How to Invest in the Stock Market: For Beginners

Investing is a way of generating wealth by simply putting some money into an endeavour with an expectation of receiving extra income or making a profit by the end of the investment tenure. Warren buffet defines investing to be “the process of laying out money now to receive more money in the future.” The good news is that anyone can invest. Having proper basic knowledge about investment is key for beginners. There are many platforms through which one can make investments. Investment vehicles range from real estate to agriculture. However, relatable to this topic are investment options such as Fixed Income Instruments, Bonds, Exchange-traded funds, mutual funds, Equity, and index funds.

Why invest?

Through investing, you can put your money into vehicles with high tendencies of yielding great returns. Investing helps you earn money by saving money, not just saving money, but saving with profits in view. Investment is one of the easiest ways to wealth creation. It, however, comes with its own risks for losses. One of the best ways for beginners to gain experience in investment is investing in the stock market.

As a beginner, it is essential to know that investing in stock may give you experience, but unlike other investments, stocks’ principal value can rise and fall at any time. Lack of proper knowledge or emotional instability can cause you to lose a good part or all of your investment capital without making any profits.

Advantages of investing

Every investment may have its risk tendencies, some high and others low. However, to become an investor, you must be willing to take risks. And, the longer the time to put into investing your money, the more time the money has to grow. A few advantages of investing include;

-       Wealth building; earn more money by having your money work for you

-       Having a good retirement plan

-       Staying ahead of inflation

-       Save on taxes

-        Save up money for other financial commitments

Other advantages of investing can be built upon the above-listed points. When it comes to saving up for college, mortgage repayment or a retirement plan, or simply just putting money away for future purposes, investment is key.

Before proceeding with the stock investment ‘how to’ let’s consider basic stock market terms:

●     Stock; ownership in a company through buying shares of stock. That is, if you buy a $100 share in Amazon you become a part-owner of Amazon, a minor part owner. The more shares you buy, the more your stake at a company increases. There are also majority shareholders or part-owners who invest in thousands or hundreds of millions of dollars into companies.

●     Stock market; a place where Stock Exchange public listed companies’ shares are traded. Companies float (list) their shares to the public in the main market to raise capital, and this is done through an initial public offering (IPO). By purchasing a company’s shares, investors can trade the stocks among themselves, the Stock Exchange then keeps a track of the supply and demand records of the listed stocks.

●     Stock exchange; the process of buying and selling shares of stock, securities, and bonds among stockbrokers and traders. It is also a government recognized platform where stock market transactions are monitored.

●     Online Brokers; these are full-service or discount-full service brokers who render brokerage services full-package. These services include giving financial advice for investment, insurance, retirement plan, and every other financial relative aspect. They mostly offer their services to high-net-worth clients, and charge substantial fees which include a percentage per trades, assets managed, and annual membership fee. On the other hand, the discount brokers, make available to you Robo-advisors that are programmed to offer you financial advice, yet allow you to select and place your transactions using the set-it-and-forget-it Robo-advisory service tools.

●     Mutual funds; the process of pooling resources from many investors to purchase securities. It is a professionally managed investment fund.

●     IPO; also known as a stock market launch, an IPO (initial public offering) is a strategy used by public listed companies to raise funds or capital for the purpose of business expansion.

●     Portfolio; a collection of the total amount of assets an individual or institution owns. What can be commonly found in a portfolio are stocks, mutual funds, money market funds, exchange-traded funds, and bonds

●     Growth Stocks; a stock of a company responsible for the generation of steady revenue. Its revenues and profits are expected to rank higher.

●     Trading fees; also known as trading commission. It is a brokerage fee charged from buying and selling stocks. 

Where do you buy stocks?

There are lots of platforms (online and traditional) where you can buy stocks from. They all have similar or different terms. Some charge low or no commission fees with poor customer care services while others charge a minimum of $5 trading commission per buy or sell with high customer care service quality. If you are looking to invest at low amounts with no commission at all then you may want to consider Robin hood. Other places to buy stocks are Fidelity, TD Ameritrade, etc.

What to look out for before buying a company’s shares

Some investors would rather have a stockbroker manage their investments while others are simply a show-me-how do-it-yourself kind of investors. Whichever category you fall into it is best to still have a good knowledge of the things to look out for in a company. For instance, if you would like to invest in Apple, simply use your search engine to search for ‘Apple investor relations’. The first thing you are likely to see is the 10k or the annual report which gives you a basic understanding of the overall business module. Financial reports— income statements, balance sheets; strategies, competitors, why there’s a shift in business in a particular year compared to previous years. The next thing to look out for is the company’s recent conference call, most companies make that available to the public. Still on the investor relations page is the 10Q, quarterly report. Your findings based on these three things should determine if Apple is good enough for you to invest in or not. You can have other requirements to look out for, but basically, a company’s investment worthiness can be judged from these three.

How do you make money from stocks?

There are many ways to make money from stock, but as a beginner, you can make money from stocks through two major ways;

●     Buying and selling stocks: Buy a stock for $100, hold the stock for a while, and when the value goes up as a result of business activities, and the shares go up to $120. You can decide to sell out, that way, you would have made a profit of $20 per share on that stock.

●     Collecting dividends: not all companies pay dividends but most big companies pay dividend yield. Basically, when you buy shares from a dividend yield supporting company, you receive the yield after three months. The percentage differs according to the companies. As the company generates more revenue and makes more profits the dividend percentages increase.

Stock Strategies

●     Day trading

●     Swing trading

●     Long-term trading (buy and hold)

How to start investing in stocks

Get properly educated on investments

 First things first. For would-be investors who already have an idea about investments some level of investment education may still be required, but not compared to the intensity of a would-be investor who has little or no knowledge about how an investment works. Before putting your money anywhere, it is best to understand how the system works including its minimum investments, returns, and risk tendencies. If investing in mutual funds or ETFs, the not much may be required of you even as a novice, through the help of index funds and dollar-cost averaging investment is simplified and understandable. But when dealing with actual stock investments, it is essential to get all the education you can about it, and probably invest via mutual funds for experience before going ahead to actual stock investments. Asides attending investment seminars, reading books, watching YouTube videos, taking brokerage courses, and listening to audios, another way to learn about investments is by reading The Wall Street Journal and being a part of investor forums. You can also stay informed by regularly visiting investment websites like Investing Port.

 All these would help you become familiar with investments before actually investing any money. Another option to testing your gathered knowledge is to work with an online broker that offers virtual trading services, i.e. open a dummy account. It would allow you to virtually do everything—trading securities and testing out your strategies before actually getting involved with real investments.

A good level of investment knowledge would help you come up with your own strategies, and determine what kind of investor you are or would be; a risk-averse conservative investor? Or perhaps, you may use an aggressive approach towards beating the market. Would you prefer a $100 investment plan or a $1 million investment plan? Would you like to be a day trader or a swing trader, or are you more of a long-term trade kind of person?

The more knowledge you gather on investing, the lower the chances are of facing risks.

Set up an account with an online broker

Once you are set to move, the next step would be setting up an actual investment brokerage account. For new investors, Robinhood and Betterment would likely be good places to start from. Robinhood accepts minimum investments of $100 with no commissions. While Betterment has no requirement for initial minimum deposit with remarkably low fees. These two are okay if you decide to start out by buying stock-related ETFs or bond ETFs, however, when you are set to take the next step further into trading, it is advisable to use the services of a full-service broker like Fidelity, E*TRADE, and Merrill Edge amongst others.

First, invest with Mutual Funds or Exchange Traded Funds (ETF)

Note that this is optional. Most daring new investors would rather head up straight into stock investors while not-so-daring new investors would rather take it slow. The advantage of first investing through mutual funds or exchange-traded funds is that the funds are professionally managed by investment funds, and would literally take the burden of investment decisions off your shoulders. Through mutual funds, you pool resources together with other investors. Your major concern wouldn’t be how to trade, but how much money you want to put into a fund or group of funds. Everything else is left to the professionals to worry about. Another advantage of mutual fund investments is that it comes with diversification.

Stick to dollar-cost averaging

For would-be investors who would like to invest in thousands of dollars, but do not have the desired amount to invest yet, the dollar-cost averaging is a likely solution to that problem. It works by letting you gradually buy into your desired investment target. For example, you would like to make a $10,000 investment, instead of investing the amount one-time in a single index fund, you can opt for periodic payments of probably $300 0r $500 per month or less. By doing this, you are likely no going to buy at the top of the market, however, you can still buy into the fund at different times. This feature is not available in individual stock investment.

Invest in individual stocks

As the not-so daring type, you would eventually catch up with the daring investors, who chose to move directly into stock investment. This is the stage where you are left to “fly” on your own, make your own decisions, and use your own strategies.

When starting out, it is best to start gradually by taking a minimal position in one stock which is about 100 shares, before moving into another stock. The gradual fund positions you occupy would help prevent overexposure to a single stock, so long as your position in the stock represents about 10% or less of your total portfolio. The reason for this is to take advantage of the best pricing. Keep doing this until you gain several stock positions in your portfolio. Note that, this is not the general standard, but it’s a good way to start. If you started from mutual fund and ETF you would already have items to build on in your portfolio.

Diversify your portfolio

Diversifying helps you spread out your investment options such as setting up a cash reserve account, a retirement plan, and an investment account, and build your portfolio in the process. Note that this is also optional, especially if you are not the investment portfolio building type, you simply just want to save some money for the future. Portfolio diversification is the process of achieving variety. It is a risk management strategy implemented in investing. It works by joining a variety of assets to reduce the overall risk impact of an investment portfolio.

Individual stocks would also help you build your portfolio, and further help you diversify your cash and fund holdings. Building a portfolio always requires that you distribute your capital among other equity sectors.

Timing the Stock Market

This is another strategic position in stock investment—it brings up the question when? And, knowing ‘when’ is key to making large profits off the stock market. Not knowing ‘when’ may cost you your initial capital or no profits at all. While some people simply think it is impossible to time the stock market, others simply say it is luck. It is not always so, that you get in at the bottom and end up at the very top of the stock market. The market is continually changing, sometimes the stakes are high and other times the stakes are low. You may get nervous and sell your shares at a particular amount out of worry that the prices may no longer go up, it could just happen that after selling your shares, the prices shoot up by a good percentage.

So, when? When is the right time? One of the ways to times the market is by observing major changes in market trends. Some of these trends always reoccur and take up similar patterns. You can take advantage of this by studying past trends patterns, and strategically position yourself to benefit off the market when you spot similar trends or a new market uptrend surfacing before the stock prices drop again.

You may not be able to control the market changes, but, you can control your activities on the market, and protect yourself by always cutting your losses short.

Buying Stocks

Before buying stocks, it is best to start from looking out for the big market winners, and knowing what they actually look like or the traits that make them big market winners. The IBD has studied common traits of market winners since the 1880s, and has been able to come up with ‘seven telltale traits of market winners’.

The basic idea is to find stocks that also display similar traits. The traits to lookout for are

-       Explosive earnings and sales growth

-       Fast-growing and industry-leading product

-       Strong return on equity

-       Strong demand among mutual fund managers

-       Relative strength

Selling Stocks

The next big challenge new investors face is knowing when to sell stocks. You may be at an advantage while buying stocks, but there are tendencies of losing everything if you don’t get it right when selling stocks. Two basic rules can be applied when it comes to selling;

-       Offensive rules for locking in profits

-       Defensive rules for cutting short losses

None is more important than the other, it only takes wisdom to know when to apply either of them. It is best to learn how to apply both of them. When selling stocks take most profits at 20% and cut all losses at 7% or less. Always lookout for a big break of an uptrend line.

Summary & Conclusion

Investing in stocks don’t just easily come about, it takes time, effort, strategies, and skills. However, the end would be worth it, if you play your cards right. As a novice or new investor, it is best to start gradually and improve your investing skills along the way.

For would-be or novice stock investors, it is best to start with proven strategies for stock investment applicable to first-time investors. Becoming a long-time successful investor requires that you learn how to strategize and keep the odds in your favour, and effectively manage risks that are likely to surface.

The information provided here serves as a guide to set the new investor on track.