Investing in the stock market can be tricky if you’re a complete beginner. This article explains how to invest in stocks and grow your net worth using simple investment principles.
Investing in stocks is one of the best ways to build wealth and own a portion of the world’s most amazing business. Unfortunately, millions of people miss out on this legendary wealth building machine known as the stock market.
A whopping 46% of Americans currently do not invest in the stock market. I think that’s a shame because all of us spend our hard earned money with several publicly traded companies like Google, Apple, McDonald’s, and others every day.
If you enjoy the product, why not enjoy owning the stock too?
Hopefully, this article will change your mindset into a positive one where you embrace stocks and shift towards a wealth building mindset instead of consumer mindset.
You can consume your favorite products and services while building wealth at the same time. You can then pass down this wealth to your children, relatives, or favorite organization in the future.
It’s important to think long term and prepare for the future now so you have more options in life.
How do you get started? Read this step by step guide showing you how to invest in the stock market even if you’re a complete beginner.
How to Invest in Stocks: The Basics
Investing in stocks means buying publicly traded shares of real businesses that generate revenue for shareholders.
When you purchase a stock, you become a shareholder of the company and gain access to the future profits and dividends earned by the company.
Your goal is to invest in companies that will be worth more in the future so you can either sell your shares later for a profit or pass them down to the next generation for long term wealth creation.
Investing in the stock market is a long term game. The best investors develop a long term mindset, invest in a handful of wonderful businesses, and hold them over the long run through the ups and downs of the market.
Of course, this is easier said than done but hopefully this article will give you a simple blueprint to start investing in stocks even if you’re a complete beginner.
Most stock market beginners start investing money right away without learning the basics of how the stock market works or how to properly evaluate a prospective comapny.
It’s no surprise that many newbies blow up their trading accounts and call the stock market “a scam”.
You must realize that the stock market attracts all different types of players including first time investors and rich, wealthy sharks who prey on inexperienced investors for big time profits.
Think about professional sports for a moment. NFL or NBA players go through a preseason training camp to prepare themselves for the regular season.
I recommend doing something similar before you place your first stock market trade.
The easiest way to get educated is by reading the best stock market books and subscribing to insightful stock market newspapers and websites.
Decide How You Want to Invest
Some of you reading this article want to take 100% control of your investments while others are comfortable hiring a 3rd party to manage your investment portfolio.
There are generally 3 different ways to select how you want to invest:
- Self-Managed Portfolio: You decide which stocks or ETFs to buy and when to sell them
- Third Party RoboAdvisor: You pay a small management fee and a roboadvisor will automatically determine your investment portfolio and allocation
- Employer 401k: You invest through your employer’s 401k for your retirement.
You must make all the decisions yourself on which stocks/ETFs to buy and hold. It helps to understand a good amount about the stock you hold and how the underlying company is performing.
I suggest researching a company’s financial metrics, reading the latest 10-K annual report and 10-Q quarterly reports, listing to quarterly conference calls, and staying on top of the latest industry news.
Self-managed portfolio require some work but you will earn the largest possible investment returns because you avoid paying management fees.
Many retail investors are turning towards RoboAdvisor to automatically build a basket of stocks & ETFs that fit their investment criteria. For example, Acorn is a popular roboadvisor that will autoatmically invest your money in a large cap growth mix while charging minimum investment fees.
Roboadvisors free up your time to focus on your hobbies and spending time with your family but lack 100% control over your investment portfolio.
If your employer offers a 401k then you can invest a portion of your monthly salary into the 401k plan. Some company’s offer 100% matching contributions and I recommend taking advantage of this if your boss offers it.
401ks usually follow broad based indexes such as the S&P 500 and rarely allow you to invest in individual stocks.
3. Decide How Much to Invest
The first step to investing in stocks is figuring out your initial investment amount. You can start investing with little money or even if you are flat broke. If you’re over 18 and have even a small amount of money then you can invest in the stock market.
Whenever someone asks me how much money they need to invest, I recommend you start investing with at least $100 in the stock market.
Most brokers don’t have a minimum deposit but you want enough money to buy at least one share of a decent company. $100 is also enough money to start trading options if you want to grow your account much quicker.
Of course, $100 won’t make you a stock market millionaire overnight. Hopefully, you build an emergency fund already and have some extra cash to invest.
It’s far better to start with at least $500 to $1,000 so you can invest in a few stocks. Getting started is more important than anything else.
Here’s a couple ideas for intial investment amounts to get you started on the right track:
- $100,000 or more
Someone you reading this article are sitting on a large pile of money (more than $100k) but don’t know where to invest in. Later on, we will talk more about asset allocation, portfolio construction, and choosing between growth and value stocks.
For now, I want you to come up with an initial amount that works for your u.
4. Open an Online Brokerage Account
You need a brokerage investing account to invest in domestic and international stocks.
Your brokerage account allows you to buy and sell stocks during normal trading hours.
You can also buy stocks direct through the company but most people prefer to use 3rd party brokers for accessibility, liquidity and ease of use.
5. Choose Between Individual Stocks or Basket of Stocks (ETFs)
Most investors invest in either individual stocks or ETFs.
Individual stocks are shares of a publicly traded corporation that represent a small portion of the underlying business. Popular individual stocks are companies such as Starbucks (NASDAQ: SBUX) or MicroSoft (NASDAQ: MSFT).
Individual stocks are the most risky type of investment because you invest all of your money into a single business. If the business performs well then the stock usually follows however sometimes a company will lose revenue & customers, which may cause the stock to crash.
Exchange traded funds aka ETFs allow you to invest in a basket of stocks from a specific sector or group.
6. Conduct Research
Research is one of the most important strategies to building a winning stock portfolio. You can’t simply buy what’s being talked about on CNBC and do well. The stock market is an emotional, volatile machine that operates on fear and greed. Research allows us to separate ourselves from emotion and invest with sound reasoning and good instincts.
Types of Stocks: Growth Vs Value
Stocks tend to fall under two types of categories:
- Growth stocks
- Value stocks
Growth stocks are companies with fast-growing revenue but don’t necessarily post a profit. Tech stocks, solar energy stocks and cannabis stocks are examples of industries with tons of growth investing opportunities. You aren’t paying from profits today; You are paying for the growth and expected earnings in the future.
Value stocks are generally older, more established companies with a long history of profitability and dividend payments. Stocks like At&T, Walmart and Coca Cola fit into this category. These stocks are better suited for income investors who want to collect regular dividend payments.
How do successful investors (not traders) view the investing universe? Are there any trends in the way they pick their investments?
Lessons from Legendary Stock Market Investors
Here are some insights distilled from the methods and writings of investment legends like Warren Buffett, Philip Fisher, and Peter Lynch.
Stay within your circle of competence
You are best positioned to identify winning companies within your own field of expertise. If you work in retail, you are more qualified to decide if you should invest in companies like Walmart, Target, Best Buy, etc. than the latest bio-tech company.
Look for Economic Moats
There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a “moat” around them to keep their competitors away. They have a durable competitive advantage. Some examples of competitive advantage are:
Invest in Companies with Strong Brands
Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands resulting in deeper profits.
Low Cost Producer
– Companies that are able to make products and sell them at phenomenally lower prices than their competition automatically attract customers – lots of them. As long as quality is not compromised, of course. Walmart and and Dell have perfected this concept to a science.
Large pharmaceutical companies with patents; companies that own copyrights, drilling rights, mining rights, etc. are pretty much the sole producer or service providers in their area. Again, these companies can raise prices without fear of losing customers, resulting in higher profits.
This is a product or service that has the potential to network or add more users with time. Adobe has become the defacto standard for publishing, Microsoft’s Excel for spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom-line.
Quality of Management
How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it’s always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.
See Which Products & Services You Use Regularly
Many of you reading this article right now are using an Apple iPhone. Invest in Apple stock (NASDAQ: AAPL) if you’re an apple fanatic.
I often find the best investment ideas by taking a look at my own personal spending habits.
If I like a certain product, chances are the company is doing a good job, has sound management and is making a lot of money. Take a look at your own buying habits and see which products/services appeal to you.
Most products clearly list the company name and brand infomration on the packaging. Household items like toothpaste, hair care or beauty products list the company name in fine print on the back of the label.
Once you find the company name, just Google “company name + stock” or “company name + investor relations” to see if it’s publicly traded. Certain brands are owned by a parent company that trades on a major US stock exchange.
If the company is not publicly traded, then you cannot buy stock because it;s privately owned. You can always look out for a potential IPO in the future, though.
Determine Your Portfolio Allocation
When it comes to portfolio allocation, it all depends on your investment goals and time horizon. Your portfolio will be made up of a mix of stocks (long term investments), bonds (short term income producing assets) and cash.
A conservative rule for building your portfolio is the rule of 100. You simply determine your stock & bond mix by subtracting your age from 100.
Ex. If you are 40 years old, then your portfolio will be 60% stocks and 40% bonds. We subtract 40 from 100 to reach 60. As you age, your portfolio will continue moving towards bonds to protect your principal and preserve your equity.
Set a Monthly Investment Budget
Your investment account will grow much faster if you make regular monthly contributions to your nest egg. I set aside at least 10% of my monthly income to invest in the stock market for my long term financial future.
You can select a percentage or dollar amount then stick to your plan each month. For example, let’s say you earn $60,000 per year or $5,000 per month. $500 per month is equivalent to 10% of your take home pay for investing in the stocks market. That’s around $6,000 per year or $60,000 per decade.
Small amounts add up and you can speed up your retirement if you remain consistent, invest in high quality companies, and hold on to your stocks over the long term.
You’ve done your research, setup a brokerage account, and funded it with some money. Now is the time to take action and buy your first stock.
Investing in big tech companies is a solid way to start off your portfolio. Many beginners start off with popular stocks like Tesla (NASDAQ: TSLA), Apple (NASDAQ: AAPL), or Amazon (NASDAQ: AMZN) because these companies are extremely successful and attract a lot of passionate followers.
You may choose to diversify a bit by investing in dividend stocks such as McDonald’s (NYSE: MCD) or Proctor and Gamble (NYSE: PG) if you want to build a dividend growth portfolio.
If you prefer investing in ETFs then selecting VOO or SPY is a good start.
Choose an Exit Strategy
Determining your exit strategy is extremely important if you plan to invest over the long term. If you want to retire early then focus