The stock market can act as a complicated topic for young high school students beginning to learn about finances. As the son of a former Equity Research Analyst, the person who delivers advice about certain stocks to investors, and the current Vice President of Investor Relations, the employee who speaks to investors about the company stock trends – my family introduced me to the market at an early age. In fifth grade, I bought my first stock with loaned money from my grandfather and continue to trade up to this day. Using information from investment websites and knowledge from my family members, I put together five suggestions for those with a new interest in investing.
First, I have seen a recent reactionary trend among young investors where they overreact to the price of the stock. At $199 in June 2018, I purchased five shares of Facebook even though the company was at the height of the Cambridge Analytica scandal. Since I first bought stock, I have held it through the difficulties of the technology market. In 2019, it dropped to below $120 per share due to a low earnings outlook but the long-term holding paid off when it jumped to over $300 per share at the end of 2021. Unless actively trying to make money in the short-term—between a few weeks and a month—long-term investment is worth the wait.
Just look at Amazon, one of the largest companies in the world. From September-December 2018, at an all-time high of $1900 per share and trending upward, the company dropped to around $1300 per share, prompting many people to sell. However, since then, Amazon has not faced a significant decline and now sits close to $3500. Think about the major money made by investors that either bought a stock at the $1300 mark or held onto stock purchases from before. From what I have learned, the market will always rebound and a long-term wait will be worth it.Embed from Getty Images
Second, do not pick a company to purchase based on the name. Always look at the numbers first instead of saying, “I have heard of Apple, Amazon, and Meta so those seem like solid purchases.” However, small-cap stocks (stocks with smaller values) can be the best to make money. According to Investopedia, four numbers to investigate within a stock are PE Ratio, PB Ratio, Free Cash Flow, and PEG Ratio. The PE Ratio—price to earnings ratio—compares a share price to the per-share earnings. Usually, a lower PE Ratio is better because it shows the price an investor will pay for $1 worth of earnings. The Price-to-Book Ratio compares a company’s market value to its book value. The net value of a company is the net difference between the total assets and total liabilities. Similar to the PE Ratio, if a PB Ratio is low, that usually means the stock presents a good opportunity because the market undervalues the company’s worth. Free Cash Flow, a substantial number that indicates a stock’s performance, is calculated by subtracting the cash outflows supporting a company’s operations from the total amount generated. Obviously, make sure to look for a high number because it is the amount of money a company can invest and distribute to shareholders without roadblocks. Finally, to calculate the PEG Ratio, companies take their PE Ratio (the one discussed earlier) and divide it by the growth rate from their earnings. Depending on the company outlook, a higher number could show that they have growth potential but could also scream overvalue. Always be careful when analyzing the numbers and look at a chart if unsure.
Third, always look to the outside world, scouting advertisements and listening to conversations. Whether watching television, browsing the internet, or taking a drive, new advertisements can begin a frenzy. Just last week, I noticed an advertisement for Newsy, a service that relaunched in October 2021 that provides unbiased news headlines. Their owner, E. W. Scripps (SSP), has had a positive gain of 15% since that release. For a company that has fallen 20% in the past five years, that represents a positive trend in their business. YouTube, Facebook, Twitter, and Instagram act as the most popular space for advertisements, and viewers should pay attention to the public companies for investment opportunities. Also, listening to conversations between people about popular products or new companies on the market can present another opportunity for investment. Tencent Holdings, the owner of Epic Games, has risen over 50% since the release of Fortnite on July 21, 2017, which presents another example of a hot product leading to a higher stock price. Young people talked about this game often and the purchases of materials for the game made the company boatloads of money.
Similar to my first suggestion, if you are not invested in the stock and its share price takes a massive fall, always think about purchasing a part of that company. Unless associated with a possibility of bankruptcy, which is an extremely rare occasion among large companies, expect a large rebound higher than previous prices. Big money comes from these types of examples because if a company lowers its guidance for future quarters but beats those numbers, investors will come in with big money. Obviously, purchasing stock at a medium price brings colossal gains, but buying at an even lower price helps professional investors make their first millions. Before my purchase of Marathon Petroleum in July 2020, it had dropped to below $20 a share, one of the lowest points in its history. However, I chose to wait to see if a rebound was in store for the company and officially bought it at $38. Though it seems like a minimal difference, I could have made an extra two hundred dollars off that stock if I purchased it in March. That difference makes the difference between amateur and professional investors!
Finally, always follow company news and listen to conference calls for stocks you are currently in and stocks you are thinking about purchasing. Especially listen to the guidance numbers that the executive officers provide and how they answer questions from investors. Sometimes it can be hard to understand all the information, so try to read articles from reputable financial sources that explain why the stock acts in a certain way after they post the results. Though it may seem unimportant, add the stocks you are interested in purchasing to a watchlist and read the articles associated with them. Apple Stocks is usually a reliable source because they collect articles from all over the world. Going back to my last suggestion, stocks usually drop after bad earnings results or bad guidance so look for drops as a buying opportunity.
As always, the stock market is unpredictable and can make moves that no one sees coming. However, these five suggestions should help make it a little easier to pick stocks and decide when to sell them. For the second part of this two-part series, I will interview Mr. Simon Paterson (CFA), an equity analyst at T. Rowe Price. His professional advice and recommendations should be something to look forward to.