You may not wear an Armani suit or drive a Bentley. You may not yet know the difference between an EBITA and EPS, or may not have any clue at all why people buy one particular stock rather than another.
This is where you start your education on the stock market, one-step at a time.
First, a question. What type of investor are you?
There are different types of investors in the market.
This kind of investor is looking to make an x amount of returns on his investments in a three to nine month period. He invests in rising mid-caps. i.e. a medium sized company with a market capitalization of approximately £4 billion down to £500 million. His appetite for risk is low and returns are medium.
A long-term investor, on the other hand, may still invest in mid-caps but for a 1-3 year period. He will wait for returns and again low-risk appetite. A carefully chosen basket of stocks will yield higher than average returns and he is a happy camper to spend very little time in his monthly review of stocks.
A value investor is someone who has infinite patience and a very long-term outlook of the company and the market. The time span can be anywhere from 3 to 30 years. They prefer to invest in large caps (> £4 billion) or a mid-cap with solid diversified businesses. A value investor is not looking for a percentage return on investments. i.e. 10 – 30%. He is looking for a 5x to 100x return on investment over a long time. These are the wealth builders.
Penny stock investor
There is also a Penny stock investor, someone who invests primarily in penny stocks. They choose from the low caps, i.e. market capitalization of less than £500 million. Typically, these stocks have very low prices on their shares.
The risk exposure of investing in such companies is very high as the company may be a new one, not have a good product or not have any kind of stable track record. So dealing with any kind of penny stock should be only in very short or short terms. Buying a huge quantity of shares and forgetting them for a decade will not yield any magical results to you.
Day Trading means buying and or selling of stock on the same day or in a very short period. You make money by the difference in the price of buying and selling. You can either sell high first and buy low later, or buy at low and sell at high. Both are possible.
Traders make money by volatility in the stock prices. Trading is essentially making use of opportunities that the market throws at you. Because the prices are a reflection of the market sentiment, the risk exposure is high.
The easiest one to start with is to be a short-term investor. Pick a sector to study and choose your company based on the fundamentals of the company. Do not go with your gut feeling. You need a lot of experience in the stock market before you can get a pulse of the market.
Do not invest in isolation.
While I encourage you to spend time alone making your selection of stock etc. find a group of fellow investors to join. It could be a social club or a meeting group where other small investors meet. Have a few conversations to understand how they invest, what they have learnt, etc.
The market sentiments determine the movement of the stock price. So it is always better to stay in touch with fellow investors to gain knowledge, learn from their mistakes and find an outlet for your own questions and concerns. You might even learn about other ways of investigating a stock.
A word of caution: Do not get into a habit of asking for or following any ‘tips’ on any stock. Stick to a disciplined approach to investing and you will make money in the long run.
The infographic below was created by CityIndex and provides a good summary of type of traders/investors: