5 Levels Of Stock Market Investing

(As always, our blogs have Philippine stock market examples but the concepts and principles discussed can be applied to any stock market of any country.)

In talking with a lot of different people about stock market investing, I found that everyone has different ways of how they approach investing in the stock market. This entails different “levels” of profits, risk and time spent every month.

However, some of them practice a certain level only because they don’t know that there are other levels and how to do them. Given the knowledge, some of them found out that they are much more comfortable in levels that are lower or higher than they currently practice.

This article will introduce the different levels of investing in the stock market. You will take a look at how much effort and time you need for each level, as well as the level’s expected gains and risks. This way, you can decide which level is right for you.

Higher levels will have higher returns, but they will also require more time spent in studying how to do them, more time spent on analyzing the stocks, and if not done correctly, there is also more risk.

Please note that like food and drinks, there is no superior level. We all have a different favorite food and a different favorite drink, the same way that we will prefer one level over the others. There is no right or wrong level here, but there is a right or wrong level for you.

Now let’s begin our introduction to the 5 levels, shall we?

Level 1: Index Fund Investing

This is the level with the lowest possible gains, but you will also be spending ONLY about 5 to 10 minutes every month to do this. Yes, you read that right, only 5 to 10 minutes per month!

Investing in this level is very effortless with extremely low risk, but it also have the lowest gains compared to other levels. However, even though this has the lowest rate of return of all the levels, the returns are still really good!

So, how do we perform this type of investment?

All you have to do is invest in a reputable index fund. You spend about 3 minutes transferring your money from your bank account to your broker, and another 3 minutes opening your broker account and using the money to buy the index fund. Heck, you can probably even skip the first part if your broker and bank is the same institution.

You can also start investing in index funds for as low as P1,000 to P5,000.

A quick introduction to index funds: An index fund is an investment that mirrors the stock market’s movement. This means that investing in the index funds is like investing in the entire Philippine Stock Exchange index.

If the stock market goes up, so does your index fund investment and if the stock market goes down, so does your investment.

Historically, stock markets have always increased over the long term, and the Philippine Stock Exchange index (PSEi) has increased at about an average 15% rate of return per year over the last 10 years.

Realistically speaking, over the long-term, you can probably expect about an average 8% yearly return to as high as 12%, considering the fees. Still, these are some really nice gains for only spending 5 – 10 mins per month!

It’s also really nice gains compared to other investments. Bank deposits, for example only give you less than 1% per year, Pag-Ibig MP2 only gives 6% to 8%, and most real estate investments usually only gives around a net of 8% max (usually).

In summary, index funds have extremely low risk over the long-term, require very little time and starting capital, but also has the lowest returns compared to the other levels of stock market investing.

In a future article, I will explain index funds further and differentiate them to managed funds (and why good investors prefer index funds). We’ll also write about how you should pick index funds, where you can buy them, and present more information as to the safety in index funds. Stay tuned!

(We already made that article, so click here to learn more.)

Level 2: Broker Stock Picks Without Confirmation

This level is more involved than level 1, but the effort and time required is still minimal. Overall, you’ll only still require about around 10 minutes every month.

To invest in this level, all you have to do is look for your broker’s “top suggested stock picks”. Which means you’ll start investing on individual stocks here, instead of bundle stocks in index funds.

That also means you’re going to have to open a stock investment broker account. I recommend colfinancial.com and will be using them as an example, but you can also open a stock broker account from Bank of the Philippine Islands, Metrobank and Banco de Oro (and many other financial institutions).

Here is an example from COL Financial, but other brokers like BPI, Metrobank and BDO should have something like this as well.

COL Financial usually posts these on their Facebook page for public view. This means that even if you have a different broker, you can still see and use them.

So, in this level, find your broker’s top stock recommendations , then choose the stocks that you like. Once you pick your favorites, just buy them and that’s it!

We call this level as “Broker Stock Picks Without Confirmation” because you are basing your choices on your broker’s stock picks, but not really confirming other information surrounding it. Of course, there is nothing wrong with that, and all this takes very little time to do.

It’s easy, it’s fast, and the recommendations are from your broker, who are presumably educated and experienced in picking the right stock to invest in.

If you want to picks stocks using more info, then level 3 might be for you.

As you can see on the photo above, there are still multiple stocks to choose from, but you are not supposed to invest in all of them! In a future article, I will be explaining further how to effectively pick the best ones. We’ll also talk about which industries are best investments, among other things.

If you choose this level, you should probably wait for my article explaining the basics. Please look forward to them!

Make sure to follow us at Facebook and Twitter to get updated when the guides are posted! Maybe also subscribe to our mailing list.

(We already made that article, so click here to learn more.)

Level 3: Broker Stock Picks With Confirmation

This level is pretty much the same as level 2, but you’ll have more work to do. You will be spending more time, but you’ll probably earn more.

Though, it will probably take you anywhere from only 30 mins to about 2 hours every month. Still not bad considering the large potential gains!

The stocks that you buy will be the stocks that your broker recommends, but not necessarily their “top picks”.

Instead, you’ll be looking at way more stocks than level 2. Not only that, but you’ll have to learn about judging the stocks using PE, BV, Upside and all those other ratios that can help you.

I know, I know. This looks extremely complicated!

You’re probably thinking: what the hell is a COL FV? Or a P/E 19E?? Or a P/BV 19E???

But it’s only scary and/or confusing because nobody has taught you what these means yet! And that’s exactly what we at Baku Finance is going to do on our future blogs: teach you what these means in an easy way so you can use this info on your own investment decisions.

Seriously, this is really easy if you follow our guides, which is coming soon!

Even better, at this level, you’ll feel like a stock analyst, but it’s so easy even a well instructed 15-year-old can probably do it well! Just wait for our guides on how to properly do investing in this level.

You’ll also feel safe when your investments temporarily go down because you know you picked good stocks from your research.

We call this level as “Broker Stock Picks With Confirmation” because you will be looking at more information for each stock, rather than just quickly buying what your broker is recommending. It takes more time, but you’ll have more info on the companies you choose.

I know I seem like a broken record here but make sure to follow us at Facebook and Twitter to get updated when the guides are posted! Also, maybe subscribe to our emailing list as well.

(We already made that article, so click here to learn more.)

Level 4: Stock Analysts

I just want to preface this by saying that most of you will probably not want to do this level of stock market investing, and that is very okay! You might still want to read it though because this level is fascinating and gives you a glimpse of how we at Baku Finance invest in the stock market.

In this level, you’ll start doing your own analysis, instead of reading your broker’s analysis and recommendations. This is going to be very time consuming both in learning the necessary lessons and in applying your learnings in analyzing which stocks to invest to.

Essentially, every quarter, when businesses release their quarterly and annual financial reports, you’re going to make an analysis and some financial computations to determine if those businesses are doing well and if you should invest in their stock. You can then pick the top 3 – 5 best ones, based on your analysis, and invest your money on those companies.

In this level, you’ll have to learn about:

  • reading and analyzing financial statements, especially the balance sheet and the income statement
  • financial ratios and how to use each one
  • which industries and niches are profitable and, more importantly, why they are profitable
  • the individual intricacies of each company, together with the actions they plan to take
  • there are also other topics, besides those I mentioned, that you’ll have to learn as well.

Essentially, you need to learn about 3 large subjects: accounting, business and finance.

It will take a long time to learn about these topics if you start from scratch. It might even take you years. However, the reward is great as you’ll be able to pick the stocks that you know will give you the best returns.

However, this level came naturally to us because our professions are in accounting, finance and general business. There is a good chance you are in a different line of work, so this may not be optimal for you.

Most of you probably don’t, or even shouldn’t, want this level as it is time consuming. For most investors, the best level would be either Level 1, Level 2 or Level 3.

Also, we can’t teach this level. There is just too much to cover. So just focus on level 1, level 2 or level 3 instead.

Level 5: The “Warren Buffett”

This is the highest level there could probably be.

This is essentially just like level 4, but the people practicing this level has even more knowledge and experience in accounting, finance and business. They are also already great at handling billions, instead of just millions or thousands.

There are only very few people that would be doing stock market investing at this level. The most popular one would probably be Warren Buffett, who is usually in the top 3 richest people in the world on most years.

He has made his wealth buying stocks of good businesses and nothing else! He did not start any of his businesses, he just bought them!

We hope to be at this level in a decade or two as we continue reading more books about accounting, finance, business and investing. By that time, we’ll probably also have a good chunk of experience in stock market investing and business purchases in general. Wish us luck!

Which Level Should You Choose?

Again, which level you choose is entirely up to you! What matters here is choosing a level you’re comfortable with.

Also, if you try one level and decide that you want to switch, you can always do that anytime!

For most new stock market investors, I recommend either investing using level 1 or level 2. These levels require very minimum amounts of time and the gains you will get from them is still really good.

Also note that you can combine these levels! For example, if you want to do level 3 but you’re not confident about your skills yet, then you can have 50% of your investments on level 1 and your other 50% for exercising your level 3 investing!

Again, it’s up to you! Mix and match as you see fit.

Are There Other Ways To Invest In Stocks?

Yes, there are! But I would not recommend them.

The obvious “do not do that” way of investing is picking stock because you “feel” like it’s a good investment. There are times when trusting your gut feeling is okay, but investing is not one of them.

There are also people who ask strangers on the internet what stocks are good investments. I mean, do you really want to put your hard-earned money on investments suggested by strangers? Probably not.

There are also individuals who buy stock picks information from other people. This is especially bad when the person selling stock pick info doesn’t even have the right knowledge and qualifications (but people who buy their information do not check that or don’t know what qualifications to look for).

Why would you trust these unqualified individuals when your broker has experienced and trained people to do actual research and stock analysis?

Also, we here in Baku Finance will teach you how to pick stocks properly, so there is not need to ask recommendations from strangers or buy stock pick info. And we’ll do this for free!

When you pick stock investments, it should be because the underlying business is good. This is the basis on your broker investments recommendations, which are researched by qualified individuals. So probably just stick to those.

What’s Next?

I will still be making separate posts that teach you on the ways to correctly do stock market investing for level 1, another post for level 2 and another post for level 3.

Aside from that, there are also basics rules to investing in the stock market that applies to all levels that you need to know.

All these are actually easy to learn but I will need to make a separate blog post for those. Please wait for those posts so you can invest in the stock market successfully. I hope you are excited to start making more money as a stock market investor!

Good luck and I hope you learned something!

So, which level are you currently practicing? And which level or levels are you going to be using? And if you’re investing in a different way, how do you do it?

Do you want more finance and investing guides? Follow us on Facebook. We try our best to upload a blog every week, mostly about making a good chunk of money with proper investing, and with some blogs being about responsible personal finance.

Want us to cover a specific investing or personal finance topic? Reach out to us through Facebook or comment below!

You Should also Read: