Stock Investing Advice FAQs

Answers on how to invest in stock!

This stock investing advice provides answers to FAQs about stock market information.

If you have a question on how to invest in stock, or how to start investing that has not been answered here, contact me with your question.

I will provide an answer for you.

What is the stock market?

It is the place where investors can buy and sell stock. That is, where investors can buy and sell parcels of shares in companies that are listed on the stock market.

I would like to know how to start investing?

There are three aspects to investing in the stock market ...

  • Are you READY
  • Getting SET and
  • GOing for it.
Look here to see what each aspect entails.

How do you buy a company's stock?

Buying and selling a company's stock is normally done through a stock broker. The broker charges a commission or brokerage fee based on the amount of stock you wish to buy in the company.

What is an IPO?

An IPO is an Initial Public Offering. IPO stock is stock that is being listed on the stock market for the first time.

Private companies are not listed on a stock exchange. When they do wish to list, they must offer a prospectus to prospective stock holders outlining detail about the company's activities.

How many stocks should I have in my portfolio?

It depends on how much time you have to manage the portfolio. I would suggest from 10 if you do not have much time, to 20 if you have time.

The idea is to have sufficient stocks across a range of market sectors to achieve a reasonable degree of diversification.

I normally try to keep each stock representing not much more than 5% of the total value of the portfolio, which includes the cash holding in my investment account. So I look to have about 20 stocks (20 X 5%).

Should I reinvest the dividends I receive from a company in more of the company's stock?

Dividend reinvestment means that your dividend is automatically reinvested in the company's stock through a dividend reinvestment plan (DRP) that the company may choose to operate.

This is a voluntary option that you may choose to exercise. I do not use dividend reinvestment as the price of the stock at the time may be overvalued and buying more stock would not be a good investment.

I prefer to take the dividends I receive and hold them in an investment account until I can purchase undervalued stock.

Is dollar cost averaging a sensible investment strategy?

Dollar cost averaging involves investing a fixed amount of money each month or more in the stock market or in a managed fund. The idea is that when the share price is high, the regular amount buys fewer shares and when the share price happens to be low, the regular amount buys more shares.

Since you are buying more shares at lower prices and fewer shares at higher prices, you are effectively averaging down the overall price of the shares.

This stock market investing strategy is intended to reduce exposure to risk associated with making a single large purchase.

You may want to guard against the stock prices dropping shortly after making your investment. Therefore, you spread your investment over a number of periods rather than trying to time stock market investment with a single purchase.

However, research has shown that investing a partial sum over a number of time intervals generally results in worse performance compared to investing the entire sum at one time. Hence, I don't do it!

What in your opinion is the best financial ratio to take notice of?

I look first at the return on equity that the company achieves from one year to the next. Return on equity (ROE) is calculated by dividing the net (tax-paid) profit by the sum of shareholders' 'ordinary' equity and expressing this as a percentage. It is a measure of profitability as distinct from profit

I do not normally invest in a company unless it has a high (greater than 15%) return on equity, and it has achieved this over a number of years.

What should I look for in the Income Statement of a company's Annual Report?

Four things I look for are ...

  • revenue or sales growth - a minimum benchmark of 5% growth per year on revenue or sales over the last few years
  • operating margin - the bigger the margin the better
  • earnings per share growth - a minimum of ten percent per annum over a five-year period
  • profit margin - above average (and hopefully growing) net profit margins for their sector.
If I could only pick one, it would be profit margin, because as I see it, it incorporates the others.

How can I invest in the stock market without buying and selling individual stocks?

Invest in an index mutual fund that tracks the performance of your stock market. Index funds have lower fees than other types of mutual/managed funds because of the lower management costs involved.

To Conclude

For more stock investing advice, examine the articles in the Site Map to see which topics may interest you.

The related article below provides information on important stock market terms.

Related Article

Placing stock market orders - requires knowledge of some particular terms. Check them out here to make sure you know what they are.

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