One of the number one questions I get asked is, “Hey Nick, I only have a couple hundred dollars to invest right now, what should I buy?” Everyone has got to start somewhere right? So where should you invest your money to start its growth? In today’s article, I’m going to be giving you the steps to take to find the best bang for your buck and kickstart your investing career.
Should I buy a Company with a Lower Share Price?
Many people get wrapped around the idea that the more shares they have of a company, the better. Taking a quick glance, you would think this is true. If I have 2 shares of XYZ company and it goes up a dollar then I’ll only make $2 dollars while if I have 50 shares of ABC company and it goes up a dollar I will make $50 dollars. What people neglect to realize is that you should be thinking of a stocks move as a percentage. For example:
XYZ company is trading at $100 dollars a share and it goes up by $1 dollar to $101. This is a percentage move of 1%
ABC company is trading at $7 dollars a share and it goes up by $1 dollar to $8. This is a percentage move of 14%
Even though both companies went up by a dollar, their percentage move in price was DRASTICALLY different. So while having more shares in a company at a lower stock price can be advantageous, it really all depends on the percentage of movement in the stock. A key point here is that you should NOT sacrifice value over getting more shares! Value is what is going to drive the percentage move in the stock.
Let’s Define Value
The other day I went to the store and was looking to buy some beer. When I arrived, I was looking at some IPA’s but soon found that Coors was on sale for $16 dollars for a 24-pack. I bought the Coors instead of the IPA and when I got home and took my first sip, I felt instant regret. I had 24 beers instead of 6 for a cheaper price but I found no value in the Coors taste. There was nothing about it that was satisfying to me except watching the mountains turn blue on the side when it got cold.
The same can be thought of when you are looking at stocks. Don’t go out and buy a ton of shares of a shitty company just for the sake of getting more shares. You might as well start gambling with penny stocks if that is your thinking.
Now let’s go through what you should be looking for when your deciding to invest your first couple hundred dollars.
- Small-Cap Stocks
Recall in the article, The Jocks and Geeks of the Stock Market, I mentioned that small-cap stocks were companies with a market capitalization of under $2 billion. These are your companies for high growth potential. Remember we always want to be on the lookout for the next Apple, Google, Amazon, or Facebook. Amazon IPO’d at a price of $18 dollars a share back in 97’ and now it stock is over $800 dollars a share! Now that is some serious growth! Investing in small-cap stocks allows you to take part in some massive growth potential if they take off. You can search or screen for small-cap stocks by looking at companies whose market capitalization is under $2 billion.
- Understand the Company and its Industry
I always advocate looking at companies whose business model you understand. You know how they make money and how they could potentially expand in the future. You have a general understanding of their industry and know how changes within that industry could affect the company.
- Overbought vs Oversold
I always like to look at charting patterns before I enter I stock. Many people get wrapped up in the hype of a stock and usually buy at the apex of its current price movement. For instance, a company will have a lot of positive PR lately and its stock goes up by over 10%. You feel like you are missing out so you buy in at the top of the move just before it reveres (recall, all stocks are cyclical). Then it reverses is path and you panic and sell out, taking a loss. We need to look at technical charts to see when there is a good buying point (when it is oversold). Such charting patters are the wedge formation:
Or the channel breakout:
You can also invest in a stock when it finds support and starts to reverse its course:
Remember investing is a marathon, not a sprint. I spoke with many clients as a broker who had become millionaires by investing in just one stock and letting it grow over a period of many years. Some keys to your growth over time will be:
- Period Contributions (Make a plan to save!)
- Dividend Reinvestment (if the stock pays a dividend, you can have that money automatically invest for more shares!)
- Stock Splits (As a company grows it will perform stock splits to make it more attractive to other investors. This means more shares for you!)
- Power of Compounding (Average return on investment compounded over time)
Let’s say you invest $500 dollars into a company taking the steps I have provided in this article. If you contribute an addition $10 a month into the stock at a rate of return of 10% per year, then in 30 years that $500 dollars will be a grand total of….
That’s only $120 dollars a year you are contributing and your money is growing while you sleep. I consider 10% a year to be a conservative return estimate if you are investing in a good small-cap company. Amazon made returns of over 40% this year alone!
Always Have an Exit Strategy
I have said it in many other articles, but I can’t stress the importance of having an exit strategy. Sometimes you will be wrong and a stock will start to turn on you. Always know how and when you are going to get out of a stock BEFORE you enter a trade. This is even more important when looking at small-cap stocks because not all of them will turn into large-cap stocks. Analyze the stock’s performance on a periodic basis and see how much the company is growing over time.
Homework: Screen for small cap stocks on finviz.com and look for ones who you think provide a great deal of value based off their business model. Next look at their stock charts to see if they have been overbought or oversold lately.