*whosh* I haven’t cut my hair for like 6 months I’m gonna have like hair I can just flip around like crazy One day Soon 6 more months You’ll see Alright, so, I’m gonna start off this video by saying that, I’m no expert and no guru when it comes to stock market investing Far from it actually I do have a good amount of experience I started investing in the stock market like 12 years ago, in college So I do have a good amount of experience, but by no means an expert I do have enough knowledge that a lot of friends and family come up to me and they ask me, how should they get started in stock market investing? and what type of stocks should they buy and what type of resources should they look at to learn more about stock market investing and I usually just tell them I learned through some books and they should just go and read some books to learn about stock market investing but, I realized that that’s not really a great answer so, I decided to sit down, come up with the guidelines that I use when I invest in the stock market and give some guidelines for new people on how they should invest in the stock market So it should be a pretty interesting video It should be pretty useful to a lot of people and I just want to also give a quick disclaimer that stock market investing in general, is not exactly a science and a lot of people have different opinions and anyone who has a different opinion than me is WRONG DAMIT! Just kidding I can definitely be wrong myself I formed opinions over the past 12 years that I’ve thought a lot about I do think they’re right and I do have confidence in them, but I do also realize that they also can be wrong So let’s get right into it First off, what is a stock? A stock is simply just a representation of a company and a stock share specifically represents a part ownership stake of that company So for example, lets say that you and 100 of your closest friends own a company called kitty day care corporation *snap* Actually, let’s say you and 99 of your closest friends own the company So, 100 people total own the company Okay, back to the video *snap* Lets say that each one of you own an equal percentage of that company, so each one of you own 1% and some people want to sell their percentage of the company and some people want to buy So what you guys do is you guys split that company into 100 equal shares So each share is worth $1,000,000 divided by 100 or $10,000 Each share is worth $10,000 So now everyone is free to buy and sell to each other for a $10,000 share But lets say that some people want to sell a percentage of the company so instead of dividing their company into 100 shares you guys decide to divide the company into 1,000 shares Now each share is worth $1,000,000 divided by 1,000 or $1,000 each So now you guys are free to trade at $1,000 increments right? or lets just say that you guys want to divide the company into 1 million shares So now each share is worth $1 So really the amount of shares that you guys divide the company into is really just arbitrary It doesn’t matter So you can see that the stock price isn’t really an indication of how much the company is worth It’s just an indication of how many share are out there It doesn’t really matter if the stock is at $1 or $10,000, it doesn’t mean the $1 stock is cheap or the $10,000 stock is expensive In this case, they just represent different ownership percentages of the same company So I just bring this up its just one of the most common mistakes that I see beginners make They think that just because the stock is worth $5, it’s cheaper than a stock that is worth $500, but this is not the case So yeah The stock price doesn’t matter So what really matters is the overall value of the company so for example, Kitty Day Care Corporation right? Let’s say that company is worth $1,000,000 But lets say an investor wants to come in and they want to buy the company for $2,000,000 So that would be considered an expensive deal for the new investor or instead, lets say that the investor comes in and they offer $500,000 for the company that’s worth $1,000,000 That would be considered a pretty cheap deal for the investor if everyone decides to take that deal So now that we know what a stock is, how do we start investing? So there’s a couple things I would recommend that you do before you start investing The first thing is if your company offers a 401k match, you should contribute to your 401k up to the match the 2nd thing you should do is you should pay off all your credit card debt and then
the 3rd thing you should do is you should open a Roth IRA and this is where you’re going to start investing, into your Roth IRA So what is a Roth IRA? So a Roth IRA is simply an account that you can deposit money into and you can use that money to make investments where those investments are invested in a taxed advantaged way There’s also something called a traditional IRA and I’m not going to get into the difference between what a Roth IRA is and what a Traditional IRA is because that’s going to require a totally different video But just know that a Roth IRA is better than a Traditional IRA They’re both good, but the Roth IRA is better The main benefit of the Roth IRA that the profits are not taxed within the Roth IRA So any stocks that you sell within the Roth IRA, any dividends that your receive through the Roth IRA are not taxed as long as you leave your profits within the Roth IRA until you are at least 59 and a half years old So you might be thinking OMG I DONT WANT TO WAIT THAT LONG TO RETIRE 60 YEARS OLD THAT’S SO OLD! Okay, Look I hear you alright? I don’t plan to retire at 60 years old either I want to retire earlier than that, but first off any contributions that you make into your Roth IRA can be withdrawn at any time, tax free and penalty free So lets say that you are 25 years old and you contribute the maximum to your Roth IRA until you are 45 years old So at that point you probably would have invested close to $150,000 into your Roth IRA and lets say that there’s like a really great real estate investment opportunity over here You can take that money, $150,000, out of your Roth IRA, put it into your real estate investment and it’s tax free, you can use your real estate investment as part of your retirement strategy So it’s not like your money is not accessible and there’s even a ton of ways to withdraw your money penalty free, but not tax free Whereas if you had invested in a regular taxable account, you would have been taxed anyway So there’s really no disadvantage of using a Roth IRA and there are a ton of advantages, but this is not supposed to be a video about the advantages of Roth IRAs It’s supposed to be a video about how to stock market So enough about Roth IRAs Just the main takeaways Use them, don’t listen to YouTubers that don’t use them they either special circumstances or they’re ill informed Alright so, to set up your Roth IRA you need to pick a brokerage So you can’t really go wrong these days with picking a brokerage because they all offer free trades now I use TD Ameritrade You can use other brokerages that have free trades There’s Chase YouInvest There’s Fidelity There’s ETrade There’s some other ones out there So you can use pretty much any one of those and you can’t go wrong but I also wouldn’t use Robin Hood because they don’t offer Roth IRAs right now The next thing you want to do is you want to pick an investment So I think that 80-90% of the people out there, especially if you are a beginner, should invest in index funds There is no homework involved, you just pick your investment and you just leave it there on autopilot So what is an index fund? A index fund is also known as an exchanged traded fund or ETF and its a type of investment that tracks the performance of a group of stocks So for example, you can have an index fund that tracks the performance of S&P 500, which is a collection of the 500 largest companies in the U.S. Index funds kind of are similar to mutual funds except that mutual funds is also an investment, but it’s an investment that is managed by a mutual fund manager, a money manager that actually picks individual stocks The advantage of an index fund is that it tends to outperform the individual investor and almost by definition it gives the average return of a professional investor but after you factor in the fees that a professional would charge, it also outperforms the professional investor So over a 10 year period, if you look at a low cost index fund it will outperform a similar mutual fund, which like I said is managed by a professional money manager, over 80% of the time When you pick an index fund one of the most important factors to look at is the expense ratio, which is the fee that the index fund charges in order to keep the fund running Vanguard has some of the best index funds out there, if not the best index funds out there because they charge a very low expense ratio usually under .1 percent This is really good compared to mutual funds that usually charge between 1 and 3 percent Some of the index funds that I recommend are VOO, which tracks the performance of the S&P 500, VBK, which tracks the performance of small cap growth companies, and VNQ which
is a real estate investment trust index, which is a collection of companies that manage real estate So even though I think that most people should invest in index funds, I still think it’s important to have a general idea of how to value a stock So I’m going to go through some of the things that I look for when buying a stock So the 1st and most important thing you want to look at is the companies P/E ratio or Price to Earnings ratio, which basically tells you how many years it would take for you to get paid back if the company stopped growing it’s earnings and this makes a lot of sense because let’s say you are out there and you want to buy a company, outside the stock market The first thing you want to ask is how much is the company selling for? The next thing you want to ask is how earnings is that company making per year? or profits per year? So lets say say you come across a company called Kitty Day Care Company and it’s selling for $1,000,000 and Kitty Day Care Company makes $100,000 per year So you take the price, $1,000,000 divide by the earnings, $100,000, and you get the P/E ratio of 10 It’s the exact same thing when you look at stocks For stocks, you look at the stock price and you divide by the earnings per share, and you get your P/E, Price to Earnings ratio You can also take the market capitalization, which is how much overall company is worth divided by net income, which is the profit of the entire company and you’ll get the same number So when we talk about if a stock is expensive or cheap we’re really talking about P/E. So if a company has a high P/E that means the stock is expensive If a company has a low P/E that means the stock is cheap So what’s a high P/E and what’s considered a low P/E? So I would say anywhere under 5 to maybe 13 would be a really good P/E in the stock market right now but that might be an indication that there is something wrong with that stock There may be something going on in the company like maybe that company isn’t growing anymore or there may be even risk of bankruptcy Anywhere between 14 to 21ish would be considered reasonable in the stock market right now And anything 22 to 30 plus would be considered expensive in the stock market, but that might just be an indication that that company is growing at a fast rate or that’s just a high quality company The best strategy in my opinion is find a high quality company, at either a reasonable P/E, or even a slightly expensive P/E. Charlie Munger says it best He’s the investment partner of Warren Buffet A great business at a fair price is superior to a fair business at a great price Companies with really low P/Es are hard to analyze because there’s usually something going on with the business that is hurting that business Whereas if you buy a high quality business at a reasonable P/E most of the time you can just set it and forget it I just wanted to note that I’m recording this in the midst of a pandemic so P/E ratios are really high right now because company earnings are affected by lock downs and high unemployment rates and it might make more sense to look at 2019 P/E ratios to get a better idea of how a company would perform under normal circumstances Also, P/E ratios are inversely correlated with interest rates With low interest rates, people more willing to pay for stocks because going through the risk free route, like buying treasury bonds is just not worth it The returns are too low If interest rates are high, then it pushes P/Es lower because people would just rather not buy stock and go through the risk free route instead So like I said, you want to find a high quality company with a reasonable P/E, but how do you know what a high quality company is The first thing I look for a their brand Do they have a great brand? and the next thing I look for is their executive team, I want see if they have a great executive team, especially the CEO I kind of go over how I determine if they have a great executive team later The next thing I look for is their financials and the things I look for specifically is, one, their profit margin I want to see if their profit margin is larger compared to their peers the next things I look for are their revenues, net profit and shareholders equity I want to see all 3 of these number grow over time and obviously the faster the growth the better If those things don’t make sense to you right now, that’s okay I’ll explain a little bit later and I’ll show you where to find those numbers So the first type of stock that I would recommend people buy would be in a company that is, one, large and also profitable because it’s easier to access information of a large company
and a company that is profitable has a P/E ratio Whereas a company that is not profitable doesn’t have a P/E ratio For a company that doesn’t have profits, the analysis is similar Except that analyst would try to predict how much profit a company would have once the company matures and they would try to come up with a reasonable price that people would be willing to pay for the stock today So where do you find all this information, that I mention previously, on a company? The first place you can look at is Yahoo Finance Here you can find the basic information like the stock price, the market capitalization, which like I said, is what the overall company is worth You can find the P/E ratio You can find the dividend rate and if you go to the financials Here, it gets a little bit more complicated so pay attention here especially You can go to the income statement where you can find gross profit, which is their revenue minus cost of goods sold or an easier way to think of this is just their profits before expenses You can also find net income, which is also known as net profit and yeah this a little confusing, so basically you can think of gross profit as profit before expenses and net income or net profit is profit after expenses Alright so, on the balance sheet, you can look at the break down of all the assets, which is everything that adds value to company So assets add value to the company And there’s the liabilities, which is everything that takes away value Liabilities take away value from the company You can also see how much cash they have You can see their account receivables, meaning how much money their customers owe them, you can see their inventory You can see debt levels and other liabilities You can also see their stockholders’ equity Stockholders’ equity is all their assets minus all their liabilities so obviously you want to see their stockholders’ equity grow over time The next place I would look at would be on YouTube and I would try to find CEO interviews of the company you are interested in purchasing stocks of What I would look for in the CEO is I would try to gauge if that CEO is capable of extraordinary accomplishments and I would see if that CEO is particularly insightful or if I could learn something from that CEO If that CEO is a great teacher a great communicator or if that CEO is just an empty suit that cares about numbers or if that CEO is just a salesmen So after you do those things you want to go on the companies Investor’s relations site and you want to listen to the latest financial’s earnings call So you want to do this, but you wont get a ton of value from the actual content because as a new investor they’re just going to talk about a lot of financial mumbo jumbo stuff that you won’t really understand, but what you really want to listen to is you want to listen to the executive team and you want to see how they answer questions from the other analysis You want to see if they really know their shit basically If they know their business inside and out if they seem competent and if they seem like effective communicators On their investor’s relations site you can also find their 10-Ks, which is their annual filings and you can see their 10-Qs, which is their quarterly filings You can find a lot of the information from their 10-Ks and 10-Qs through Yahoo Finance, but sometimes there are errors on Yahoo Finance so if anything looks weird on Yahoo Finance then you can just go on the investor’s relations website and verify using the 10-Qs and 10-Ks So now that you did all this research and you decide that this is a company that you want to invest in, lets go ahead and actually buy some shares of the company but quick note though, before you buy, just know that if you do a ton of research, it might biased you towards buying stock in that company because you would have felt like you’ve done all this research and wasted your time if you end up not buying any stock So just know that it’s perfectly fine to do a ton of research and end up not buying any stock Alright, so there are two ways to buy a stock Through a market order, and a limit order A market order buys the stock at whatever the market price is So if there’s a stock that is trading at $100 currently and you put in a market order, then you’ll end up buying that stock for $100 per share Pretty self explanatory A limit order on the other hand, doesn’t execute until the stock reaches the price that you set for it So if a stock is currently trading at $100, you can set a limit order at $95 and you will
not end up purchasing the stock unless that stock reaches $95 or lower So I buy almost everything with a limit order and there is a chance that if you have a limit order too low that it may never execute and you would have lost the opportunity to buy a stock at a certain price So what you can do to reduce your fear of missing out is you can have a market order just to buy an initial position and then have limit orders to buy additional shares at a lower price If you do use limit orders you should set them at Good ‘Till Canceled or GTC and that way you’ll have that limit order stay in place for the next 90 days or until you cancel Boom! There we go If you followed everything in this video then you are now in the market So a little bit of parting advice, don’t try to time the market just invest in the market for the long term and don’t be like me How was I supposed to know that Tesla would be at $2,100 right now I would have SO MUCH MONEY! *sign* alright, I’m good! Okay so, a couple of other advice, you can go ahead and actually read some books like I did I think books are helpful, but I think a better approach would just be to watch book summaries on YouTube on the books that you want to read It’s just a more efficient use of your time and you can just get the key takeaways with a fraction of the time, like 1% of the time that it would take to read a book The 3 best books that I’ve read on investing were, number 1, was A Random Walk Down Wall St. number 2, is the Intelligent Investor and number 3 is Warren Buffet’s Biography called The Snowball So that’s my beginner’s guide the stock market If you have any questions just comment below and I’ll probably respond unless the video is like 10 years old Otherwise, thanks for watch and I’ll see you in the next video!