The Stock Market has been the source of major success, and major failure. There are those that have profited billions, and those that have lost millions. It has been considered a blessing by some, and a curse by many. But there is nothing bad about the Stock Market. Those that lose either adopted infavorable tactics, became greedy, or didn’t conduct proper research.
In this guide, I will use this Stock Market Investing Guide to teach you how to invest for the long-term.
What are Stocks, and Why Are They Popular?
When you make the decision to invest in the stock market, you make the decision to invest in a company. Don’t view it as a piece of paper, don’t view it as a stock. View it as a company. When you buy a share of a company, you now own part of that company. If you buy enough shares of stock, you could play a vital role in that company’s success. It would take a long time to reach that point, however.
The primary point of succeeding in the stock market is understanding the formula you need to take to success. These “get rich quick” schemes that you see on advertisiments are often scams. And in some of these situations, people do profit greatly in the short-term. But for that one person that made it, they don’t show the 200 people that failed. If you’re going to choose that formula, just go to Vegas and gamble. Because that is essentially what you’re doing when you try to get rich quick.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” -Paul Samuelson
You need to adopt the mentality of a long-term investor. You will build your wealth year-by-year, and allow it to multiply. Consistency is the key to success.
The Stock Market is popular because it doesn’t take much time to invest once you become knowledgeable. You need to invest in yourself before you invest in companies. Read books such as “The Intelligent Investor” by Benjamin Graham. Learn the lessons taught in it. You will need to pour hours and hours of research into stocks in order to understand what you are getting into. If you don’t know what you’re doing when you invest, you aren’t investing. You’re speculating.
“An investment in knowledge pays the best interest.” -Benjamin Franklin
You often hear horror stories about people failing in the stock market. Why do some fail, and others succeed? It isn’t a game of chance. The loser either didn’t do the proper research, or had a faulty temperament when they made the decision to invest. There is a chance that something unfortunate happened, but there is no chance that anyone would completely lose in the stock market if they adopted a good investment strategy and applied it properly.
I will dive into the three primary long-term stock market investing strategies. I will touch on the Growth strategy and Value strategy, but I will focus my time on dividend stocks, because this is what I understand the most.
Growth Stock Strategy
The growth stock strategy is the investing method that most “newbie” investors adopt. I’m not saying it is a bad method, it has worked for many people. However, this is where many people fall victim, because this is as simple as saying “That stock has gone up, it should go up more”, or “I see that company everywhere, so the value should go up”. That’s not the way it works.
Growth stocks are stocks that are expected to receive capital appreciation over time, instead of receiving income from dividends. This is when the share price that you would originally buy the stock at goes up, and then you sell when it is at a higher price. It is a simple formula, and it is simple – once you understand it.
There are a lot of factors to take into consideration when analyzing a growth stock, but that is a topic for another day. I will give the basics on what to look for:
- Market Cap
- Current Assets
- Total Assets
- Current Liabilities
- Total Liabilities
- P/E Ratio
- Net Sales
- Cost of Sales
- Gross Income
- Operating Income
- Net Income
You can find this information in the Income Statement and Balance Sheet of a company. It is also important to read the 10-K Form to find out the analytics about a comany and how it operates.
Value investing is similar to growth stocks, in the fact that they both rely on capital appreciation.
The primary focus of value investors is finding undervalued stocks in hopes that they will rise to what they’re worth. This is why it is vital for you as an investor to understand how to research, and know what to look for in a stock.
Ah, my favorite. We might spend a while on this topic. This isn’t just a stock market investment strategy, this is the dividend stock investment strategy.
Dividend stocks take a completely different approach from growth and value investing strategies. Growth and value stocks are fairly similar in the fact that they both rely on consistent capital appreciation over the course of many years. However, dividend stocks rely on consistent passive income that can be reinvested to increase your amount of dividends over time. I will go in-depth about this.
Well-established companies typically have dividends that are paid out every three months, and reason for this is simply capital return. They want potential shareholders to invest in their company, and dividends are a very attractive way to do that. There are growth companies like Amazon that purely focus on growth, and they succeed. But there are companies like AT&T or Coca-Cola that primarily focus on paying out dividends, and succeed.
If you look at a company, you may find that they have a 2-6% yield. This is the ideal yield for you to buy shares at. This is because a low yield indiciates that the company may put capital appreciation as the priority over dividend income. A higher yield is typically unsustainable from a typical dividend stock. What makes a dividend stock profitable is yield-on-cost.
Dividend growth investing is when you rely on a company to raise its dividend payout every year. Eventually, after a company raises its dividend for a number of years, your yield-on-cost will go up to an exponential amount. I’ll show you the math.
Cardinal Health is a popular dividend stock. I will show you the math if you would have begun investing in 1989, until now. That is thirty years of investing in this stock, and I will show you what an initial investment of $10,000 could do.
In 1989, Cardinal Health’s quarterly dividend payout was $0.002. That is $0.008 a year. Shares costed $1.56 at the time, which gave the company an extremely low dividend yield. That doesn’t sound like much at all right? You aren’t receiving much dividend income from that.
So here’s what we calculate:
- Average Annual Capital Growth Rate – 28.19% (Present Price – Past Price / Past Price) ($45.55 – $1.56 / $1.56)
Now, this isn’t entirely accurate. It actually grew at a much faster rate, because Cardinal Health grew to $91.52 in 2015. It grew rapidly in a metter of 25 years. But then it fell 50%. Many would consider this to be bad, but is it? If you’re a dividend growth investor, the share price doesn’t matter. If anything a lower share price should be reassuring, because now you can buy more shares. As long as the fundamentals of the company stay strong, there is nothing to worry about.
- Average Annual Dividend Growth Rate – 239%
This is an example of find a pennystock that turns into a great dividend stock.
Is this recommended? No. Trying to find a pennystock that will turn into an amazing company is doubtful. But I can show you a current established company, and a realistic view of how it will grow.
The reason you want a well-established company is because you know it will succeed if it has good fundamentals. Pennystocks is a gamble, well-established companies are an investment.
By using a Dividend Reinvestment Plan calculator, we can calculate how much you would have made if you reinvested your quarterly dividends into Cardinal Health. We will only be using the rates from the past five years, because the growth will obviously be less once the company has become well-established.
- Initial Investment: $10000
- Current Price of Stock: $45.55
- Average Dividend Growth Rate: 11.9%
- DRIP: Yes
- Taxable: 15%
These are the results. Understand that this is if the company continues to raise its dividend 11.9% every year, and you reinvest your dividends.
You MUST reinvest your dividends to receive good results. If you don’t reinvest your dividends, the amount of shares will stay the same, and you won’t be able to utilize the effects of compound interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” -Albert Einstein
If you don’t understand what compound interest is, I already made an article about it which you can find here:
As you can see, there is a snowball effect that forms. You start out getting $422 annually from dividends your first year. It grew to $1746 annually by the tenth year. $19116 the 20th year. Then you see the snowball effect start. The yield-on-cost goes up. You paid the price for a 4.22% yield. But hypothetically, the dividend was raised 11.9% every year. So as it goes up, while the starting yield for those who are investing in the future will be low, yours will be much higher, because you paid a lower price.
Year 29 you received $699,391. Year 30 you received 1,180,919. That jump was huge, because now your portfolio is huge. This is the magic of dividend investing.
The chances of the company consistently raising its dividend 11.9% every year is completely unrealistic, so it is unlikely to receive these results, but even a fraction of these results would provide a full-time dividend income. I hope now you see the potential of dividend investing. If not, I have more articles on this website.
Index Funds, Mutual Funds, and ETF’s
These three types of stock investments are more conservative. You can still receive dividend income from these, depending on the funds you choose to invest in.Let’s discuss the three:
A mututal fund is simpy a group of stocks paired together in one fund. So instead of investing in individual stocks, you would invest in a mutual fund that comprised of multiple stocks.
An index fund is similar to a mutual fund except it is designed to track indexes like the S&P 500.
An ETF is similar to a mutual fund except it can trade like a normal stock.
I personally don’t have any experience with any of these , so you will need to do your own research on these if you’re interested in these stocks. I would personally recommend an index fund over a mutual fund however, because they typically outperform mutual funds both in dividends and capital appreciation, although they may bring slightly more risk. There are so many options in thee funds, there is no set standard. You can’t truly generalize it. However, some popular index funds will be listed below:
- Vanguard Dividend Appreciation Index Fund
- NOBL ProShares Index Fund
- SPDR Dividend ETF
- iShares Dow Jones Select Dividend Index Fund
If you don’t understand the stock market, or have no interest in understanding the stock market but still want to take advantage of the dividend income opportunities, then I would suggest these funds for a lower risk-lower reward deal.
There are funds that aren’t don’t product income for dividends, but through capital appreciation. In-fact, dividends are a minority in the funds, as in individual stocks. So if capital appreciation sounds more attractive to you, do not be deterred, because there is a plethora of growth funds out there.
Fundamental Analysis vs Technical Analysis
The last point I’m going to make in this stock market investing guide is that you need to decide between conducting fundamental analysis or technical analysis on a potential stock.
Let’s start this by saying: you need to analyze a stock before you invest. Don’t go based off of emotion, or what analysts say.
“Know what you own, and know why you own it.” -Peter Lynch
“Peter Lynch doesn’t advise you to buy stock in your favorite store just because you like shopping in a store, nor should you buy stock in a manufacturer because it makes your product or a restaurant because you like the food. Liking a store, a product, or a restaurant is a good reason to get interested in a company and put it on your research list, but it’s not enough of a reason to own the stock! Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.” -Peter Lynch
Once you’ve made the decision to analyze, you need to choose between fundamental and technical analysis. Typically, fundamental analysis is better for long-term growth. Ask Warren Buffett. Ask Peter Lynch. Ask Charlie Munger. They don’t try to time the market through technical analysis, they leave that to the day traders. They are interested in long-term growth, and that’s why they are sitting at the top as multi-billionaires. If you understand the fundamentals of a company, you can be confident in their management, and know that minor setbacks are temporary. In time, they will come out on top, as will you.
The factors you saw at the beginning of the article are factors of fundamental analysis. You can learn what these factors mean anywhere: youtube videos, courses, books, blogs. The most important thing is to have the drive to do your own research. You have the internet at your fingertips, resources are everywhere!
The second most important thing with stock market investing is temperament. Control your emotions. Be patient. Too many people have sold because of fear, and bought because of excitement. You cannot trust your gut, you can’t let your emotions control you. Do your own research, don’t believe the analysts. Trust the company, know the company. Understand what they stand for, and be prepared for the long haul.
In this stock market investing guide, you learned about growth stocks, value stocks, and dividend stock investing. We went in-depth about how you could develop a full-time income from dividends, by utilizing the dividend reinvestment plan, and patiently waiting for your returns. We also went over index funds, and how they could be beneficial for someone who isn’t as confident in their investing skills. I hope that you got what you were looking for, and if you have any questions, let me know at firstname.lastname@example.org, or in the comments section below! I thank you for checking out my stock market investing guide!