A stock is a piece of a business. If you own a stock, it means that you own a piece of a company. An incorporated business is collectively owned by its shareholders. You should look at stocks the same way you would look at owning a share in a local business.
What is the difference between a stock in a share?
A stock is referred to a piece of a company listed on a stock market. A share refers to a piece of a specific company. You own stocks of many companies. You own shares of PepsiCo.
A share is piece of a business
When you buy a share in a company, you are investing in a business. Remember that. This is a very important detail that most investors forget. Suppose you want to invest in a local fish and chips restaurant. When should you invest? When the owner is offering the share at discount or when he is asking too much. Of course, when it is cheaper. What would you ask for when buying the business? How much is it earning? What are the costs? What is the revenue? What are future plans for increasing revenue? How much debt needs to be serviced? You need to do the same for shares in publicly traded companies. You get the answers from financial statements. You would also want to consider market conditions and the possibility of selling the business at a profit many years in the future.
Problem with focusing on stock price
When a business is selling for half the price or a house is selling for half the price, most people will rejoice at the opportunity and do the necessary to seize it. Because many people don’t see stocks as businesses, they do the opposite. They buy high and sell low, losing money. Because people panic and become greedy at the wrong time, you will see great opportunities to buy businesses at a discount and sell when the businesses are overpriced. The problem with focusing on price is that you don’t have any tools to evaluate the business and its long-term ability to earn a profit and increase in value.
How do I look at stock prices?
Using only stock price to evaluate stocks will help you lose a lot of money. When I started investing, I focused on price and lost money. Over time, I learned to ignore the price of a share until I am ready to buy or sell. I look at the fundamentals of the business. I look at the ability of the company to earn more money and grow in existing and new markets. I look at their balance sheet paying special attention to company assets, liabilities, and its ability to service its short-term and long term debt. When I see a strong company that is able to continue increasing its revenue and offer me solid dividends, I look at its price. If the shares are selling at a discount, I buy and hold it. If I see deterioration of the balance sheet, excessive debt, or long-term negative outlook, I look at the price to figure out if it makes sense to sell it now or later.
Conclusion
Most of the information you need to evaluate a company is found in its financial statements and annual reports. Learn to read these statements and conduct fundamental analysis if you want to be able to make money by picking winning stocks. Otherwise, invest in low-cost index funds as advised by Warren Buffet. If you pay attention to stock prices all the time, you will experience a lot of stress, which will negatively impact your health and you will find yourself making wrong decisions in haste. Investment decisions should never be made in haste. Before you make any investment, you need to understand the market, the business, the outlook, and above all you need a calm and undistracted mind.
