Stock Investing Is Like Shopping
Analogies are one of the basic ways to learn something – transferring knowledge from one aspect and applying it in another.
And one of the toughest hurdles in stock market investing is the sheer unfamiliarity of it.
So I thought it made sense to try and explain stocks by comparing it with one of the most basic and mundane tasks – grocery shopping.
Hopefully more Filipinos will see it, understand it’s not so arcane, and be encouraged to learn more. If nothing else, at least there’s another way to think/explain stocks other than poker or some other form of gambling.
Shopping: You look for a supermarket or department store where the same exact item is sold for less
Stocks: You look for the stock broker that has lower fees. There are a lot of choices (products), the primary differences being convenience and availability of research. But when you have basically the same product (ex: an online broker, with research), there’s no point in paying more.
Read more: Learn how to choose your stock broker.
Shopping: You shop around looking for the best product: cheap, but high-qulity
Stocks: You shop around looking for a high-quality (profitable) company that is cheaply priced. To learn how to find a quality company, you’ll need to perform Fundamental Analysis. A quick, simple overview on Fundamental Analysis can be found here.
Shopping: You buy in bulk to save
Stocks: The bigger volume you buy, the bigger the profits. A placement of 3,000 will have to appreciate more in order for you to profit, compared with a placement of 8,000 or more.
One reason is that, percentage-wise, you pay more fees. Another is that with bigger volume, small gains are magnified.
If you can, place in bigger volumes. But if you’re a long-term investor (and you should be) it’s ok to place less than 8,000 – you can still gain a lot over the long term.
Shopping: You don’t buy just because it’s on sale. You buy because it’s something you need and it’s on sale
Stocks: Just because the stock is cheap (PE ratio less than 15, at or near 52-week low, suffered a sell-down, etc.) doesn’t mean it’s a good buy. Do your home work first. You need to know if it’s a company you “need” – great management, great earnings history, great chance for future growth, great product, recession-proof, etc.
Shopping: When a product you normally buy goes on sale, you “invest in real goods” – bulk buying maybe as much as a year’s worth of supply, essentially locking in the cheap price and realizing “real” savings. You pony up cash now, but increase your cashflow later.
Stocks: You keep a a good portion of your fund in cash. When a company you’ve done your homework on starts going down in price (based on superficial news, or maybe it’s a bear market) you wait until the bottom is confirmed. Once it’s hit bottom, that’s the “sale” price. Start buying in tranches.
To confirm the “bottom” you’re going to have to rely on a few things: stock broker’s research, technical analysis – if you’re very proficient, current market sentiment and news. Just be sure it’s confirmed first.
But don’t worry about investing at the bottom. The main point is to not use up your fund too soon, and seeing your investment keep going down. Even when buying a great company, it’s not the nicest feeling and can take some getting used to.
Shopping: You can participate in Group buying, to get the lowest price without having to buy wholesale.
Stocks: You can subscribe to UITFs and mutual funds, so you can buy a bunch of blue-chip companies for a minimal amount (usually 10K initial investment, 1K for additional investments).
In my personal opinion, it can be a cost-effective and less risky way to invest in the stock market while you’re still learning.
Read more: Investing in UITFs and Mutual Funds.
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