You want to start investing, but you have no idea of where to start. Where do you begin to learn investing?
In the beginning it can seem overwhelming.
Should you invest in bonds, stocks or a combination of both?
If you begin with equities should you start with bigger companies or smaller?
How do you pick the stocks in which you want to invest in the first place?
The default option is to invest in an index fund – I’ve been talking about that solution before.
There is a small problem with that solution though and that is that it is boring.
Therefore I suggest that you choose three to five stocks that are publicly traded and you begin to follow them.
The good news is that you only need to look at this four times a year.
Set up a spreadsheet where you track key numbers like Price, Earnings, Current/Total Assets and Current/Total Liabilities.
You can do it like this:
With just these five indicators you will be able to draw conclusions about the financial health of the companies that you are following.
Have they had an exceptionally bad/good quarter and why is that?
Then after a few quarters you will understand the Balance sheet better.
You will know how the companies are making their money and you will be able to calculate ratios like Working capital (Current assets – Current liabilities), Equity (using the Fundamental accounting equation) and the Price to earnings ratio.
One of the best ways to start investing is to follow a handful of companies. In the US companies traded on the stock exchange are required by law to submit a financial report every quarter.
Just keep track of the companies’ earnings, their assets and their liabilities and you are on your way to become a financial analyst.