in this video i want to break it down step by step how to invest in the stock market for beginners now remember the goal with investing is to one day live off our investment portfolio but we have to start somewhere we can't just click our fingers and be sipping cocktails on a beach living off of dividends let's start with the basics and break it down step by step how to get into investing and by the way everything in here is free there's no hidden courses or anything at the end where you have to pay for something no also the timestamps are in the description below if you want to skip to a particular section so for me the reason why i personally invest in stocks is one thing and that is passive not active income essentially there are two ways of earning income one is you go to work all day whether that be in an office or construction site or customer service whatever and you actively earn your income aka active income work income the second type of income is passive income and this is where you own an asset like a stock that produces income for you once you own it you get paid without having to do any extra work so it's completely passive and that for me at least is the number one reason to get invested in stocks so you don't have to work for every dollar that you earn so a stock is a security that represents ownership in a fraction of a business okay so for example if you own a stock in coca-cola you actually become a very very small owner in coca-cola the company so if we look at robert kiyosaki's cash flow quadrants you join the fourth square of the quadrants where you own part of a business but you don't have to work for the business so in order to buy a stock you need to sign up to a brokerage company a brokerage company is a platform that allows you to buy and sell stocks now don't worry this isn't 1995. you don't need a dodgy broker from wall street to do your trades go with a well-established company with a proven track record if you're looking for a very cheap broker and you're just beginning your investing journey robin hood and weeble are quite popular you can buy and sell stocks for free with them or if you have a bit more money and you're looking for a platform that's been around for a lot longer look into one like trial schwab or fidelity or td ameritrade they're pretty easy and straightforward to sign up to if you're living in the usa just google them go to their website and fill out a form or two and step one find a stock broker done now this is the important part this is where a lot of people can go wrong they get greedy they don't do the work up front and instead of making money they lose money through uneducated silly investing so you need to decide what investing strategy you're gonna employ and then what stocks are you gonna pick so i'm gonna outline four different approaches to investing and the positives and negatives that come with them pick the style that you feel suits you in your specific situation and how you want to invest so the four styles are one is dividend investing a great approach for passive and reliable income two is value investing the approach that warren buffett took one of the wealthiest man in the world three is growth investing and this is the style that kathy wood has been making a lot of money from recently and the last type we'll go over is passive index fund investing a laid back style that does well over the long term so let's start with dividend investing this approach is one where you can pretty much have guaranteed passive income through quarterly or monthly dividends dividend investing is an investing style where you buy stocks that pay a dividend as a portion of their earnings they normally get paid every quarter okay every three months or sometimes they get paid every month or semi-annually so if you pick out some good dividend stocks that's one way to ensure passive income rolling into your bank accounts throughout the year but you got to play things smart you can't just put your hand on a piece of paper and pick out the ones that pay the highest dividend that's too risky we need to understand the numbers behind the stock so here are some things to look for in a dividend stock there's four key things i want you to pay attention to let's go on to my computer and i want to show you these four measures so we're going to use coca-cola stock for the example and the website that i generally like to use to get the stock metrics is yahoo finance so we'll just click here and this page gives us a summary of coca-cola stock now what we want to do is click on statistics and then scroll down until we see dividends and splits and this is going to give us some important information on the dividend side of coca-cola stock so one of the first statistics we should look at is the dividend itself so we can see here that the dividend for coca-cola is a dollar 68 which gives it a dividend yield of 2. 86 percent so okay if we bought a hundred dollars of coca-cola stock we will get 2.
86 every year as a dividend so 2. 86 percent it's not too bad considering that the average dividend in the market is 1. 3 percent so it's always good to compare things to the average or to their competitors and that's how you get a feel for how good a stocks numbers is now the next thing we want to look at is the payout ratio the payout ratio shows the proportion of earnings a company pays in the form of dividends and how much it reinvests in the business okay so if a stock earned ten dollars a share and its payout ratio was forty percent this would mean they would pay out four dollars as a dividend and six dollars would be reinvested in the business now with coca-cola we can see that the payout ratio is 82 now this means that most of the earnings that they generate they pay out to the shareholders as a dividend now the other 18 percent they use to reinvest in the business this is a very high payout ratio to be honest with you the reason is because coca-cola is such a mature business and they're more of a cash cow than a growth company but generally i do prefer the payout ratio to be quite a bit lower than 80 percent it's always good to see a business reinvest in their future growth instead of paying it all out as dividends speaking of growth the third thing that we need to look at is the company's earnings over the past now to do this we click on the summary section of yahoo finance we've got to scroll down a bit and here we get a good look at their past earnings so the blue line is earnings the green line is revenue and with coca-cola the earnings were trending to be higher and higher that is up until 2020 where of course they got hurt in the pandemic and earnings went down but generally you want earnings to be trending upwards i'll get i guess we'll give them a pass because of the pandemic another important thing to look at before buying a dividend stock is their dividend history do they have a reliable past of paying dividends consistently or are they perhaps a bit more inconsistent so for dividend history i like to use the website macro trends which we can find pretty easy on google and with coca-cola stock we can see that they have a very strong history of paying out dividends in fact it seems that they've never dropped their dividend payouts over the course of history of their stock since 1974 as per this graph so this means that in the future if we bought the stock they are pretty unlikely to drop their dividend payouts even in recessions and in bad economic times so that's a big reason why coca-cola is and has been such a popular dividend stock over time that's sweet and reliable dividend so other dividend stocks that are quite popular that you may want to look into in order to start building up a portfolio is 3m ticker symbol mmm dividend yield 3.
3 percent so that's a consumer goods company with quite a good dividend to it johnson and johnson second symbol jnj dividend yield 2. 5 percent in the health care sector or you could look at something like a t a bit more of a riskier dividend ticker symbol t the dividend yield though is 8. 5 percent so that's very good in this market so guys get and slowly get in stocks that are reliable with a good business model behind them and start building up a portfolio that hopefully one day you can retire off obviously it's not going to be any time soon don't get your hopes up too high but once you start building and allow for some compound interest you can actually grow a portfolio into something quite impressive if you give it time so the positives of dividend investing are the passive income from the dividends that income is pretty reliable especially if you buy into strong business models plus you'll get income from the capital gains of the stock so it's you know those two forms of income i'd say the main negative with dividend investing is sometimes these companies are more mature and they have less room for that high quick growth that we see in other investing styles so it's a lot safer form of investing and a lot more reliable but we won't generally see those big yolo returns as the youth call it okay now moving on to the investing style that made warren buffett a billionaire and that is value investing and i'm not saying that it's going to make you a billionaire we're not all warren buffett but value investing can make some very healthy returns if done right so the essence behind value investing is buying stocks at a price below their value basically it's like bargain hunting but instead of going to a garage sale or going to shops you go to the stock market so now the question becomes wait how do we know if a stock is cheap do we just look at the price and if the price goes down by 20 then it's cheap then it's a bargain unfortunately it's not that simple because often when the price goes down the value of the business goes down as well so the key to value investing is determining the intrinsic value of the business once you know the value you can simply compare it to the price and see how much of a bargain you're getting or how badly you're getting ripped off i made another video on this that breaks it down into three steps on how to calculate the value of a stock so i'm going to leave that in the description box below it's actually not too hard once you know what you're doing and then basically what you do is you go around analyzing different stocks and you compare the price to the value compare the price to the value the price to the value that's what warren buffett did when he was younger but back in those days without the internet he used the moody's manual instead he said that he went through the entire book twice just by reading over different businesses and looking for bargains looking for high value and low prices but there's a lot of stocks in the stock market so one way of screening for value stocks is looking for the ones with low p e ratios a p e ratio is short for price to earnings ratio and essentially as per the name it compares the price to the earnings if the number is low it means the price is cheap compared to the earnings and if the number is high it means the price is expensive compared to the earnings that a stock brings in pretty easy to find the p e ratio on stocks so you just go to our friend yahoo finance again we go to the summary section and it says it right here 29 for coca-cola so that means the price is 29 times higher than the yearly earnings and it will take around 29 years to get our money back if earnings stay the same now you might ask if 29 is high or low well one way to work that out is to compare it to the market's average p e ratio the market's p e ratio is sitting around 29.
3 right now so coca-cola is around the average price of the market price to earnings it's not really cheaper it's not really more expensive so coca-cola is definitely more of a dividend play compared to a value play so some examples of stocks that are quite popular with value investors include alibaba the chinese e-commerce company a lot of value investors are buying this after its recent dip it's a bit of a controversial investment not gonna lie but famous value investors like charlie manga and ray dalio are two big names that have bought the stock then we've got berkshire hathaway another value stock in fact this is kind of like a group of value stocks since warren buffett is the head investor of berkshire who owns a bunch of stocks under the company then we've got gamestop this was a huge value play especially a year ago before the whole reddit hedge fund saga and bank stocks are another place to start for value investors this year especially with their low p e ratios buffett has bought big into them over the past couple of years i'm not saying that you should definitely go and buy these stocks but these are a place to start if you're looking to find a value investment okay this is an investment style that has more risk associated with it if a recession comes you're probably going to get hit hard but on the other hand there's a lot more potential for those quick high returns now we can look at someone like kathy wood who's adopted innovation slash growth as her core investing style and over seven years her innovation fund averaged an annual return of 39 percent that's the average over three times the return of the s p 500 so growth investing if done smartly can pay off big time and there's a couple of core things that we need to focus on with growth investing the most important thing is we need to work out where is the business heading in the future is it innovative is it disruptive is it the next tesla changing the car industry or will it be the type of business that gets left behind like the textile business in the 70s or the video rental or newspaper business in the 2000s they got wiped out by innovation so put your thinking cap on and try work out what will be the disruptive companies over the next 5 to 10 years so some examples of industries that could flourish in the future include artificial intelligence automation robotics self-driving cars elon musk thank you blockchain companies now these sectors could change the way business is done in the future and a lot of growth investors are focusing on these particular ones these sectors but you do need to do a bit of digging into their financials there's no point in buying a business that's going to be popular but not make any money so for growth investing revenue is a very important figure to look at revenue is the total income that the business is generating we need to look at this and importantly check that it's growing so for tesla one of the most popular stocks we can see that in yahoo finance that every year they're generating more and more money also if we look into the future under revenue estimates we can see that the analysts expect it to keep growing at a strong rate of knots now the other thing that we want to look at is return on equity because it gives us a good idea on how effective the business is from a monetary standpoint so return on equity is calculated as net income divided by shareholders equity this shows us how much profit we can make as a percentage of equity we want this number to be as high as possible and we can find return on equity by simply scrolling under statistics in yahoo finance scroll down a little bit and there we have a return of equity for tesla of 15. 6 percent so 15 is not bad especially when we compare it to their competitors which i'll show you soon and just a little bit up is profit margins another metric to help us get a feel for the business and its effectiveness and as we can see tesla's is 7. 4 percent so that means for every a hundred dollars in revenue that tesla generates 7.
40 will be the profits now it can be hard to tell if these numbers are good or not but as with everything we have to compare it to other companies in order to get a feel for things so tesla's competitors include neo which has a negative 30 profit margin and a negative 47 return on equity ford a 2. 1 profit margin and a 8. 1 percent return on equity volkswagen 7.
2 in profit margin and a negative 14 return on equity and nikola another competitor which has a zero percent profit margin and a minus 75 return on equity so tesla actually beats all of these competitors with these two metrics elon musk is a very smart man i guess we can just say that another thing that many growth investors like to do i don't particularly like it but that is looking at the past price of a stock and see if it's trending upwards so it's pretty easy to see this we just type in tesla stock and google go back five years and we can see that every year it seems to be trending upwards by quite a bit and this is no guarantee that in the future that the stock will only head up but some people like that positive forward momentum some examples of growth slash innovation stocks to start looking into can include coinbase a cryptocurrency exchange platform and that's if you want to build into the blockchain sector without buying individual cryptocurrencies intelligent therapeutics are an exciting company that are into genome editing looking to cure diseases then we've got pounds here a company that uses software to integrate data to improve business decisions so this is an exciting company founded by peter thiel who also co-founded paypal and was the first outside investor into facebook so he's got a proven track record and then even tesla the electric car company that's a growth stock but tesla is so big now its market cap is 1. 1 trillion so that means it has less growth potential on the upside you rarely want to buy the stocks before they get overly hyped up where they're just starting to gain momentum and they're getting talked about on smaller platforms like reddit forums or certain discord groups that's when you want to buy generally not when every big media outlet is talking about them so if you buy earlier that's where you make the big 10 20 even 100x type returns okay passive investing in an index fund is the way to go if you don't want to spend time researching and analyzing different stocks the interesting thing about index investing is it actually beats most other returns that big hedge funds gets it sounds untrue but it is actually true so this is why you have people like warren buffett recommending it to most investors so an index fund is simply a basket of stocks that tracks a specific group of the market okay for example the s p 500 index fund is a group of 500 large stocks that tracks the american stock market the vanguard information technology fund has more than 300 u.
