What a novice investor should know

What a novice investor should know

To become successful, a novice investor should to know some principles and laws. Financial survival and success depend on them. However, do not be afraid, deep knowledge is not required here. This is not nuclear physics or rocket science. Here, everything is simple and able for any person.

Arithmetic

Without arithmetic, it is impossible not only in finance, but also in everyday life. Arithmetic is not the highest mathematics, where it is necessary to solve differential equations or calculate integrals. An investor should know arithmetic as well as a schoolboy. Arithmetic consists of the following simple operations that are known to people who studied in elementary school:

  • Addition,
  • Subtraction,
  • Multiplication,
  • Division,
  • Exponentiation.

Learn how to add, subtract, multiply, divide and raise different numbers. Not necessarily in the mind, you can use a calculator or any program, for example, Excel. The main thing is that the result was correct.

Probability theory and statistics

We live in a world of probabilities. There is no one who sees the future. All that we can operate with is probabilistic events. Especially in the world of finance, where probabilities play a huge role. Therefore, an investor should know the basics of probability theory and statistics.

In the financial world, there are competing battles between companies for the consumer and sales markets, between investors for good undervalued stocks, between traders for profitable deals, etc. All this leads to a fog of uncertainty, where it is impossible to be 100% sure.

The investor does not know for sure whether the separately purchased shares of the company will grow. Investing all your capital in 1 company is much more risky than investing in 10 companies. A company may fall into a difficult economic situation under the onslaught of competitors, changed laws or other factors.

An investor should know that a portfolio of 10 stocks with a probability of more than 90% will yield a profit when using certain profitable investment strategies.

There are various methods and strategies that allow you to achieve the maximum favorable outcome, but no one will ever give a 100% guarantee. Even the richest and most successful people will never give a 100% guarantee. They know that, in addition to regularities, there is always room for chance and coincidence.

Fundamental analysis

Fundamental analysis includes the ability to understand the basics of business, read and analyze the financial statements of public companies. This requires basic accounting knowledge and accounting standards GAAP and IFRS. All information about profits and losses, cash flows, dividends, return on equity, etc. – is in the financial statements.

Therefore, an investor should know how to read and analyze financial statements. Only by reading and analyzing financial statements can one understand how profitable and reliable the company in which the investor wants to invest.

Fundamental analysis is divided into quantitative and qualitative:

Quantitative analysis

Quantitative analysis studies everything that can be measured by numbers. These are sales, profits, cash flows, dividends, margins, profitabilities, etc. For example, when analyzing profitability and financial sustainability, the following indicators and coefficients are used:

  • Operating income,
  • Net income,
  • Operating cash flow,
  • Free cash flow,
  • Return on equity (ROE),
  • Return on assets (ROA),
  • Return on invested capital (ROIC).

Qualitative analysis

Qualitative analysis examines everything else that cannot be measured in numbers. It is of no less importance than quantitative, so an investor should know and understand this. Examples of qualitative factors:

  • Biographies of top managers;
  • Their achievements and experience as a company manager;
  • Do top managers work for shareholders?
  • Do top managers keep their word and follow their promises;
  • Does the company have a recognizable and popular brand?
  • Are the services or products made by the company is unique?
  • What is the competitive advantage of products and services produced?

Critical thinking and logic

The investor should know that everything needs to be questioned. Especially if he wants to win the battle for investment survival.

The human brain often falls into various logical and cognitive traps. As a result, a person can be deceived, while being confident that he is right. For example, the survivorship bias lives in the world of finance very freely and many people fall on its hook.

There are much more such logical errors and pitfalls, and you should try not to fall into them. Keep your emotions in check; evaluate everything soberly, coldly and critically. If a company or investment strategy looks good, try to find flaws in them.

Legislation and economic situation of countries

The investor does not live in a vacuum or on an uninhabited island, but in society. Society lives by its moral and ethical principles, which are enshrined in laws. Each country has its own laws that regulate the life of society in this country, including economics and finance.

As an investor, you should know how things are in the individual country (where you want to invest) in the following points:

  • Attitudes towards investors in the country;
  • What is the investment climate?
  • How developed are financial institutions and markets?
  • What is the attitude to the right of ownership;
  • What is the tax on profits and dividends?
  • What type of economy is in a country and how successful and efficient is it;
  • What about corruption and freedom of speech?

For example, in the USA there is a property right, there are highly developed financial institutions and a powerful diversified economy. In North Korea or Nigeria, there is none of these.

Therefore, an investor should know that he can invest own earned money in the US economy, and in no way in the economy of North Korea. In the first case, your money will be in reliability, and in the second – you will say goodbye to your money.

Programming

Can you program? Fine. These skills will be useful to you. Especially if you want to be an investor. Among the programming languages in the financial environment are common:

  • Java/Kotlin,
  • Python,
  • R,
  • Julia.

If you do not know how to program, then it’s okay, many calculations can be done in Excel and even on paper. However, programming skills can save considerable time and help process large amounts of financial data. The investor should not be able to program, but these skills will be an advantage.

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