4. CONTENTS
Introduction 1
Chapter 1: Why Invest? 4
Chapter 2: Introduction to The Stock Market 10
Chapter 3: What You Need to Get Started 13
Chapter 4: How to Buy and Sell Stocks 20
Chapter 5: How to Create Passive Income with Stocks 25
Chapter 6: Investment Strategies 29
Chapter 7: Becoming a Smart Investor 31
Chapter 8: Additional Resources 35
Author’s Final Words 39
5.
6. INTRODUCTION
Investing is an effective way to make your money work for you without
putting any effort, and most importantly, look to potentially build wealth.
With smart investing, your money will outpace inflation, resulting from
different catastrophes that will impact an economy. And despite these
problems, your money will increase in value. Keep in mind that I use the
phrase “smart investing” you will see why soon.
I have gone through millionaires’ biographies and read through articles on
the internet about the habits of wealthy people.
Do you know one thing that is consistent in all of these? That is in these
biographies and articles? Investing. These guys all made one investment or
the other.
So investing is the secret but not so much of a secret of wealthy people. The
stock market provides a convenient platform to begin investing.
The thing is a lot of people invest and make money off it. You might have
heard or even read some success stories, and at the same time some
disappointing stories.
But one thing I have learned is that what separates the guys that invest and
make a lot of money out of it and those that lose all their money is based on
one single phenomenon: their goals.
This influences every single step you are going to take on your path to
becoming a successful investor. Your goal could lead you, with the right
resources, to make smart investments. This means that if your goal of
investing differs from that of Robert Kiyosaki, you are not expected to buy
the same stocks as him or invest as much as him. Your objective differs and
consequently, the steps you will take to reach your investment goals will
differ. In this book, I will teach how to invest in stocks, buy them online
towards the GOAL of producing passive profits.
You are probably wondering if this isn’t the goal of every investor. Well,
yes and no.
Yes, because, well, every investor wants their money to work for them.
7. No, because making a profit is not the end game for some investors. After
trading the stock, they go on to try out other profit-making ventures. Some
people invest as a way to build a retirement getaway.
Also, an active investor spends all his income and years trading. They call
these guys day traders.
The main object of this book falls in the second category of the people I
mentioned. I am going to take you through the basic steps of investing,
knowing the stocks to buy, and exactly the way you should buy them
towards making passive profits. So, while you engage in other ventures,
you earn money without so much as lifting a finger. Ten years from now,
your investment will continually pay you while you do nothing. This
includes not panicking when the market goes south and the perfect time to
sell if you need to.
Simply, you can continue your 9-5 jobs, including that side hustle, while
you invest as you slowly stack wealth.
Don’t worry, I understand the complexity of investing. The terminologies
will make you rack your brain so hard it will produce a headache. I went
through this myself and have no intention of allowing you to go through it
also. This is why I use very simple terms as I take you through the steps of
learning how to invest the right way. Each section also contains a glossary
for terminologies I can’t avoid using to better help you learn. It will feel
like you are going through an instruction manual, not the complicated ones,
as you digest all the information thoroughly.
I am going to share insight from some of the best investors and analysts
who possess the same mindset and ultimately similar goals.
These guys aren’t just the best because the world regards them as such; you
will learn from them like I learned the right ways to invest. It includes the
tips and tricks involved that helped them make passive profits in a stress-
free manner without all the knowledge in the world that some will require
you to master before you enter the world of investing.
So, sit back, relax as you gradually learn how you can create passive profit
through investing from start to finish.
9. Why Invest?
Before you learn how to invest, you need to first learn the reason for it.
Wondering why? Well, understanding why you have to take action usually
does two things:
1. Prevent you from taking the wrong steps
2. And most importantly, urge you on towards the end.
But seriously, why do you need to invest?
10. Benefits of Investing
Your savings account isn’t enough
Saving money is pretty important, but it is not quite enough to create
wealth. You could slowly build wealth in your savings account or through
an investment in the money market account. Your choice. However, if we
want to be realistic, after saving for like 6 months to a year, you will still be
left without the income that you actively earned. This still makes your
financial independence shaky and a long way from securing your future.
Investing in the markets offers you many potential advantages. It allows
your savings to be enough. Enough to save as emergency funds as you
strategically build wealth.
Passively compound earnings towards building wealth
Besides savings account not being enough, investing also provides the
platform to passively build wealth. The higher growth potential of investing
is mainly due to the power of compounding (check out chapter 5). With
savings, you actively compound your salaries. Unlike investing where the
same thing happens just a bit differently. You passively compound,
specifically, earnings not salaries. That is, the money you get from investing
your salaries. Let me explain better.
Compounding occurs when your investment generates dividends (earnings),
which will then be reinvested. These dividends then generate more earnings
and so on. That is the more you reinvest, the higher your profits and thus
earnings. So, simply, compounding is when investments generate dividends
and are continually reinvested to produce more earnings.
For example, if you chose to invest in a dividend-paying stock, you might
want to consider taking advantage of the power of compounding by
reinvesting the dividends.
A huge opportunity to beat inflation
With investing you are also able to beat inflation. If you simply leave your
money in a savings account, think ten years from now, will that amount be
worth as much? I don’t think so. That money will decline in purchasing
power due to inflation. However, with investment, your money inflates as
the prices of goods inflate. Although reported inflation is a bit low
11. nowadays, the actual inflation is high when you look at healthcare and
education expenses increasing faster than the reported inflation.
For instance, banks in Canada don’t even pay 2% on your savings deposit.
Imagine that! it is not even up to 2%. This goes for most banks in the world.
This means that if you do not invest, your money will most definitely lose
value over the years. To insure yourself and thus protect your future against
this situation, you must consider starting making investments, which will
help you beat inflation.
It is tax-efficient
Apart from beating inflation, investing can help you in saving taxes. For
instance, accounts such as the 401k, TFSA, RRSP, Roth IRA, and a lot of
others out there have either lower taxes or none at all. This is the
government's way of reducing the responsibility of funding their citizens
during retirement years. So, they take little or no tax, so you can save
enough money for your retirement. Compare this to your monthly income
from salaries where the government taxes every penny out of you. Now,
which is better, save or invest?
Yes, you probably now have a good idea why you should invest. But like
you must know now, investment is not a smooth ride. However, certain
steps could help you avoid some of the difficulties you will experience on
that ride. Topping our list is to start investing as early as possible. Let me
tell you why this is very much important.
12. Why start now?
Early on, your expenses are either low or moderate
If you are in your early 20s, be honest, life is a bit inexpensive. If you are
above 30, compare your situation now, and let’s say 5 years back. You can
tell there is a difference in your expenses. The older you get, the higher the
amount you have to spend. That’s how life works. If I imagine how life was
for me 5 years back, I just shake my head. I was able to save more and had
fewer reasons to spend. But now, I have a long list of the stuff I don’t just
like to buy but need to buy. Things like insurance, gas, electricity. Before
you could share these with your roommate now it is all you. Then talk about
adding marriage to the list. You get what I am trying to say? When you
invest early, you have enough to throw into a stock without worrying about
your budget for the next month or two. Take advantage of your youth, and
invest your income. Compare a guy who begins investing in his early 20s to
someone in his early 40s, who would you think becomes a young
millionaire first?
You become a creditor
Being in debt tops the list of ruining one's aim to becoming financially
independent. However, when you invest early you get to turn the table and
become a creditor instead of a debtor. Early on, investment is useful.
Having surplus money invested will help you avoid debt. With smart
investment at the appropriate age, you have surplus money to give to others.
I don’t mean simply give out but lend, and you can make an investment out
of that by charging interests.
You slowly build up your risk tolerance
Here is another reason why you should consider investing now. As you
grow, your appetite for taking risk grows. You grow to tolerate more risk
over time. Wondering why? Because you have ridden out recessions and
financial storms over the years. It is like saying “I have seen it all.” This
increases your risk tolerance because you can all but predict how the market
will turn out after a hit. I am not saying take all your money and throw it
into any investment. No, not all. It’s about investing early and smartly. That
is something you will learn in this book. Keep in mind that compound
13. interest needs a lot of time to work towards something substantial, and
taking higher-risk investments is part of the package.
You get to plan for early retirement
My previous question: between a 20-year-old and a 40-year-old, who both
began investing at the same time, who would you guess retires very early?
Early age investment increases the probability of attaining financial stability
at a relatively young age. Saving for your retirement from your 20s rather
than when you get to your 40s is better. Life is more challenging after
retirement. So, making retirement plans now leads to a happier and
comfortable life when you eventually retire.
We have seen why we need to invest, and why we need to get started as
soon as possible. But where exactly do we start?
14. How the Majority of Wealth in the World is Made Through
Markets
There are two kinds of millionaires: self-made and those born into wealth.
Regardless of this, they have one thing in common. This is something
called multiple streams of income. That is multiple streams of making
money, multiple assets, and ultimately multiple investments. These guys
become wealthy by taking advantage of the market. Financial independence
goes beyond receiving salaries. It is difficult to grow wealth simply by
being an employee and saving a certain percentage of your salary.
Jeff Bezos built wealth by being an entrepreneur and investing in the
market.
Elon Musk became a millionaire with Tesla and SpaceX.
The same goes for Charles Munger, Warren Buffett, and Larry Wilson. I can
keep going on for hours, but you get the idea.
These guys took advantage of the market to build wealth that will sustain
their generations to come. I know these are a couple of big names. But
every millionaire didn’t achieve that status simply by receiving checks or
being on someone's payroll. They invest, and when they are ready, they set
up their own businesses. Are you ready to make a passive profit while you
slowly build wealth? Take advantage of the market. You know why
investing is important. You also have the information that indicated you
should start now. Start now by building this wealth through the market.
Now, why don’t we learn about the stock market?
Terminologies Breakdown
Dividend-paying stock: Every stock comes with dividends. However,
several companies don’t release this money to their shareholders. In this
case, your shares only increase or decrease in value depending on the
company’s performance. Dividends come from profit, so the company
reinvests the profit in innovative projects. If the venture is successful, the
company market value will grow, consequently, your shares’ worth will
grow. Dividend-paying stocks come from companies who regularly pay
profits made to their shareholders at a given period.
15. 401k: A 401(k) is a savings-like account that you deposit into towards your
retirement. It is a defined-contribution retirement and tax-advantaged
account offered by employers to their staff. This means that if you regularly
deposit cash into the account, you will pay fewer income taxes. Wondering
why it is called 401k like me? Well, it was named after a section in the U.S.
Internal Revenue Code.
TFSA: A tax-free savings account (TFSA) is a tax-free account in which
interest earned, contributions, capital gains, and dividends are not taxed.
Although it is called a savings account, a TFSA does hold investments like
securities, mutual funds, and bonds. It was introduced by the Canadian
government in their 2018 budget to help their citizens save for various
purposes throughout their lifetime.
RRSP: A Registered Retirement Savings Plan (RRSP) is a type of financial
account available for Canadian citizens for holding savings and investment
portfolios. It is a retirement savings plan to which you, your spouse, or
common-law partner can contribute. Your earnings in the RRSP are tax-free
as long as those earnings remain in the plan. However, you will be taxed for
any payment received from the plan.
Roth IRA: A Roth IRA is another retirement account in the United States,
which is not taxed upon distribution as long as you meet certain conditions.
Roth IRAs come with a couple of key benefits, such as tax-free growth and
without minimum distributions. A Roth IRA plan could be seen as a better
alternative to a 401(k) plan, due to its flexible investment vehicle and a
more improved tax benefit. Want to take advantage of both? Invest in a
401(k) account until you reach the matching limit, then proceed with a Roth
by funding the account until you reach the contribution limit.
17. Introduction to The Stock Market
The stock market is where investors connect to trade company shares
otherwise known as stock. Anyone, including you, can invest in the stock
market, and you don’t need any certification that permits you to trade.
Regardless of this, the stock market is a whole new world, and knowing
how it is, how it works, and especially its dynamics will allow you to
maneuver your way through eventually making smart investment decisions.
18. Dynamics of the Stock Market
You must have read headlines that indicate movement in the stock market.
That is, it moved up or down. The situation of an economy typically affects
companies' shares. How investors are running frantically to sell off their
investment to minimize loss. All of these are a daily norm in the stock
market world. Know that investors who trade stocks or hold them for the
long run hope to make a profit either through this up and down movement
in stock prices, dividends, or capital appreciation with time. In some
cases, it could be a combination of all three. This depends on your
investment goals.
This is basically how the stock market works. However, if you intend to
take more advantage of the market, you need to understand more than just
the basics. The stock market operates very much like, let’s say, an auction
house. Let me explain. While the economy and political events play a big
part in how the stock market moves, other big players are the traders and
investors. Investors either as buyers or sellers negotiate prices to make
trades.
Now, an exchange platform is where this negotiation takes place. For
instance, the Nasdaq or New York Stock Exchange. Companies go on to list
their shares on these exchange platforms through an IPO. Investors go
ahead and buy these shares in quantities, depending on what they can
afford. This allows companies to raise funds to innovate. I hope you are
getting the picture now. When these companies make profits after investing
the raised funds, they pay the investors in the form of dividends.
Sometimes, companies choose to reinvest the profit. If these investments
are successful, their market value grows consequently their share prices
increase.
Also, traders trade these stocks among themselves, while the exchange
platforms track the demand and supply of these stocks.
See how this works. A buyer places what you call a bid typically lower than
the sum a seller asks for. This would be logical; every buyer would want to
buy cheaply to make a profit after sales. However, a trade can only occur if
either the seller reduces his price or the buyer increases his offer. It’s not as
complicated as it sounds. When you want to buy a stock, you will see how
19. much sellers are willing to sell on your account. Now, the difference
between seller A's demands of a particular stock and that of seller B could
be pennies. You only have to be concerned if you intend to sell that stock
afterward. But for long term investors, it is not much of a big deal.
Before the internet, stock trading took place in a physical location. I
imagine that would be stressful. Now, all you literally need is a mobile
phone. With hundreds of online stockbrokers available, you are on your
way to becoming an investor.
Terminologies Breakdown
Capital appreciation: In the simplest terms, this is when the initial amount
you bought a share(s) grows. You bought a share worth $100. In 5 years, the
share is now worth $1000. Your capital has appreciated by 10%, excluding
taxes and investment fees.
Traders: Although every investor is a trader, traders are mostly referred to
as individuals who solely enter the market to buy and then sell stocks rather
than holding their position for a very long time. Investors, on the other
hand, enter the market primarily to build a portfolio taking long positions.
IPO: An Initial Public Offering launch (IPO) is a public offering where a
company shares are sold to investors on the stock market.
Stockbrokers: These are institutions that make company shares easily
available to buy and sell. They serve as intermediaries between an investor
and the stock market.
21. What You Need to Get Started
Since you have a pretty good idea of how the stock market works, the next
step you would be expecting is obviously how you need to start buying
stock. Well, 7 out of 10 people will go for that, which is why more investors
lose money in the market than they gain. My aim is that you be among that
3% of people who don’t take the obvious path but the logical one instead.
So, I am going to share an exhaustive checklist that you need to go through
to get started.
Here:
● A goal – what kind of trader you want to be
● A pathway - budgeting
● Build an emergency fund
● Pay off all credit cards and high-interest debts
● Evaluate risk tolerance
● Investment options
● Investment strategies
● Brokerage account
Yes, I know this seems a lot. However, keep in mind that when it comes to
smart investment, you don’t need every piece of information but every
important information. After you check through all of this as I did, you will
be amazed at how prepared you are for the market. Most importantly, you
will find yourself making fewer mistakes than so many investors out there
consequently going to produce passive profit for a very long, long time.
Why don’t we get started?
A goal – decide the kind of trader you want to be
When it comes to taking advantage of the stock market, your goal is as
important as your pen in an examination hall. What kind of trader do you
want to be? Your goal will help you decide the answer to this. If you can’t
decide on this now, you will make a lot of unnecessary mistakes as you
begin buying and selling stocks. You can take your pick from these three
before moving on to be specific about your objectives.
Day trading
22. A day trader buys and sells stocks daily at least 4 times within 5 business
days. Keep in mind that day trading is risky. However, if you are looking to
make quick returns and quick losses, it is your best bet.
Swing trading
This is a bit longer than day trading. That is, swing traders buy and sell
stocks lasting from a couple of days to weeks at most. It is another angle to
consider if you are looking to make quick profits but with reduced risks
compared to day trading.
Investing
Investing is longer than both day and swing trading combines. You buy and
sell stocks for months and years.
Now, the kind of trader you want to revolve around your goal. Now, there is
a couple of considerations:
● Towards retirement (an obvious pathway to this is through
investing)
● Starting a business (swing trading)
● Consistent cash flow (day trading)
Of course, there are more of these. Decide what your goal is, and this will
help you discover the kind of trader you want to become. With this, you are
less concerned about swing or day trading strategies if you intend to
become an investor. You see where I am driving at: your goal improves
your focus helping you make smart trading decisions.
A pathway – budgeting
Next up is your pathway to investing. This is something you will rarely find
elsewhere. However, I found it to be extremely useful for me as I began
investing. You have to know how you intend to take advantage of the
market.
First thing first, you need a budget. Why do you need a budget to take
advantage of the market you might be wondering? Well, the biggest mistake
an individual can make in the stock market is throwing all their money in a
single stock. Trust me, you don’t want to even think about doing that. It is
lion-like dangerous. Because of the risk of trading stocks, it is best to use
the money you have saved and, at the moment, have no need for it. That is,
23. you need to set aside money for your needs, leisure, and then savings. Part
of these savings can then be thrown into the stock market.
You can try out the 50/30/20 budgeting approach.
50% of your income will go for your daily needs.
30% will go into savings.
20% for leisure such as traveling and that spa you like to go to or that
expensive wine you indulge in.
Now, for the pathway, you can decide to use 50% of your savings for 1
month or more to buy stocks. For me, I use 50% of my savings for 2
months to buy stocks. So, every 2 months, I buy shares from 1-3 companies
I have been monitoring. If you want to be a day trader, you can buy stocks
monthly and look to sell over the next couple of days. The same goes for a
swing trader. You can also consider studying the market and when you
notice a slight downturn, you can throw in the money you have been saving
up.
This is a pathway. Of course, you can be flexible about it. Regardless, keep
in mind that trading in the stock market requires discipline and a checklist!
You will make fewer mistakes through less impromptu actions.
Build an emergency fund
YOU NEED AN EMERGENCY FUND IF YOU INTEND TO TRADE!
Yes, I intentionally wrote that in all caps, so you understand how important
it is. While you invest, make sure to build an emergency fund. With the
50/30/20 budgeting approach, you can do this using your savings. Imagine
all your savings are tied up in stock or two, and you suddenly need money
to cover a hospital bill (if you don’t have health insurance). Yes, imagine
that. Two things are likely to happen, and none of them are any good.
First, you borrow.
Secondly, you are forced to sell your shares sometimes at a loss or for-
profits worth nothing more than pennies.
See, what I am talking about? So, while you invest part of your savings,
designate a certain amount to an emergency fund account.
Oh! Don’t touch it until it is absolutely necessary. Remember, discipline.
24. Pay off all credit cards and high-interest debts
Another unpopular but smart move to becoming an investor is to pay off
credit cards and high-interest debts. This allows you to buy stocks and sell
without being influenced by greed just to pay those interests. Besides, you
don’t want to buy stocks while you are in huge debt. If we want to be
logical, those stocks aren’t yours.
Evaluate risk tolerance
Now, this is another important step you need to take. What is your risk
appetite? Are you the kind of individual that will go all out for a share and
still sleep all through the night? Or do you wake up 5 times like me to look
at how much your portfolio has either increased or decreased? Know which
of these is you. Every person has a risk tolerance depending on certain
factors like age, priorities, responsibilities, income, or financial situation.
Younger people would no doubt have stronger risk tolerance compared to
someone older. Determine if you have a high, moderate, or low-risk
tolerance. With this, you can make the best investment option, which we
will look at now.
Investment options
Now, when it comes to investing one thing is important: diversify! Stocks
aren’t the only investment to buy. You have to know your options, what
instrument you can trade, and the risk attached to each. Here are popular
investment options:
Stocks
A stock is a share of a company. That means if you buy a certain amount of
a particular stock of a company share, you own part of that company. A
stock purchased for a share price is worth from a couple of dollars to
thousands. Stocks have a moderate to high risk tolerance.
Bonds
Bonds are securities sold by the government or a company. These securities
are loans sought by these institutions with an agreement to pay back after a
period with interest. Unlike stocks, bonds have low risks. Well, government
bonds do have low risk as it is very rare for a government not to be able to
pay back their loan unless there is a collapse; another rare occurrence.
Corporate bonds come with moderate risks just like stocks.
25. Mutual funds
A combination of investments mostly stocks and bonds are a mutual fund.
Let me put it like this, while a stock is your breakfast, mutual funds are
your breakfast, lunch, and dinner. So, while you might get only carbs from
your breakfast in this case as profit, you get protein, carbs, and vitamins as
profits from mutual funds. Mutual funds are often managed by
professionals. They have low risk due to diversification. With a
combination of stocks and bonds in a portfolio, even if a stock dies, you are
bound to get lucky with another stock in the same portfolio, which will
offset that loss.
Index funds
These are mutual funds not managed by professionals. This makes the fee
lower thus saving you money. Index funds follow a stock performance. An
example is the S&P 500.
Exchange-traded funds
ETFs are like mutual funds, except they are traded throughout the day like
stocks and are bought and sold for a share price. Unlike mutual funds, ETFs
have lower minimum investment requirements. They are a good way to
start investing if you want to begin factional investment, or you have a
small budget.
Investment strategies
You also need to have an investment strategy that revolves around your
goal, the kind of trader you are, and the time zone (trading online).
Due to the importance of having an investment strategy, I dedicated a full
chapter to it. don’t be like many failed investors, who wake up one morning
and decide to buy a share of Tesla, because it seems like one for the future.
You need to have a strategy in place that guides you to make every
investment.
Brokerage account
If you are going to buy and sell in the stock market, then you need a
brokerage account. A brokerage account is where you deposit money to buy
a stock, bonds, or mutual funds and withdraw your money after you sell. It
works like a bank account, except you get to use it to trade in the stock
26. market. A brokerage account is referred to as a taxable account compared to
a retirement account. A taxed account seems a bit annoying. I mean, you
could just dump your money in your bank and forget about taxes. However,
a taxed account usually comes with unlimited freedom when it comes to
depositing, buying and selling stocks, and withdrawing your money
anytime you like, unlike retirement accounts that have limitations.
You can open a brokerage account from a brokerage firm. Generally, you
don’t need a penny to do this but will need to deposit when you want to
purchase a stock. There are two kinds of brokerage account:
Online brokerage account – Sign up through a broker’s website online and
get started. Robinhood is a good example.
Managed brokerage account – This is an investment management firm, a
Robo-adviser or a human advisor, that uses sophisticated algorithms to
choose, buy, sell, or manage investments. Warren Buffett’s Berkshire
Hathaway can be considered as an investment management firm.
With all of these, you can now confidently buy your first stock, bonds,
knowing their differences, and the risk attached to each.
Terminologies Breakdown
Fractional investing: Fractional investment is buying shares in a bit. Let’s
say you have $1000 to invest; Amazon (AMZN) is worth $3000 per share,
and Bank of America (BAM) sells for $500 per share. You want to invest in
both companies; you can easily buy AMZN stock worth $700 and BAC
worth $300, sharing the risk. You don’t have to wait until you save $3,500
to buy both stocks.
28. How to Buy and Sell Stocks
Buying and selling stocks might look complicated. However, with careful
analysis and of course the right information, it is pretty much
straightforward. For this book, we will focus on how to buy and sell stocks
online. Keep in mind that online brokers rarely provide investment advice.
Basically, what they do is offer you stock to buy, and the platform to sell
when you feel like it. Unlike a full-service broker, online brokers are
cheaper; since you don’t have to pay anyone for their smart investment
implementations and strategies. The cost and fees attached are based on
each transaction. However, you can open an account with nothing and will
only be charged a certain amount when you deposit funds, buy, sell shares,
or withdraw your money. With an account, all you have to do is log in, buy
or sell shares, and that’s that.
Keep in mind that you are on your own while trading with an online
stockbroker. Although these platforms come with tools like charts that will
help you determine crucial elements of trading like support and
resistance, it is left for you to analyze these charts, determine the support
and resistance levels before you venture into a trade. What you get with an
online broker is technical support and a couple of articles recommending
stocks to trade from experts (something you mustn’t always adhere to until
you do your research).
With that, let's see a step-by-step approach on how to buy and sell stocks.
29. Buy a Stock
With a few right steps, you can quickly and conveniently buy your first
stock. Here is how:
● Choose an online broker
● Research - finding good stocks to buy that are about to take off
● Select shares
● Choose a stock type
Honestly, the easiest and fastest way to buy your first stocks and any other
one after that is through an online stockbroker. As I have said, all you have
to do is find a stockbroker, register, and you are in.
Once you’ve successfully set up and deposited funds in your account, you
can now go ahead to buy any share of your choosing made available by
your stockbroker. Though, before you do exactly that, you have to first pick
the stock.
I am going to explain how you can do this.
Start with researching companies you are familiar with. Maybe as a one-
time or loyal customer, you came across a brand that really sticks out for
you and does not seem to be messing around when it comes to gaining a
wider share of the market. While doing all of these, you are going to find an
analyst giving you tips on the ideal stock to buy, but you need to stay
focused. Be more concerned about the company than just its shares. Yes, the
shares dictate the worth of a company but as Warren Buffett said, “buy into
a company because you want to own it, not because you want the stock to
go up.” This rule has netted him not millions but billions of dollars over
many years.
Let me make this simple:
Identify companies that you know about.
Read their annual reports.
Other analytics you should factor in is usually provided by your online
stockbrokers such as conference call transcripts, SEC filings, and news on
each company.
30. When selecting the number of shares you want, don’t feel pressured to fill
your portfolio with a single stock just because it seems like a profitable
investment, and you have the funds. Start small. Buy a single share or half
of that (fractional investments). See how it feels to be part owner of a
company. Most importantly, after you purchase that stock, there will be ups
and downs. This is a way you can evaluate your risk tolerance. Do you lose
sleep when your stock dips a little? How long were you able to hold your
position? Answers to this will help you know what stocks to pick next, and
for how long.
31. Sell a stock
Now how would you tell that it is the perfect time to sell your shares? I
pieced together a list of scenarios that would better help you to make the
right decision.
Sell for financial needs
Unfortunately, there could be times where we are desperately in need of
cash, selling our shares becomes the only option. Yes, it is obviously not
very good advice, but it is way better than getting a loan, which ultimately
is worse. Since stocks are more or less valuable assets, selling them for
financial needs might not be such a great idea but could be the only option
some individuals have. Now, this is where your emergency funds become
crucial. You saw why I insisted that you grow an emergency fund while you
invest? It keeps you from selling your shares quickly for a financial need,
without any deliberation.
Sell for valuation
A share price rests on the current value of a company's future cash flows.
Since the future is uncertain, it will be a bit difficult to know when to sell a
stock for valuation. However, with the margin of safety concept, you will
be able to pinpoint just when you need to sell a stock for valuation.
Sell when there is a dramatic increase in price
Sometimes, the stock prices could shoot up so unexpectedly high within a
short period. This could be within hours of buying the stock to days. Yes,
you might want to play smart and hold your position. But investors are both
smart and humble. It might be the best time to sell. Keep in mind that the
dramatic increase must be completely unexpected and not influenced by
factors such as a merger which increases a company’s value.
Tip: Since most dramatic price increases are temporary, consider buying the
shares again when the price drops, which means you will have a larger
share of the company.
Once I noticed a price increase in one of the shares I own, I refrained from
selling it at that time, unfazed by the idea of selling and rebuying. The
shares eventually fell a bit less than 24 hours after the increase. When it
32. comes to buying and selling shares, of course, there is a rule of thumb, but
in actuality, it depends on two things: your goals and risk appetite.
Terminologies Breakdown
Support and Resistance: In the stock market, there is something called
technical analysis. Support and resistance fall into this category. Support
shows the lowest level a stock price can fall to, while resistance represents
its highest level. Both are used to identify the entry and exit price in a trade.
SEC filings: The SEC filing is a financial statement tendered to the U.S.
Securities and Exchange Commission. Public companies, broker-dealers,
and certain insiders are required to prepare this financial statement.
Investors rely on these statements when analyzing a stock to make better
decisions and consequently smart investments.
The margin of safety concept: Margin of safety is an investing principle,
which revolves around the idea that an investor only purchases instruments
when the market price is lower than their intrinsic value.
34. How to Create Passive
Income with Stocks
Since you know how to buy your first stock and eventually sell it, let’s see
how you can create passive income doing exactly that. Here’s how you can
build a passive income stream using stocks most of which are from my
experiences investing in stocks.
Keep in mind that there is no such thing as a safe trade
While it might seem logical to wait out a stock decline before you enter the
market, for day trading it is a bit OK, but when it comes to investing, you
are most probably wasting your time. Why? the stock market is extremely
difficult to predict. While you wait for a decrease, a stock share price might
actually increase in value. Maybe it has been declining for days straight,
waiting to buy in this kind of situation isn’t considered safe trade. It is
better to look out for undervalued stocks like Warren Buffett and sell when
the price climbs. As a long-term investor, waiting for the price to decline
before you take a position isn’t the ideal perception of safety, you might just
end up paying higher more.
Think long term
Honestly, investing long term is the best and direct path to building wealth.
Most importantly, you are going to be able to create a sustainable passive
income when you think long term. The best investors wait on their stocks
for years, while its compound gains. In fact, know that investing in stocks is
usually not the FASTEST way to create passive income. You gain by sitting
on investment rather than day trading.
Consider automating your investments
You will gain more when you invest regularly. Automating your investment
fulfills three purposes:
1. You don’t time the market. This has its advantages and
disadvantages. With automating you benefit from this. If the market
is favorable, your investment portfolio increases. When the market
35. is not, you will still gain because through automating you buy at
lower prices.
2. You don’t need any motivation to invest. When you automate your
investments, it becomes a natural instinct to invest.
3. Although you should have a budget, automating allows you to
spend freely. You can easily set-up a standing order for every
monthly income. It won’t even feel like the money was there in the
first place.
With automating, you secure your future without actively thinking about it.
Get index funds
Index funds are, undoubtedly, the best way to make money from stocks.
Index fund managers do not spend time trading stocks to beat the market.
Beating the market really is a myth as active index fund managers 90%
failures have shown. Fund managers' reluctance to spend hundreds of hours
looking for ways to beat the market makes it a great way to create passive
income just like automating your investments. Besides that, index funds are
the full package because of:
● Low cost and taxes
● Better returns
● Low risk
● No expertise needed
With a single index fund, you can achieve the real meaning of
diversification, a smart way to invest.
Purchase high dividend stocks
In need of cash flow towards building a passive income stream? Go for high
paying dividend stocks. While automating will ensure you benefit from the
market up and downs, purchasing high dividend stocks will increase this
benefit. Dividend-paying stocks are the simplest ways to create passive
income through stocks. With dividend-paying stocks, you don’t only enjoy
the benefits of automating your investments but also sitting on your stocks
for years. As public corporations generate profits, a certain percentage is
distributed to their shareholders. You can pocket this cash or reinvest them
by increasing your share volume. Imagine having multiple high-paying
dividend stocks. This means you can retire early and live on these
36. dividends. Keep in mind that it will take more than a couple of dividend-
paying stocks for this to happen. One way to pick high dividend-paying
stocks is looking at companies that have been paying substantial dividends
for the past 25years straight.
Compound interest
If you like the idea of watching your investment or money grow passively
then you would want to take advantage of compounded interest. What is
compound interest and how exactly does it work?
I will use an analogy to explain.
Now, imagine you are looking to invest for the long haul towards early
retirement. You decide to put $200 every month in your IRA or brokerage
account. If you decide against this and deposit into your savings account,
this will net you 2% annual interest but with your brokerage account, you
get a 9% return on average.
In a year, you get $2614. This is just for a year and on a 9% average return.
Know that at the end of the year it could even be double or triple that figure
depending on several factors affecting the market. Now, reinvesting your
returns will not only increase the value of the stock but also its expected
returns at the end of that year.
Compounding interest and returns is simply the constant reinvestment of
capital gains. So, you earn from your earnings when you reinvest these
incomes. This is what made Warren Buffett. Compounding isn’t simply
reinvesting gains but specifically on assets that you choose to invest in has
low proverbiality of declining. Why? Well, just as compounding interest
and returns is a good way to passively increase your wealth, it is also risky.
It is risky when you pick the wrong stock. So, instead of accumulating
gains, you accumulate loss. To harness the power of compounding is to
think of your investment portfolio as a single asset and making sure it stays
near its highs.
Now, think long term, look to buy high and multiple dividend-paying
stocks, consider automating your investment and compound interests, and
see how this helps you produce passive income. A combination of them will
work better than going with one or two.
38. Investment Strategies
You need an investment strategy that helps enhance discipline when buying
and selling stocks to create passive income. Since you are just starting out, I
will share beginner-friendly investing strategies that would prove very
useful.
Open a retirement account
Whatever your goals are, you need to open an IRA. There are more than a
couple of benefits to this. Yes, the goal is to create passive income.
However, opening an IRA isn’t simply about investing towards your
retirement but the advantage of owning such an account. The first and the
most important of them all is its tax advantage. You can open one with an
online broker. This is important if you are deciding to day trade or swing
trade, whose accounts don’t have any tax advantage. Besides, with an IRA
account or a combination of them, you are investing smartly. Moreover, if
you reach the maximum using investing with an IRA, You can simply
switch your focus to your other accounts knowing that, with smart
investments, you have secured your future.
Consider target-date funds
The Security and Exchange Commission of the United States explains that
target-date funds are “designed so that the fund’s mix of investments will
automatically change in a way that is intended to become more conservative
as you approach the target date.” With target-date funds, you minimize
investment risk especially when you are approaching retirement age. Hence,
with this fund, you have positioned your money in more conservative
investments to give you the best possible safety net for your money.
Invest cash you won’t need for at least five years
Yes, I know this sounds a bit too far. However, one of the reasons why first-
time investors don’t get it right is because they throw the money they don’t
have into stocks. This is important when you are thinking long term. Of
course, as a day trader as long as you have set aside money for your
expenses, you can easily invest a part of your savings. Regardless, don’t
skim yourself in the hopes of making back the money through buying and
39. selling stocks. Even if you day trade, it is best you do not carry this
mindset. The stock market isn’t a get-rich-quick venture. Besides, if you
plan on holding a long position using an IRA, you can even be taxed or
penalized for withdrawing your funds too early. Notwithstanding, investing
has a very simple and, undoubtedly, a great idea: Do not invest cash you
will need for whatever reason within five years. If you have a specific date
you need your money back, buying bonds and treasury bills is an option,
not stocks. Patience pays with investing. Besides you need to give your
portfolio time to increase its valuation.
Exchange-Traded Funds
Like index funds, ETFs are a great way to start investing. In addition to
investing in a couple of index funds, you can add ETFs to your growing
portfolio. ETFs allow you to buy smaller amounts of mutual funds. It is a
great place to start if you are into fractional investments. With mutual
funds, the minimum amount you can invest is anywhere from $2000 and
above. However, for ETFs, you can get a share for about $300. Now, what
makes buying ETFs a great investment strategy? Well, it comes with all the
benefits of owning mutual funds but a more affordable way to diversify.
There are hundreds of investment strategies out there, but you don’t need
most of them. These strategies are beginner-friendly, something you will
need. As you get more experience investing, you can learn about some
advanced strategies that would be useful. At the moment, stick with these.
When it comes to investing, I have come to understand that due to its
critical nature, there is often an overload of information.
41. Becoming a Smart Investor
You know the hard truth about investing in the stock market? You are more
likely to break it rather than make it despite taking the right steps.
Wondering why? The stock market, like life itself, is out of your control.
You can’t beat the market. It takes more than this to be a smart investor.
This is because making smart investments in the stock market isn’t by
staring at a price chart all day for a week. I have learned the hard way that it
takes more than implementing investment strategies to make smart
investments that will create passive income. Here are 3 mistakes, I made
that eventually cost me up to a year worth of investments.
42. Top 3 Beginner’s Mistakes to Avoid
Watching the stock markets way too much
At the time I bought my first stock, it had previously spent close to a month
on my watchlist, then I spent a couple more weeks studying the company
finances. Although the finance part was OK, I had spent more than enough
time trying to get the “perfect stock”, something that doesn’t exist even in
sci-fi movies. As soon as I deposited the money, I watched the stock go up
and down, eventually bought it, and spent a couple of hours in the day
continuing watching it. It could be down to the excitement but regardless, it
was unnecessary as it made me sell my stocks to cut my losses way too
early due to market upward and downward movements. In a day, prices go
up and down more than 10 times within a couple of hours. This is
something I came to understand after a long while. Yes, watching the
markets daily helps you get used to price movements, but making quick
decisions based on that will hold your investment growth like it did mine.
Making heavy investments
I was so excited about building wealth that instead of investing a certain
percentage of my savings, I actually used all of them. Now, this was a very
poor idea. Even if you have lots of money to invest, start slowly. I will be
honest with you, even with all the information in the world, there is no
guarantee that you won’t make a couple of investing mistakes. And no, like
you are probably wondering, there is no curse placed on investing (or
maybe…). That’s just the way it works. These mistakes help you make
better investments and make you a smart investor. So yes, just because you
have $10,000 lying around somewhere, it doesn’t mean that you should use
them up all at once. Start small and invest your way up.
Don’t bother to re-invest dividends
I knew I needed to buy dividends-paying stocks to create passive income
and improved my cashflow. This was both a logical and smart way to
invest. Unfortunately, I didn’t have a clue that I could have gained more by
reinvesting those dividends. Now, where it hit me was that simply buying
dividend-paying stock created a passive income stream for me, but it wasn’t
sufficient to take care of my basic need if I decided to retire in a few years.
So, invest to make extra money to re-invest growing your investment
43. portfolio, which makes you an even larger figure of the extra cash you were
aiming for.
These were my top 3 mistakes that made my investment path a bit annoying
sometimes and also toughened me up. There were other mistakes such as
choosing the wrong investment account, which doesn’t align with your
goals, or buying a stock without doing your research based on what he says
or she says. Along the way, I avoided repeating the same mistakes due to
ignorance and found ways to protect my stock investments. Let me share
some of them with you.
44. How to Protect Your Stock Investments
Don't throw out your stocks
When you buy a stock, it will, most likely, fall at some point and rise after
that. There are some instances where a share price would keep declining for
more than a day spanning days and weeks. You are forced to sell to cut your
losses. I want you to know that this is a right move. However, it can also
backfire. So, to ensure it doesn’t, when a share goes on a bearish run, I do
my research. Has this happened before? Is there an internal organizational
conflict that would lead to even worse outcomes? What exactly is going on
with the company? With each of these questions answered, you will have
enough information that tells whether to hold your position or sell your
shares. This is how to protect your investment. Do not fall prey to negative
market forces that pull share prices down misleading many investors.
Trim your stock portfolio
Just like you shouldn’t throw your stocks, don’t be afraid to trim your stock
portfolio when it is not in your favor. Like trimming unfavorable stocks,
don’t be relentless to take profits when it also goes boom. If some shares
have done remarkably well, it is not a bad idea to take profits. Yes, you
might miss future gains, but you have some earnings tucked in. Besides,
you still have your capital locked in. Keep in mind that you don’t have to
overdo this, and be wary of the stocks you decide to take profits from.
Remember, you take profit for just one or two shares and not all the shares
in your portfolio. Another benefit of trimming your stock holdings
protecting your shares is that it helps you cut risks. In some instances, if
you fail to make a substantial profit from a stock, it could decline. As I have
said before, this is normal, and there is a good chance the shares will go
back up again. Over time, you should reduce the percentage of your stocks
portfolio and allocate it to other ventures. Let your risk tolerance, time
horizon, and potential losses guide this reduction.
Tweak your investment strategy
Yes, your investment strategy has been working for a while but it is
important to tweak your investment strategy every now and then. You will
not only take better advantage of the market but also reduce risks. For
instance, I spend my savings buying more ETFs than individual stocks,
45. after sticking with that for a while I switch to buying more individual stocks
than ETFs. However, I only made this decision after considering some
factors such as
● Company’s growth
● Dividends
● Special situations such as a potential merger
● A backed bullish run.
When you combine all of these, you reduce the risk attached to your
portfolio, protecting your investments.
Terminologies Breakdown
Bearish run: A bearish run is a prolonged period of declining stock prices
by 20% or more. The opposite is regarded as a bullish run.
47. Additional Resources
While you can now go ahead to buy your first stock confidently, I am going
to recommend additional resources that would further help you like stock
newsletters that I subscribe to that were very useful, online brokers, and a
couple more. Check them all out.
48. Stock Newsletter Recommendation
Monthly updates on stock recommendations: The Motley Fool
Distribution: Every month
Cost: $99/yearly
To learn about aggressive stocks: Linde Equity Report
Distribution: Every month
Cost: $199/yearly
For daily updates: Stratechery
Distribution: Monday - Thursday
Cost: $12/monthly or $120/yearly
For weekly updates: MyWallSt
Distribution: Every Friday
Cost: Free
Quick read: Morning Brew
Distribution: Every morning
Cost: Free
Great research: Morning Star
Distribution: Every month
Cost: $29.95/monthly
49. Online Stock Broker Recommendations
TD Ameritrade
Pros
● Great for beginners
● Access to videos, monthly webinars, and courses to guide you
● No deposit needed to set up an account
● They charge $0 per trade.
Cons
● Includes multiple platforms to use tools, which may become too
much.
● Low-interest rates on uninvested deposits.
Interactive Brokers IBKR Lite
Pros
● Offers fractional shares trading
● No deposit needed to set up an account
● They charge $0 per trade.
Cons
● Less educational resources compared to other brokers on this list.
Charles Schwab
Pros
● Offers fractional shares trading
● Specialize in retirement
● Comes with valuable research tools
● No deposit needed to set up an account
● They charge $0 per trade
Cons
● Doesn’t paper-trading for simulation
● Doesn’t support progress tracking
E*TRADE
Pros
50. ● A good environment for beginners
● Excellent web-based platform
● No deposit needed to set up an account
● They charge $0 per trade.
Cons
● Doesn’t support progress tracking
● No access to international markets.
Fidelity
Pros
● Offers fractional shares trading
● Outstanding on-site education
● No deposit needed to set up an account
● They charge $0 per trade.
Cons
● It doesn’t support paper-trading for simulations
Merrill Edge
Pros
● Provides top-notch research for beginners
● Great customer service for technical support
● With $100,000 or more, you can combine with Bank of America to
get additional benefits
● No deposit needed to set up an account
● They charge $0 per trade.
Cons
● High margin interest and per-contract option fees
● Limited investment options.
IPO Calendars
Know about companies about to offer their shares to the public.
https://www.nasdaq.com/market-activity/ipos
Advance Trading Resources
Bought your first stock or made your first trade? Then this will be helpful.
51. https://corporatefinanceinstitute.com/resources/knowledge/trading-
investing/
Warren Buffett's Current Holdings
Warren Buffett is a genius when it comes to investing. Check out his
portfolio. You never can tell; it could serve as an inspiration or a guide.
Company: Berkshire Hathaway (BRKB)
Value: $228.89billion (2020)
Top Holdings: Apple, AAPL, (47.78%), Bank of America, BAC, (10.63%),
Coca-Cola, KO, (8.63%), American Express, AXP, (6.64%), Kraft Heinz,
KHC, (4.26%),
Others include Amazon (AMZN), Pfizer (PFE), AbbVie (ABBV), Merck
(MRK) and Bristol-Myers Squibb (BMY), U.S. Bancorp (USB), Wells
Fargo (WFC), General Motors (GM), Bank of New York Mellon (BK),
Sirius XM (SIRI).
52. AUTHOR’S FINAL WORDS
We have come to the end of this journey. Of course, there is still a lot you
must go through if you want to build passive profit. It takes more than
reading this book. You have to adhere to them. I am saying this because it is
easy to be swamped by the stock market. Almost everything you do seems
like the most logical step to take.
However, every one of those steps could lead you to failed investments. It
happens every day. You are going to make mistakes anyway. The essence of
this information is to make fewer mistakes not to never make mistakes.
Your goal is to build passive profits towards something else. Keep this in
mind while you are wary of every step you take towards buying your first,
second, and more stock. don’t over-analyze. At the same time, don’t avoid
analyzing the steps you have to take.
Yes, I know that’s a bit confusing but you get the idea.
When I started investing, I knew it would take a while to build wealth and
earn passive profits. I also knew it would take both some finesse and the
right education. It felt like I was fully prepared. But like you know now, I
learned most of the lessons while investing. Yes, those initial research
helped but I learned more about investing. So, go invest in your first stock
and start building passive profits.
53. Thank You!
Your choice to read this book is appreciated and is certain to go a long way
toward helping your financial future prosper through leveraging the Stock
Market.
And if you enjoyed this book I would highly appreciate it if you can leave a
review by clicking here!
Reviews help me know i’m on the right track and I utilize all the feedback
to continue improving this book and all future ones so you can have a better
reading experience.
