Investing 101-Getting started

I recently finished my MS and found a job. Now that I have a steady income and some extra time in the evenings, I need to figure out what to do with the money. So I evaluated the options and decided neither gambling nor online poker is the way to go. Since I don’t have any finance background and don’t understand a word in that world, I decided to educate myself. In the process, I thought it will be helpful for some of my readers to have this site as a one stop for getting into investing.

The first thing I did was read up how to get stared in buying stocks. I thought stocks would probably be the way to go because if I play my cards right, I would get at least 10% interest, which is much better than what any bank can give and will beat inflation. I also wanted to make sure that I diversify my investment portfolio. So I did open a 401k account through my company and a way to save account at wachovia, just to make sure that if the entire stock market crashes I will still have something to rely on.
The next thing I realized while reading online was that before I get stared I need to make sure that I know exactly what I am doing. So rather than play with my own money I decided to paper trade before I am confident of what I am doing. Some research pointed to http://www.cboeoptionsinstitute.com/tradtool/virtualtrade.aspx. Its a really nice site that lets you trade virtual stocks. My goal is to see at a minimum 10% returns over the next 4 months. If I get that, then Ill commit myself to the stock market.

I also realized that apart from stocks there are other avenues to invest and trade. Futures is one; where you are betting on the price of a commodity going up in the future. I registered with http://www.ptrades.com/. Its again a site that lets you paper trade, but this time with commodities instead of stock. My goal is to make a 10% profit here too.

Finally I also want to trade currency by the end of the year. When I find a good simulator to get started, Ill add it here.

Stocks

I picked stocks to start with because I understand two industries fairly well: One is technology and the other is healthcare. So I thought if I were to start investing in something, then I should start investing in companies in these two industries. To evaluate stocks I downloaded the MSN money investment toolbox. It is a really nice tool that lets you identify stocks based on various variables. There are much more sophisticated tools in the market but some of the material I read pointed to the MSN investment toolbox to the best free one in the market. Please note that this tool is best suited for the longterm investor and not so much for the day trader.

To use this tool, you need to understand some variables or terms that are commonly used.

1. ROE: Return on equity is a profitability gauge. It compares the net income of a company to shareholders equity. The metric indicates how much a company can grow. It is important to note that a company cant grow faster than the ROE without additional cash, which would reduce profitability. But also note that a high ROE does not necessarily mean that it is a good investment because it could be that the company needs fewer assets (eg a consulting company). By the way equity means shareholders funds. It by definition is companies net assets – liabilities. ROE = (net income/average shareholders equity) expressed as a percentage.

2. ROIC. Return on invested capital. This is a more useful metric while evaluating stocks. ROIC basically tells you how efficient the company is in allocating capital into operations. Or how well a company generates cash flow relative to the capital invested. ROIC = (net income-dividends) / (shareholders equity + financial debt)

More terms in the next post