A Beginners Guide to the Stock Market, Part 3

nina-iraq Guy Norman, stocks and shares

Guy Norman

by Guy  Norman

I believe that stocks are the best tool for the long term investor. Investing is a completely democratic operation. Irrespective of gender, race of religion – as long as you have access to some money and basic know how you can get involved.

NB: I am only going to attempt to explain investing in stocks, not any other investing instruments. Also, the information below is designed to be a guide. It doesn’t constitute advice re investing in any specific product or stock. Always consult an expert before you invest your money in anything.

 

Stock Picking

The most obvious way to invest in the stock market is picking your own stocks and buying them. There are some strong disadvantages to stock picking in comparison to investing in a passive fund.

There are serious risks to picking and choosing your own stocks. This is because many corporations go bankrupt, suffer serious fraud or encounter a competitor with a new technology which completely outmatches them. Industries and corporations are large and complicated – not easily understood by even an expert and can suffer extreme, unpredicted change very rapidly. The future is uncertain and many single stocks have become worthless as their corporations have gone bankrupt in the past and many more will do so in the future. It is very unlikely that every public corporation invested in by a large passive fund will go bankrupt. So if you pick your own stocks in which to invest you face a danger that the investor in passive funds effectively does not, ie losing all of your savings. The best route to potential t long term investment returns that the stock market offers is investing in low cost, passive funds that track the stock market for a very low fee. To beat the average return gained by investors in the stock market you will either need to be of above average investing expertise, or to take a lot of risks and get lucky. You are well advised not to attempt the latter option and should be realistic about your chances of achieving the former!.

Secondly the logistics of picking your own stocks can be time consuming and expensive. To buy and hold stocks you will probably need to pay a stock broker for each transaction you make. These fees can very quickly take up a large amount of the returns on your investments. To achieve a diverse portfolio (essential for the non-expert) you will need to buy quite a few stocks. The right fund will automatically diversify your holdings and you will only need to pay your stock broker once to buy that fund. To build your own diverse portfolio you will need to pay a fee for each stock you purchase, which can quickly become expensive.

Thirdly, you should also be aware that researching industries, gathering the information, learning to analyse financial statements, reading the annual reports of numerous potential investments is all very time consuming.  Again, investing in a passive fund takes the pain out of this.

So what are the advantages of picking your own stocks? I need to answer that as I am no expert and do try to pick my own stocks and outperform the market without taking undue risk. Primarily I find it enjoyable and interesting. Investigating financial statements, corporations, markets and managers is a fascinating hobby. It also gives me skills and insights I believe will be useful for my career. Finding valuable businesses that the market has under-priced is something like a treasure hunt and it is rewarding when you come close to succeeding. I also find it empowering. I like, knowing in detail, how my money is being invested and the fact that I am responsible for it. I also like learning more about the corporations that are (and will be) increasingly dominant in our national and global economies and therefore our lives going forward.

If you do wish to pick your own stocks in which to invest then you need to educate yourself . Find my beginner’s list of topics below:

  • Accounting
  • Statistics
  • Economics
  • Finance
  • Taxes
  • Financial Law

If you do decide to pick your own stocks in which to invest then I recommend investing only a portion of the savings you wish to invest into the stock market into your own stock picks. The rest I would put into a passive stock fund.

A Brief Introduction To Valuing A Stock

To value a stock you need to value the corporation the ownership of which it represents. The value of a corporation is in how profitable it is. We prefer our corporation’s profits to come sooner rather than later. The value of a stock therefore is the sum of all of its future discounted profits. The profits of each year are discounted more when they are further away in time.  This fairly simple calculation would be covered in any good finance textbook or introduction so I will not go into detail here. However I will explain that you will need to estimate/ predict the profits the business will generate 5, 10, 15 and even 20 years from now in order to value a stock. It takes real expertise to know what even a relatively stable industry like car manufacturing will be like in 10 years time. Accurately predicting the future of a business with an entirely new business model like Facebook would seem to be impossible.

How Can I Find A Stock Broker In Iraq?

I mentioned previously that to buy a stock or a fund you will probably need a stock broker. For a fee such an organisation will contact the market, find a seller of the stock you want to buy and pay them your money for that stock. Competition for the provision of stock broking services can differ from region to region and thus the quality of these services is likely to differ. A guide to the stock brokers available in Iraq would be beyond the scope of this article but a quick google found these websites which I hope will be useful.

http://www.warka-bank.com/?427dacca3eca8903f5aceefbb86d6d2efc545ea0c66393bad9604c247faa6f27d85a

http://www.iraqstockx.com/default.asp

http://www.iraq-businessnews.com/category/investment/

http://www.rs.iq/

http://isxbroker.com/

These links were found in 10 minutes time and no diligence has been done on these organizations. For the safety of your investments you will have to do this yourself.

I hope my article has introduced you to the fascinating and financially freeing process of investing in stocks. A warning before you go: Investing in the stock market will always create the risk that your savings will reduce in value. My introduction to these topics has been just that, an introduction. Before you invest your savings into the stock market you should consult an expert.

 

More information:

 

Part 1  – Why Should I Invest In The Stock market? What Is A Stock? How Is The Price of a Stock Related To The business? Isn’t the stock market unreliable.

Part 2Where Do My Returns Come From? How Long Should I Invest In The Stock Market? The choice of different funds.

Free Course: If you want to find out more, a free course about investing in the stock market is offered by Udemy.com.https://www.udemy.com/value-investing-code/

 

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