Table of Contents
- 1 Understanding Stock Market for Beginners in 2021
- 1.1 Understanding How to Invest In Stocks for Beginners
- 1.2 Conclusion
Understanding Stock Market for Beginners in 2021
Today I’m sharing with you a comprehensive list of what you need to understand on how to invest in stocks for beginners who want start a stock trading business but no sure where to start. But it’s not only for beginners.
Even if you know a few things about the stock market you will still find some great nuggets here. Now this post on stock market investing is going to be a long one. I have 17 comprehensive stock market training tips for you.
So what we’re doing here is we’ve broken this down into a two part article, with this article being the first. You’re welcome to skim through and pick up the main points but I would recommend you take your time to understand each section if you’re true beginner because we’re making it as in-depth as possible.
This is a full, all-inclusive tutorial showing you how to invest into the stock market.
Obviously right now we’re in some turbulent times in the markets and so people are interested in investing. But many of them do not have the knowledge required. There are many questions that people have and these include but not limited to:
- how to actually start investing,
- what brokerage firms should you use,
- how much money should you start with,
- what are some of the initial techniques that you can use to find stocks,
- what type of investors should you be.
After that we will talk about about stock market research in the next article. We’re going to talk about qualitative versus quantitative research, we’re going to talk about looking at different income statements, balance sheets and cash flow statements we’re gonna really try to go as in-depth as possible.
In this first part we will discuss the following stock market investing tips:
1. Logic vs Emotion
2. Investment Strategies
3. How To Buy Stocks
4. What Is A Stock?
5. Types of Brokerage Accounts
6. Passive vs Active Investing
7. How Long Should You Invest?
8. Mutual Funds, ETFs, Index Funds
Let get into the details…
Understanding How to Invest In Stocks for Beginners
1. Logic vs Emotion
One of the biggest ideas of investing is that you need to try to limit as much risk as possible while increasing the potential reward. That is the main goal of investing. Sometimes people get a little bit confused about that. One of the things that will serve you well early in your investing career is a little bit of a forewarning.
And that is to curb your ego.
Now I don’t want that to come off in the wrong way. However, the one thing that I would like to bring across here is to make sure that when you are investing, especially if you’re a beginner investor, is how to keep your ego in check.
Make sure that you are making investments based off of actual logic rather than emotional investments. I know when I first started in the markets I would start to buy stocks on a whim.
I would see somebody on the news. I would see Jim Kramer talking about buy this stock now. I would just go out and buy it right away within five minutes. I didn’t really know anything about the company. And in the end things didn’t really go all that well.
So what I suggest that you do is try to find a buddy or a friend who might also be learning about investing in the stock market for beginners. Or better still they’ve already been investing profitably for a long period of time.
Call them up, talk to them and make use of their advice and experience before you invest in any stock. Let them know about this investment that you’re thinking about making. Run it over with them. See what they have to say about it, their concerns etc.
It really kind of creates this better better way to invest so that you can throw ideas and bounce ideas off of each other.
So bottom line: Don’t let your emotional side of making money quickly get the better of you. Use as much logic as you can.
2. Understand Investment Strategies
In trading stocks, there are different types of investment strategies. But there are three main strategies. Perhaps, you’ve heard of some of these known as technical analysis and others such as fundamental analysis.
There are other strategies as well such as passive index investing, where they dump money in through dollar cost averaging.
Those are really the three primary strategies for investing.
Then there’s also another one that we’ll touch on briefly which is more so behavioural finance. It’s basically going off of the news, trying to understand people’s emotions and making investments from that perspective.
Now here’s what majority of investors on Wall Street, throughout the US and around the world. They use some type of fundamental analysis. This is a long-term investing strategy.
This is where you are trying to find companies that their current valuation or the current stock price is lower than what it should be at the moment. There’s a number of ways to do this but first let’s actually just discuss a couple of others before that and one of those is technical analysis.
This is actually something that you probably will hear when you begin to find how to invest in stocks for beginners. When you look at somebody who maybe is a day trader, or swing traders or very quick traders.
People who quickly get into a stock and get out of the stock, based off of technicals, based off of the actual stock charts. So the truth is most experienced and successful stock market investors don’t actually sit in front of like three big monitors and looking at stock charts all day long and watching as every couple of minutes.
Those stock charts change and we see the price go up and down and up and down. Really what I’m focused on is long term investing and as I said most people on Wall Street focus on long term investments as well.
So we’re not so much worried about the day-to-day activity but more so over the span of months and over the span of years. As learner investors we’re interested in where that company’s stock price is going to be in a year, two, five or more years’ time.
Now you can certainly get into day trading. You can certainly get into penny stocks and swing trading. It can be very attractive.
I know people who make quite a bit of money in those and actually I would suggest picking up some books on these strategies such as Technical Analysis for Dummies. These ‘Dummies’ books can be really useful especially if you’re new.
Bottom line: Our focus is on long-term investments in stocks that can really build wealth over time.
3. How To Buy Stocks
Our next tip on how to invest in stock for beginners with little money or lots of money is how to buy stocks.
People have wondered this for some time, may you have too. There are so many different companies out there and you see these advertisements for all these companies. How do I actually buy a stock of a company?
We’ll touch on this very briefly because I think some people already kind of know how to do this. Or to be honest you could just go onto the App Store and type in ‘investing app’ and you can find one on there.
However, there’s a couple that I really like. But there’s also a lot that you probably have already heard of before like TD Ameritrade, Charles Schwab, Fidelity Vanguard. These are some of the more traditional ones.
Then we see a lot of newer ones in the past few years like the Robin Hood app, M1 Finance, which is one of my favorites. Then there’s others as well like Weibo.
I’m not any way recommending any of these apps I’ve mentioned. You could simple Google for a brokerage firm and go with them. Honestly, it doesn’t really matter which brokerage firm you go with.
A lot of them today are pretty similar to each other. They have very similar features to them. But I have a preference like M1 Finance because you can do fractional shares investing.
Let me illustrate fractional share investing with an example. If you wanted buy to into Amazon stocks and looking at Amazon stock at the time for writing, it’s almost $2,000 per share.
So traditionally if you wanted to buy one share of Amazon stock you would need to actually have $2,000 to buy that. You wouldn’t be able buy half of a piece of one Amazon share right?
Well now you can do that with a brokerage app like M1 Finance. I’m in no way advertising for this app. It’s just something that I actually do like about them. Also there’s a very low amount of money required to actually start investing.
You can start accounts with $100 or less for most of these different brokerage firms.
4. What is a Stock?
Now let’s actually talk about stocks and what a stock specifically is just briefly. It may be kind of a concern of what actually is a stock, how does it function and maybe some other questions.
The most basic way to put this in a couple of sentences here is that a stock is essentially just a piece of a company that you own. To illustrate let’s say you buy your very first stock, your very first share of a company called Happy Wedges.
You pay $120 for one share of Happy Wedges. It may not be the best share to purchase but you’ve bought it. What this means is that you own a tiny sliver of this company. You actually own a piece of this company.
It’s not that you’re speculating on it. You actually own a piece of it. You’re a shareholder of the company. Depending on what type of company Happy Wedges is, what can happen is that you may get invited to shareholder meetings.
They actually give you free tickets to their amusement park if they have one, even though you may only have just a few shares. It’s actually a pretty good deal but you can actually get invited to the shareholder meetings especially if you own a lot of shares of a company.
For example if you own one share you’re not gonna really have much say in a company. But some people who own 10, 20, or 30 % of a company can actually vote on certain things that the company does. They can vote on who’s going to be on the board.
So it’s really interesting how this can work but yes you own a piece of the company.
What is difference between stocks and bonds?
A stock or share is unlike bonds. With bonds, you’re going to be essentially loaning money to the company and then they will give you that money back with a little bit of money on top as an interest rate.
Well with stocks you actually have some equity in that company and that’s the best way to view it. Hopefully that kind of clears it up.
5. Types of Brokerage Accounts
Our next step in learning how to invest in stocks for beginners is understanding the types of brokerage accounts that can be set up.
In order to purchase stocks or shares of a company you need to open a brokerage account. The brokerage firm acts like the middle man between investors like yourself and the company.
Using the example of M1 Finance, most of the brokerage firms are super easy to sign up for an account. You can sign up for an individual brokerage account. You’re probably also going to see a ton of different options when you’re signing up.
You might see an IRA potentially. You’re probably also going to see joints accounts. There are also custodial accounts. If you’re under the age of 18 and if you live in the US, then it’s going to be difficult to invest in the stock market.
But you can still do it but you’re just going to need to get your parents help with that. It’s technically going to be a called a custodial account. So it’s under their name but your name is attached to it as well.
I’m not sure on the entire legality of whether or not you’re legally allowed to control that money if you’re under 18 but it has your name on it. So you will need to find out.
Bottom line: Most people will just need to have the basic account which is just going to be an individual brokerage account. This is what you probably see at the top of the list when you were signing up or opening up a brokerage account.
6. Passive vs Active Investing
Our next stock market for beginners tip is to understand the difference between passive and active investing. As a beginner investor you want to know which one is going to be the best option for you.
Obviously this depends on you as a person and how much time you have on your hands. If you have time on your hands and want to read a ton of books, go ahead and get yourself educated on this. That is what I did when started to learn how to invest in the stock market.
Start looking into individual companies, investing into individual stocks. The other way of learning is through experience. You start learning to buy stocks usually using demo accounts and trading. You will make mistakes but you learn from those mistakes and move forward.
With that said, there are two ways of investing into the stock market. You can be can be a passive investor or an active investor.
Active investors from our point of view is to say roughly about at least once a week at a minimum, you’re looking over each one of the stocks that you own. How do you do that? You’re looking at the news from those companies making sure that everything is going smoothly.
If there’s any red flags you’re able to recognize those red flags. On average you’re spending at least some hours doing this each week. I would argue that people might put in anywhere from five to ten to maybe 15 hours per week of actually reading about companies, learning about companies and making sure that the investments that they have or future investments that they’re looking into are in good condition.
For passive investors, if you don’t have that time on your hands, which I would assume is for most people, you could take a passive approach to investing as well.
Now one approach is not necessarily better than the other but from a passive approach a lot of people do something called dollar cost averaging and they do this into mutual funds and ETFs (Exchange Traded Funds).
You may hear people talking about investing into index funds through dollar cost averaging. This is a strategy that many people use as well. It’s certainly been tested well.
We will talk a little deeper about that passive investing strategy at a later time. But what we’re really focusing on more is a little bit more active investing talking about investing into individual companies and finding good deals within the markets.
7. How Long Should You Invest?
Let’s talk about short-term versus long-term investing. What type of investors should you be in terms of how long you’re investing?
One thing that I want to make very clear is that the way that most people who have succeeded very much on Wall Street or in the stock market is invest for a long period of time.
If you’re buying a stock and then hoping to sell it in a few days based off of fundamental analysis that’s not really what we focus on. There’s certainly a way to do this and we’ll do write up later on short-term investing.
If you want to do day trading or things like technical analysis, it’s certainly profitable although it’s got its risks.
What we want to do is we want to buy a stock that can reap rewards for a very long period of time, for example for decades to come. You want to buy a stock now and you want to make sure that this company is a very good company in five years and that their share price has gone up.
Bottom line: You want to invest for the long term into companies whose shares are going to appreciate in the future.
8. Mutual Funds, ETFs, Index Funds
The next big tip you want to understand mutual funds, ETFs and index funds compared to stocks.
We’ve already mentioned that buying a stock or a share of a company very similar to owning a piece of that one company. But there is also ETFs, Exchange Traded Funds, mutual funds or maybe you hear index funds.
These are all relatively the same thing. It’s essentially a basket of stocks that people can invest into.
Say that you didn’t want to put all of your money into Walmart stock. You want to diversify your investments.
You don’t want all of your money going into one company because what if Walmart has problems next year and their stock price goes down to much lower than what it was today? You can end up losing a lot of money.
What some people like to do is they like to invest into ETFs. Mutual funds and index funds are relatively the same in the sense that they’re going to represent an overall basket of stocks.
So let’s say you open an account with an brokerage firm like Vanguard for their S&P 500 index. It tries to track the S&P 500.
Just quickly, the Dow Jones Industrial Average (DOW) represents 30 companies in the United States. Then we have something like the S&P 500 which represents 500 companies in the United States.
This is probably arguably the best indicator for how well the US markets are doing and overall kind of the economy’s health. Then there’s another index that we see quite often in America which is known as the Nasdaq. This is much more focused on tech stocks.
Throughout the world most countries or most regions do have some type of index that indicate how the markets are doing in that region. There’s an index in Shanghai, in Tokyo there’s an index, Europe also has an index, etc. These are all overall basket of stocks.
Sometimes there could be 30 or 40 stocks and other times it can be a thousand stocks in that one index.
Let’s say that one share of an ETF is $100. Inside of that $100 let’s say that that ETF owns 100 companies. This means that I theoretically could have invested $1 into each one of those 100 companies when I bought one share of that ETF.
This just sort of diversifies your investments. There are pros and cons to this as well.
Let’s say that you investment into an ETF like VOO which is that SP 500 index fund. It represents 500 companies. If you invested money into this well you’re pretty well diversified.
Now let’s say one out of these 500 companies goes bankrupt like Enron or Lehman Brothers or Bear Sterns. The company goes under and have no money left and their stock price goes to zero.
Well if you bought an index fund and that one company in the 500 went bankrupt, the other 499 should hopefully kind of carry the weight for that and you wouldn’t really feel that much of an effect.
On the flip side if say one of those 500 companies turns into the next Amazon, Apple or the next Netflix. It absolutely booms and the stock price goes from $1 to $1,000.
You’re not gonna see much of an effect from that as well because the other 499 stocks might be sort of weighing it down. So you see how that has both positives and negatives to it.
So that is briefly how to invest in index funds and ETFs and mutual funds.
I trust this article on how to invest in stocks for beginners has you a great picture of how stock market investing works. In the follow up article we’ll discuss how to do stock market research.
Do you have any questions, comments or recommendations? Feel free to use leave them in the comments section below.
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