Investing is a tricky business, it is one of those things of life which can be considered very intimidating when you first begin.
I’ve been investing for only two years now, so I would not call myself an expert by any means, but I have spent a considerable amount of time and energy in learning how to invest properly. As someone who has recently overcome most of the hurdles and ‘barriers-to-entry’ of investing, I think I may be able to provide some unique insight for those who are where I was two years ago.
Investing does require some attention and learning to be successful, but it is really quite simple of a concept.
Investing is, in its most simple form, defined as:
laying out money or capital in an enterprise with the expectation of profit
For the purpose of this discussion, I would broaden that definition to not only include enterprises (businesses) but also commodities (gold, silver, oil).
Most things we own today lose value the instant it reaches our hands, our car, our furnishings, our gadgets. Here’s the rub, even today’s money loses value… anywhere from 1% to 4% per year! Investing is the beautiful idea of putting your money in places where it can grow in value, rather than slowly (or quickly) drift away.
Investing Possibilities
What are some of the choices to invest in (I’ll filter out bonds since they are riba based)?
- Stocks - A stock is essentially a piece of paper representing a piece of a company. Stocks are the most intimidating to invest in, but they are also where the most ‘fun’ is at.
- Mutual Funds - If you think stocks are too intimidating you should find comfort in mutual funds. These are essentially the stock of stocks. One share of a mutual fund buys you a part of a whole wide number of companies. Which ones the mutual fund holds are managed by the ‘fund manager’. Part of the price of the fund includes percentages that need to be paid to the fund manager. It is his/her job to make the right choices on all of the fund-owner’s behalf. Mutual funds usually represent certain segments of the entire economy/market. So one fund may specialize in technology companies, another in car manufacturing, etc.
- Commodities - For the Muslim, this is limited to buying actual physical ‘things’, such as precious metals (gold, silver, platinum). I won’t discuss buying these outside of the plain fact that you can go and buy a gold/silver coin or bar and feel confident that you are making a relatively safe investment decision. An ounce of gold would buy you a nice suit in the 1800’s and it will do the same today.
How do you buy stocks and mutual funds?
Most of us who work have a few investing options provided to us by our employer’s (401k’s, IRA’s, etc). These investment vehicles are the first ones that most of us are exposed to, and for good reason. They are generally painless to get started and often have great incentives to promote them such as “employer matches”, which essentially translates to “free money”.
Unfortunately, investment choices are often limited in such 401k’s and IRA’s to a subset of the investing world. You are only given a choice of a handful of mutual funds, pre-selected by a combination of the employer and the brokerage firm running the show.
To truly invest you need to have a broker of your own, or, preferably a discount broker (Ameritrade, MB Trading, etc). This is the company or person that gives you your account, account number, and either the person or web interface for you to carry out purchases (called ‘trades’). The first thing to be aware of is that ‘people’ brokers generally involve higher commission rates and come with the usual pitfalls of dealing with a person. Sure you may get some much needed expertise in helping make a decision, but at the same time you are also inheriting their own self-interest.
I, therefore, recommend low-commission discount brokers that have a do-it-yourself mentality.
The interface on these websites is very simple, you can either Buy or Sell. You choose the ’symbol’ of the company you wish to purchase. You enter how much you want to purchase. Finally you enter the amount you are willing to pay for it.
As long as your willing to pay the price it is currently at, your order will get ‘filled’ and walaa’ you are the proud part-owner of XYZ company or ABC fund.
Remember, this is called ‘trading’ for a reason. It is often said, “There is a loser on every end of every trade”. You bought those shares because someone was willing to sell you those shares, and that means he/she thought it was worth their while to sell it then. Various factors will eventually prove them right or wrong.
What drives a stock price?
Money. Specifically, how much money the company is making/losing, and what the potential is for them to make money and grow.
This is how the famous bubble of the 90’s was created. People began buying stocks on more and more speculation of potential. Eventually stocks need to meet those expectations and if they fail, people sell. Different industries have different drivers for those expectations, for example bio-technology companies are highly dependant on the success of their drugs in patient trials. Retail companies are dependant on how many people come into their stores. Most companies are highly dependant on sales and keeping their own costs low.
Market Capitalization
A big word, but not that complicated. The market cap is essentially the count of all the stocks issued by the company multiplied by its current value. We say Google is a “billion” dollar company because it’s market cap is 120 billion dollars.
Market capitalization is important because it affects the volatility of the stock you are purchasing. Larger companies have less room to grow (but also less probability they will collapse entirely). Most people define the following three categories slightly differently but it boils down to large ($5 billion+), mid (500 million+), and small cap (everything else) companies.
Dividends
Eventually stocks reach a point where they can’t grow anymore, or at least, not fast enough to justify further price growth of the stock. This is when the company becomes a cash printing machine. The profits it makes become eligible for ‘dividends’. A dividend is essentially a cash distribution of the companies profits to shareholders.
Ethics / Fiqh
There are a number of concerns for Muslims who are investing, some are fiqhi and some are personal.
Some issues include avoiding companies which make money primarily off of unislamic things, engage primarily in unislamic activities, or those that support problematic causes.
In the case of fiqh concerns, Sunnipath answers becomes a vital service. There are many answers regarding trading and I’ve compiled a list for the next post. I’ll write more about investing in the future and I’m available for any questions in the comments area.
