, Tesla's meteoric rise is due to an expectation of electric cars dominating the automobile market.
v) Analyst or "expert" opinions and target price ranges:
A target price range is basically where experts believe the stock will be priced after a certain period of time. You obviously want to look for stocks with a favorable price range, but keep in mind that these can change depending on the factors I talked about above.
Analyst opinions or ratings are expert opinions on whether you should buy, hold, or sell a stock. Look at webull's "Analysis" tab to see opinions there. Smaller stocks don't always have these unfortunately.
vi) Overall:
EACH of these factors are important when making a decision to buy or sell; none takes precedence over another. Please consider each of these, and keep in mind that there is a LOT of uncertainty, and can get lucky/unlucky due to factors out of your control (CEO shit their pants during a press conference, etc).
4. How to diversify your portfolio and minimize risk:
Above all else ETFs are great since they basically automatically diversify your investment across multiple companies for you. However, you don't want to buy multiple ETFs within the same industry (I.e., 2 different ETFs within the green energy industry), since these often have similar holdings (same companies appearing in both), and have strong positive correlation between each-other (if one rises, the other rises; vice-versa). Be careful to reduce the overlap of companies in your ETFs to diversify as much as possible.
You also want to diversify across multiple industries. For example, owning stocks/ETFs in natural resources, green energy, AI technology, automobiles, etc. A good rule of thumb is to not have more than 10% of your portfolio in one individual stock, and no more than 25% of your total investments in one industry.
5. My recommendations -- relatively safe ETFs and stocks to start with:
IOO (BTC iShares Global 100 ETF): takes the top 100 large-cap (big) multinational stocks. Has mostly safe holdings in things like Apple, Johnson & Johnson, Amazon, and Microsoft.
ARKF (ARK Fintech Innovation ETF): holdings in companies leading financial tech innovation. Riskier holdings (smaller companies), but has had excellent past performance.
HERO (Evolve E-Gaming Index ETF Hedged): holdings in firms that invest and help grow in e-sports and e-gaming, and just videogame companies in general. Safe holdings in Nintendo, Capcom, NVIDIA, Ubisoft, etc.
VEA (Vanguard FTSE Developed Markets ETF): an international ETF that takes the best performing and largest (most mature) international companies. Wide-range of holdings in companies like Toyota and Samsung.
SNE (Sony): positive cash flow, very high analyst opinions, above-average beta (<1), positive recent earnings news.
GM (General Motors): shift to working with electric-vehicle startups, relatively good value, strong analyst ratings.
6. General "do's" and "don'ts":
i) Avoid panic selling: daily fluctuations can and do happen, but don't freak out because your portfolio lost 5% of its value in a single day; it happens. Generally, if you portfolio is diversified, it will bounce back. Don't compulsively check your portfolio every hour because you are worried, you will be fine in most cases.
ii) Be patient: investing is a long-term commitment, and you should expect to see 6-8% returns on your portfolio if you do your research and avoid panic selling. You aren't going to get rich overnight through investing long-term; rather, you are building up your portfolio overtime. 6-8% may not sound like much, but it really adds up over the years.
iii) Avoid penny stocks: these are mostly a trap. A lot of the time, hype will be generated by a group of people looking to "pump and dump" the stock. In other words, they will convince a bunch of people to invest and increase the price/share, and sell it as soon as it rises.
iv) Don't try and "time" the market: you won't win. The best way to beat the market is to be patient, realize that there will be some volatility, and let your assets grow. Waiting until 4 days from now to invest because it's the "right time" is silly, and will not amount to much.
v) Don't yolo your life savings into a meme stock because some 15-year-old on /r/wallstreetbets/ told you that it will rise "to the moon!" Basically, don't give into hype and make compulsive buying/selling decisions.
Anyways, that's my advice. I hope it's helpful and please feel free to respond to this if you have any questions.
