I am interested in investing but have no idea where to begin. What are some tips for people just starting out from those more experienced?

If you are interested in investing you should check the site Quora out. There anybody can ask whatever they want and you get insightful answers from qualified people. It’s a good way of getting more informed.

This is what the person is asking: “I’m interested in investing. I’m young, no debts, budget ~5k. I wanted to know whether I should opt for more low-risk options or go for day trading. Not really trying to get rich quick. I won’t need to spend any money for at least a few years, and I’m thinking more in terms of long-term, for retirement or house funds.”

First of all, forget about day trading. In order to a day trading operation successfully you need much bigger funds than those you have at your disposal. In a decent day traders world your whole budget is looked upon as small change and not anywhere near what you would need to be successful.

What I suggest that you do is to take a “value” approach where you honor the power of compound interest. What this means is that you will reinvest your dividends into the same stock and over time you will increase your wealth significantly. As an example, an interest rate of 10 per cent (which is not unthinkable in the stock market, price appreciation and dividends combined) will double your money in seven years.

What kind of stocks you invest in depends on your temperament. If you are so inclined you can look into small-cap stocks and find really cheap ones based on their recent earnings. Here it gets a little bit tricky because the free financial web pages only give out a momentary price to earnings (P/E) ratio – while what you are really looking for is consistency in earnings and cash flow. The only way to really figure this out is by going to the annual reports and write down the numbers either in a spreadsheet or in an old-fashioned notebook with a pen.

Otherwise I would stick to the bigger companies and make sure that I do not pay too much for what I get. The argument about the P/E ratio above also holds here. In order to make sure that the earnings of the company that you are interested in are consistent, you can go to your local library and pick up a recent edition of Value Line and figure this out.

Welcome to the exciting world of investing!

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How can I start learning the basics of investment? What are the books that I should read?

The first thing that you need to consider when you want to learn the basics of investment is that almost every investor is a saver down below.  You will never be rich by spending your money on lattes at Starbucks. The only way to become rich is to begin to save regularly at an early age – the earlier, the better. In this article we will therefore lay out the basics of investment and give you a few tips on books to read to begin with.

If you have trouble with spending money spontaneously and want to learn the basics of investment here’s a little tip that you can use:

If you are going out shopping, decide in advance what you want to buy and estimate the approximate cost of the things you want to buy. Then bring that money along plus a little extra, but don’t bring your credit card. Leaving your credit card at home will prevent you from shopping many unnecessary things.

When that is all out of the way, let’s get into some of the specifics.

Sure, you can be rich by speculating, but chances are that you won’t. Successful speculation involves buying and selling securities at the exact right time and that is very difficult to do consistently. Therefore, what I suggest is to look into companies with a steady cash flow and a good dividend yield. The cheaper you can get them, the better it is.

How do you determine the price of a security?

How cheap a security is, is determined by the price to earnings-ratio. If, for instance, you have a company that cost 100 $ while at the same time earning 10 $ then the P/E-ratio is 10.

If you want to buy apples on your local market, you know that the cheaper it is, the better. Somehow that quality does not apply when people are buying securities. Instead the more a stock falls, the more people tend to sell it instead of taking advantage of the opportunity. The facts are indisputable, the cheaper you buy a security, the more value you get. Similarly, when prices have gone up it means that you receive less value for your purchase.

Therefore, always look at the predictability of the cash flow. Are the company’s earnings something that you can count on or do they fluctuate? Is the dividend yield increasing over time? If it is it is generally a sign that the company does have enough cash to pay out to shareholders. Otherwise you can go in and look at the company’s free cash flow – which is defined as the operational cash flow minus CAPEX-spending – and see if they generate enough. The free cash flow is the money that is readily available to the company to pay out dividends. Otherwise they have to borrow money, which disturbs their debt structure.

What books should I read?

• The Intelligent Investor by Benjamin Graham. This is considered by many – myself included – to be the bible of value investing. It gives a blueprint, not only for finding good stocks to invest in but also for keeping your head cool when the market is in turmoil. A true classic.

• The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks. This book is full of praise for defensive investing which may prove to be the soundest piece of advice that you can get.
  

• The Little Book That Beats The Market by Joel Greenblatt – This book lays out a formula for how you want to approach the market and how to play it in your favor. Of course it is easier to invest if you are feeling the wind is in your back.

Conclusion:

This is a short top three list of our own favorite financial books in order to learn the basics of investment. Don’t just read them, but also try to learn the wisdom that they are teaching. That way you are almost guaranteed to become wealthy one day.

If you have read this whole text and liked what you’ve read we would like to ask you a favor. That is to leave a comment or question on the subject down below.