So Im thinking about getting into the game and have absolutely no clue what Im doing. The terms you guys throw around have no meaning for me. I only have 3 grand to start with and I worked damn hard for that little money. Now I want to try my hand in the market and feel a bit like a 5 year old with a machine gun.
I know it really lowers the quality of discussion when someone raises their hand to ask a stupid question but Ive gotta start somewhere. How does the stock market work? If you have the time and the patience please explain this all to me like Im an idiot. Thank you.
Hmm. Where to start.
First, IIRC, you work at AWAC. Take full advantage of the 401k they have there. If you are young and not earning much right now (i.e. first year FO), contribute to the Roth 401k. Also fully fund a Roth IRA every year. Just get the money in there. Worry about what to buy later. $5500/year can be put into the Roth IRA. Max into a 401k is $18k yearly. I walked out of AWAC after 8 years with around $200k in combined retirement savings starting from $0, and my gains weren't even significant, like 1.5% over that entire time frame (yes it sucked).
As to the stock market.
Stocks are priced based on Earnings Per Share (EPS) estimates/guidance and Price-to-Earnings ratios (PE). The value of a company is typically figured by multiplying the EPS X average PE.
Let's say a company has an EPS of $0.25 per quarter and an average PE of 10. $0.25 x 4 (4 quarters in a year) is $1, X 10, gives a value of the stock of around $10. That is historically what people value the company at. When the price goes below $10, it can represent a value, when it goes above $10 it might be overvalued.
Some stocks are priced on forward earnings more than others (Forward PE). Stocks like Chipotle, or Tesla are a good example of this. People think the company will take over the world and have priced the stock at untenable levels IMO. $30 bil valuation on a company (Tesla) that just had to offer junk bonds at 6.5%. Buying high PE stocks rarely works out. Rarely.
Mr. Market does crazy things. A great example is in Jan/Feb of this year, and again after Brexit. Lots of selling going on created a lot of value, assuming profits didn't drop off the chart.
In general, companies with higher EPS ratios and lower PEs are value stocks. One thing you're going to need is more money. A lot more, in order to start to see a decent income from it. It will take time to get there, it took us around a decade of saving to get to the point where I could take a sizable position in a company and smaller swings would actually produce some real money.
