Stock Market 101, with Prerna Khemlani
💸 In today’s Stock Market 101 session, we’re going back to investment basics. For this exercise, I speak to qualified Chartered Accountant and founder of This Girl Invests, Prerna Khemlani — a passionate advocate for educating and encouraging women to get financially confident.
🤑 Despite working in the financial industry, Prerna still found the information around personal finance difficult to understand and apply to her life. It was because of this frustration that she decided to launch her Instagram account, This Girl Invests, which now serves as a community for women to learn more and take control of their financial futures.
💥 Today on The Wallet:
1️⃣ Goal setting has been instrumental in Shellye’s success. She talks about how to get intentional about your goals, build timelines, why planning helps you stay on track and why risk and opportunity are two sides of the same coin.
2️⃣ You’ll find out how to build confidence when it comes to negotiating your salary, and how Shellye has navigated asking for more in her career -- even when it felt uncomfortable.
3️⃣ We discuss Shellye’s relationship with money and the role it plays in her life, and how her upbringing formed the money mindset she has kept with her to this day.
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You can listen (38 min) and subscribe here:
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1. THE BASICS OF INVESTING
Assets are something you buy that will (hopefully) appreciate in value. The four asset classes out there are stocks (equities),
bonds (fixed income), cash (cash and money market instruments), and real estate.
An income-producing asset is an asset you pay money today for with the expectation that it will generate income for you in the future. Shares, bonds, and funds are examples of assets that can generate long-term income and are better than, say, buying a car (which technically, is also an asset) but that will most certainly depreciate in value after it is used.
Alternative investments include cryptocurrencies, fine wine, art, and anything else that may not fall into the four main categories of asset classes. These tend to be quite niche, and require a lot of research and expertise in order to understand what’s going to grow in value. Alternative investments also tend to not be very liquid.
A stock or a share is a piece of a company. The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter.
A stock market index measures the change in the share prices of different companies. Indices are formed by selecting a group of companies, whose shares are listed on a public stock exchange.
The primary capital markets trade in new stock or securities which they transfer to interested buyers or companies through an initial public offering (IPO) — basically, it’s new shares. Secondary capital market is also called the stock market, it is where already-used stocks are traded between investors — this is where most people buy from.
How can you make money from stocks? You can make money via dividends — which is money that arrives in your account (that you can reinvest). The other way is long-term gains — which is when you having a long-term view of holding it for 10 or 20 years and then selling it to make a gain.
“Often, people don’t talk about investing when they’re young, but it’s quite important to start early because time is a big factor when it comes to investing. That’s why I love to talk to women about investing, and get them to think about it, and not be scared about it.”
2. UNDERSTAND RISK
No investment is 100% risk-free: it is up to you to understand the risks involved with different types of investments so that you can confidently decide what to do.
Also, no single asset class can be relied upon to produce safe, reliable and consistent returns — which is why diversification is so important.
Different investments will be more or less risky. Shares are considered more risky than bonds, although this is not true for individual shares and bonds. Generally speaking, investments that have higher risk usually have higher rates of return.
Understanding how you feel about risk is the first step in determining what sort of portfolio of investments is right for you. Remember: risk is personal!
A good exercise to try is to look at how much the portfolios at certain levels of risk have gone down in value in the past, and ask yourself how you’d feel if it happened to you.
Focus on what you can control, eg. how you react to market volatility/the news (stay calm and carry on!), and how well you’ve diversified your portfolio to manage risk.
3. BUILD UP YOUR CONFIDENCE
Before you do any research on stocks, decide how much you want to invest, then, decide what you’re going to invest in.
Researching companies to get a feel for the market will make you more confident in what you’re investing in.
If you want to invest in individual companies, you should be reviewing their annual reports and financials, paying close attention to:
Income Sources
Company Risks
Company Debts
Company Trajectories (review the company’s historical revenues and cash flow).
Do lots of your own research and reading — The Financial Times is a great resource to help you get clued up on how companies are performing on the stock market.
RESOURCES:
You can follow and connect with Prerna at:
Website: www.thisgirlinvests.co.uk
Instagram: @thisgirlinvests
We shared some resources in this episode. The links are below: