Investing in stocks can be an intimidating task for beginners, especially with the abundance of information available on the internet. However, investing in stocks is an excellent way to grow wealth and secure financial stability in the long run.
The stock market has a long history of generating high returns, but it also comes with its fair share of risks. As a beginner, it is essential to understand the basics of the stock market and how to navigate it to make informed investment decisions.
In this quick-start guide, we will break down the fundamental concepts of stock investing and provide practical tips for beginners. From understanding the stock market to creating a diversified portfolio, we will cover everything you need to know to get started with investing in stocks.
Whether you’re a complete novice or someone who’s looking to brush up on their knowledge, this guide is for you. By the end of it, you’ll have a solid understanding of how to invest in stocks and be well on your way to building a strong investment portfolio.
Table of Contents
Basics of The Stock Market
The stock market is made up of exchanges, Just like the New York Stock Exchange and the Nasdaq. Stocks are listed on a selected exchange, which brings buyers and sellers together and acts as a marketplace for the shares of these stocks.
Stock market indexes.
When people refer to the stock market being up or down, they are generally referring to one of the major market indexes. such as the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ. When an index drops, it means the average value of all the stocks in the index is down from the previous business day and vice versa.
When a company makes the decision to go public, shares of that company become available for purchase, allowing normal people just like you to purchase a stake in the company.
Companies may choose to go public for a number of reasons namely:
- The firm can raise capital to finance its growth opportunities.
- It gains access to a public equity pool that can be tapped in the future.
- An IPO gives venture capitalists a chance to realize a return on their investment, founders, an opportunity to sell some of their shares, and employees to exercise share options.
- Becoming a public company enhances the liquidity of the firm’s shares.
- Public firms can use their shares as currency in future acquisitions.
- The fact that a firm exposes itself to public scrutiny can be interpreted as a commitment by management to perform well.
- The visibility that comes along with a successful IPO can increase the firm’s brand value and act as a marketing tool.
Shares are designed to provide investors with two types of return, annual income, and long-term capital growth. Most shares offer income in the form of dividends, which are typically paid twice or four times a year.
Dividends may be distributed in the form of share repurchases, which help drive up the price of the stock, making the shareholders money, or they may be set aside in order to be used at a later date to grow the company and increase the value of the shareholder’s stock.
One factor that is the key to investing success and the principle by which investors are able to make immense returns on their investment over time is the principle of compounding interest.
When a stock makes you money, you can use that money to buy more stocks. Ideally, those stocks will make you even more money, which can then be invested again and again in an ongoing process.
If you make good investments, the net result will be that your money grows exponentially over time. This is the principle that investors such as Warren Buffet have used to turn just a few thousand dollars into billions of dollars in wealth.
Bull markets vs. bear markets.
A Bull market is a sustained period where prices rise, usually for months or years. we say that there is a bull market when the stock prices rise 20% (or more), which follows a previous 20% (or more) decline and is followed by another 20% decline.
On the other side, The Bear market tends to happen during periods when the economy is strong or strengthening and the core economic metrics like GDP growth and company profits will be strong, while other metrics like unemployment will tend to trend lower.
The good news is that every single bear market in the history of the united states was followed by a bull market. If you remember what happened in 2008 the market dropped down to 50% then it went up 69% twelve months later.
Stock market crash vs. correction.
A correction is often defined as a 10% drop in the market from recent highs. Corrections can occur over days, weeks, and months.
On the other hand, a Crash is a sudden and very sharp drop in stock prices usually a 10% drop or more, often occurring in just one day. Market crashes usually occur every 7 to 10 years and can lead to a bear market.
Now that you have the basics, It’s time to learn how to invest in stocks with our step-by-step guide for total beginners.
How to invest in stocks
1. Decide How You Want To Invest in Stocks.
I’d recommend investing in individual stocks once you have a complete understanding of the stock market and how stocks work.
You significantly reduce your diversification and increase your risk by investing in just a handful of individual stocks. The reward can be higher, though, because you become more targeted.
Before deciding to invest on your own, take a step back, and do some research to ensure you make educated decisions. for instance, it is vital to know the various sorts of funds you’ll invest in.
Here’s the key point. if you have the time, knowledge, and desire necessary to invest in individual stocks the right way, we absolutely encourage you to do it. If not, there’s absolutely nothing wrong with building a portfolio of low-cost ETFs and mutual funds to take the stock-picking part out of the equation.
With that in mind, if you decide that you’re better suited to invest in stocks through funds, here are a few things you need to know. There are two main categories of funds you can use to invest in the stock market: mutual funds and Exchange-Traded Funds, ETFs.
Rather than buying one stock, mutual funds enable you to buy a basket of stocks in one purchase. The stocks in a mutual fund are typically chosen and managed by a person or group of people.
These fund managers make the decisions about what stocks the fund holds and how much of each they want to invest in, they also charge a percentage-based fee when you invest in their mutual fund.
Most of the time — this fee makes it difficult for investors to beat the market once they invest in mutual funds. Also, most mutual fund investors don’t actually ever beat the market.
There are pros and cons to this as you can imagine, but some people feel more comfortable having a human managing their money versus an algorithm (created by Robo-advisors).
Mutual funds offer three major benefits:
- Convenience — by investing in a mutual fund you get to own a bunch of different stocks all in one package.
- Diversification — is a strategy that reduces your investing risk by spreading out your eggs.
- They are managed by investment professionals
But, that doesn’t mean mutual funds are 100% amazing. convenience and Diversification are definitely good benefits, but the problem with having professional fund managers is that they charge a lot of fees (usually that charge an annual fee of 1-2%).
2. Open Brokerage Account.
Index Funds & ETFs:
ETFs are basically a basket of stocks that act as a single stock. You purchase it like you would an individual stock, but it’s basically a fund that encompasses multiple other stocks. For example, you can buy an ETF that has Google, Amazon, and Facebook all in one, so you get exposure to all three companies.
ETFs are very similar to Index Funds except for one major difference: with index funds, you can only buy and sell shares once a day, but with ETFs, you can buy and sell your shares whenever the stock market is open. Even though an ETF is not stock, you can buy and sell ETFs as if they were stock.
Unlike Mutual Funds, Index funds and ETFs are passively managed, which means the fees are much lower.
2. Open an Investing Account
To start investing in individual stocks or funds, you’ll need to open an account at a brokerage firm. That could be a Traditional brokerage account or Managed brokerage account.
Traditional brokerage account
A Traditional brokerage account is a type of online investing account similar to a bank account, with the key difference of being able to buy stocks, bonds, mutual funds, and ETFs. Opening a brokerage account is a crucial first step before investing in the stock market or trading forex.
There are several great online-based brokerages with lots of features to help you analyze stocks, reasonable commission structures, and user-friendly trading platforms.
Managed brokerage account
A managed brokerage account comes with investment management, either from a human investment advisor or a Robo-advisor. Robo advisors are affordable and easy to use. You’ll answer a few questions about your goals as an investor, your income, and your age.
Your Robo-advisor chooses an asset allotment and automatically distributes your money using an algorithm-generated portfolio. This gives you some basic investing assistance without a full-service broker.
3. Start investing.
With your budget in mind, your research is completed, and your account opened, it’s time to start investing. With most online brokerage accounts this is often pretty easy. Just log in, head over to the investment page, search for the particular stock or fund you want and click the “buy” button.
A customer service representative should be able to walk you through the process the first time to show you all the ins and outs of your particular account.
With a Robo-adviser, you’ll just check in on your account periodically to ensure it’s progressing to match your goals and make adjustments as needed. You can also set your investment account to automatically pull a set amount of money from your checking account or paycheck each month so you don’t have to remember to make those transactions yourself.
Stock Market FAQs.
How much money do you need to invest in stocks?
Despite the common misperception, you don’t need a ton of money to get started investing in stocks. Stock trading commissions have dropped significantly in recent years, so it’s practical to buy your first individual stock with just a few hundred dollars. Many brokers also offer a nice selection of exchange-traded funds (ETFs) commission-free, so you can literally get started for the cost of just one share of whatever fund you’ve got your eye on.
In short, if you’re ready to start investing in stocks, a lack of investable capital shouldn’t necessarily get in your way.
What Are Dividends?
A dividend is the distribution of reward from some of the company’s earnings and is paid to a class of its shareholders. Dividends are decided and managed by the company’s board of directors, though they need to be approved by the shareholders through their voting rights.
Dividends are often issued as cash payments, as shares of stock, or as other property, though cash dividends are the most common. Also, various mutual funds and exchange-traded funds (ETFs) pay dividends.
What is Stocks Split?
A stock split is a corporate action during which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Even though the number of shares outstanding increases by a specific percentage, the total dollar value of the shares stays the same compared to the pre-split amounts, because the split doesn’t add any real value.
The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares, respectively, for each share held earlier.
How can I start investing with little money?
Investing doesn’t require you to start off with a fortune already. In fact, some of the most successful investors in the world started out incredibly small with just a few hundred or a few thousand dollars.
When you’re starting small, though, it’s especially important to choose a company or two that you have thoroughly researched and that you deeply trust. Allow that company to make you money, reinvest that money again, and then you’re off to the races.
When To Sell Stocks?
When it comes to investments, there will never be a perfect time to sell a stock. Any sell-off would always come down to what one was thinking when one bought the investment.
Experts advise on selling a stock only when it does not meet the original investment criteria, leading to losses, or upon a stock rising to the desired level and generating the desired profits.
Any stock sale that has the potential to result in profits will always be the right call especially in meeting the initial investment objectives. Besides, whenever sale results in a loss, accompanied by the conviction that it is the only option for avoiding additional losses, then pulling the trigger would be the right call.
Investing in stocks can seem overwhelming, but with a little bit of knowledge and patience, anyone can become a successful investor. By following the steps outlined in this quick-start guide, you can begin to grow your wealth and secure your financial future. Remember, the key to successful investing is starting early and being consistent. Don’t let fear or uncertainty hold you back from taking the first step towards financial independence.
If you have any questions or would like further guidance, please feel free to leave a comment below. We are always happy to help and provide any additional information that may be useful. Happy investing!