Take a Look at These if You Are New to Investing

Photo by George Becker from Pexels

Intro

If you are just starting out with investing and have no prior experience, there are some important things that you might not know.

1. Share Price ≠ Value of a Company

One of the most common mistakes I see people who are looking to start investing make is confusing the share price with market capitalization. You can’t compare two different companies to each other based solely on share price, and decide which one is better valued at the moment. In fact share price alone says almost nothing about the valuation of a company. The same goes for coin or token price if talking about cryptocurrencies.

This is because there is no set amount of shares that a company can have. The share price can be $10 and the total amount of shares of the company X could be 100 (just to keep it simple). In this case, the total value of the company (Market Cap) would be $1000. But there could be a company Y with the same share price of $10 and much more shares outstanding. For example 5000 shares. In this case company Y would be worth $50 000. Do you see where I am going? The share price of both companies is the same, but one of them is worth 50 times more.

To effectively use share price as an indication of the value of a company in a fashion that lets you compare it to other companies, you need to look at share price relative to other metrics. For example revenue or earnings. If you only want to know which company has a larger total value Market Capitalization is the metric you are looking for.

Real-life example: Amazon (AMZN) share price at the moment is $3228 and Apple (APPL) share price is just $174 but in reality, the market capitalization of Apple is much higher at almost 3 trillion dollars while Amazon’s market cap is at around 1.6 trillion dollars. This is because Apple has issued more shares.

2. Making Emotional Trades

It might be tempting to follow others who have made money and buy-in after an asset has risen in price. Or the exact opposite sell-out just because you feel like everyone is selling and there’s something bad on the news. But if you really want to be good at investing you need to do your own research. Shut off the noise, and make decisions based on hard data, not on sentiment. Pick a strategy that works for you and stick to it. Don’t follow the crowd. If the price of a company has significantly risen, you are probably late. Don’t jump in just because you have a fear of missing out.

‘Be Fearful When Others Are Greedy and Greedy When Others Are Fearful’ — Warren Buffett

Buy into something when you have strong reasons to believe that there’s growth ahead. And sell only if the reasons you bought are no longer true or you have made a profit. If you fall into the trap of making emotional trades, you are bound to lose money. Then you are better off sticking to more passive investing strategies like dollar-cost averaging into index funds.

If this was interesting to you here are some more articles you might enjoy!

What If You Bought the Stock, Not The Product?

6 Reasons To Start Investing

3 ways investing changed my life.

Thank You For Reading,
And Good Luck With Your Investments!