If you are a beginner investor struggling to get your feet wet in the world of investing then this would be a very beneficial article for you. This is written keeping the investing for beginners in mind however even if you have been investing for some time we are sure that you would find some valuable points in this.
Before we start on the accurate steps on starting the investment journey it is important to get a quick view of how Investing can change your life for good.
Investing in stocks plays a very important role in constructing wealth and attaining financial freedom. When investing in any company you essentially become the shareholder of that company. And by becoming a shareholder, investors hold a stake in a company’s profits. Can reap the benefits of its rising value as time passes.
Investing in stocks offers the potential for capital appreciation, which means that the value of the stocks can increase, resulting in investment returns. This growth potential renders stocks an investment choice, for those aiming to expand their wealth.
Benefit of Investing
- Historically, stocks have provided higher average returns compared to any other investment options like bonds or savings accounts.
- Owning a stock makes you a part of the company share and as the company grows you are automatically benefited from that.
- Some companies distribute a portion of their profits as dividends to shareholders, providing an additional source of income.
- Investing in stocks allows you to diversify it in different sectors and not concentrated on a single sector. For example, you can diversify between real estate using REITS, or tech sector, or the finance sector.
- Stocks are generally liquid investments, unlike real estate where it is not easy to get in and out of investments. For stocks, you can get out of your investment anytime you wish to.
Risks of Investing
There is a popular saying in the investing world that you should NOT invest in anything which you do not understand. Investment comes with inherent risks and some of them we have highlighted here.
Always remember, invest only what you can really afford to lose.
- Stock prices can vary significantly due to market conditions, economic factors, or company-specific news, which may lead to potential short-term or long-term losses.
- Investing into a specific company does expose you directly to the performance of that company and any bad news or poor performance of the company will reflect directly into your stock value.
- Because of the stock market’s short-term volatility, it may lead to emotional decision-making, potentially impacting investment outcomes.
- Broader economic conditions, geopolitical events, and regulatory changes can influence stock market performance.
Before you even put a penny out of your hard-earned money into investing it is of utmost importance that you educate yourself. You should not be into investing only because you got a tip or someone told you to invest in a particular stock that they think is going to be multifold. You will be setting yourself up for failure and financial loss if you do so.
If you do not understand something, do not put a penny of investment into it.
Here are a couple of resources and tips that you can use to get yourself ready for investing.
- Books are a great way to get your journey started on investing. Read as many books as you can about investing. Some of the recent books like the psychology of Money are a great resource to make you understand what it takes to be a winner in the game of money. There are other classics like Intelligent Investor, Rich Dad Poor Dad, and A random walk down the wall street. Great books for any investors. These are just some recommendations however any book on investing will definitely give you some points that you can carry back home.
- If you are not a book person then there are tons of online courses available in Udemy and other online platforms like youtube where you can get ideas on investing. It may be overwhelming to see a lot of online content, especially on investing so be sure to choose to watch wisely.
- Get some basic knowledge about doing fundamental and technical analysis for a stock. You don’t need to be an expert in this field but you should have a basic understanding to see and filter out stocks with factors like asset-to-debt ratio, P/E ratio, profit margins, etc. On the technical side some basic charting indicators like support/resistance, RSI, Volume, etc. They will help you to validate your understanding of the stock tremendously.
- Last but not least being aware of the market trends. Following reputable financial news outlets like CNBC, Bloomberg, and Financial Times will help you stay updated on market trends
Create a Plan
Having a well-defined investment plan will set you up for success in your investment journey. There are three key important factors that you have to be aware of when you are making an investment plan. They are diversification, asset allocation, and time frame so let’s go into detail slightly on these three points
The first one is diversification, this basically tells you that you need to always diversify your investment and not put all your eggs in a single basket. If you are not very good at doing a fundamental or technical analysis on a specific stock then as a beginner it is recommended that you invest in an index fund.
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You can either choose a specific sector or you can also put it in an index fund that covers the whole market like SPY or you can go specific to the technical sector like QQQ.
The basic idea is, instead of doing investment in a single stock which carries a much higher risk than putting your money in Index Fund so as a beginner, if you are not too much confident or familiar with doing stock analysis then go with the index friends
Allocate Assets Wisely
Be Fearful when others are greedy– Warren Buffett
The second point is about the asset location, you need to properly manage the allocation of your money. You need to define the allocation properly and how much money you are keeping aside in case any opportunity arises suddenly.
It is always recommended to not go all 100% in the stocks and always keep cash aside at least between 20 to 30% to take advantage of any market situation.
For example, in the event of a significant event like the COVID-19 pandemic, individuals who have readily available cash to utilize will be in a better position. During situations like these, it is advisable to have cash on hand to take advantage of potential opportunities that may arise.
Select Time Frame And Investing Type
The third important factor is the time frame and the investing type. You should have a clear time frame in your mind like whether you’re Investing for the short-term or investing for the long-term.
Also, you need to decide what type of investing style suits you and what type of investor or trader you want to become. There are different categories of investors in the market like swing Traders or day Traders or long-term investors so you need to figure out what criteria fit you whether you want to go for day trading or something for long-term investing because your investment plan would completely be different based on what type of investment you are planning to make.
For example, as a day trader, you should be very good with technical analysis because that is going to be your bread and butter. If you are a swing Trader again that that is a combination of technical and fundamental analysis.
If you are a long-term investor then the technical analysis would not matter that much compared to the fundamental analysis. It will have more weightage in that case so all these things are based on what type of investment you’re planning to do you need to fix a time frame it could be a day, a week, or a year.
You may also check our detailed stock selection guide which provides a step-by-step process for selecting the right stock.
Choosing the right brokerage is a vital step in your investing journey and it is very important as a beginner that you choose the right platform to invest.
There are several factors that you should be looking at when choosing a brokerage firm for your investment.
The first of which is the fees and commission, how much you are going to pay while buying or selling a stock. Today there are a lot of brokerage firms that allow zero-dollar trading which means you don’t have to pay anything for buying and selling the stocks however be aware of any hidden fees for certain types of trading.
The second point is about what type of securities are available on that platform not all types of stocks are available on all platforms. Although the majority of stocks will be available on most platforms some may not have OTC stocks for example or some may not allow crypto trading.
The third point is the overall user interface of the platform, it should be easy for you to navigate around and should not be too complex so choose something which is beginner friendly, there are some brokerage firms like Robinhood and Webull which are popular among beginner investors. They are very user-friendly and should be easy to start with.
The final point is about customer support, this is also very important if you are a beginner. If you are stuck at some point it should be easy for you to call customer care or chat with them and get your issues resolved quickly.
You may find better customer support in major brokerages firms like Fidelity or Charles Schwab or TD Ameritrade they are large brokerage firms their customer support tend to be better compared to the small brokerages like Robinhood so decide what is your investment plan and choose your brokerage from accordingly.
Now is the execution time. Below is a quick note on some points that you should take care of while buying/selling any securities irrespective of the brokerage firm.
- Shortlist a stock based on your fundamental and technical analysis as needed.
- Select a stock in your brokerage firm and always go with a limit order when executing the same as there are chances that the price may change at the time of execution if you go with a market order.
- On the selling side you may be able to sell a particular stock on the same day itself in most of the brokerages however depending on your portfolio size there may be a restriction on the number of day trades that you can place.
- As we have discussed before the selling of stock completely depends on what type of investor/trader you are. You can hold it for a day/week/ year. As a beginner though it is recommended that you go with a long-term view on the stocks.
- If you choose to be a day trader then it is important that you always have a stop loss in place to avoid any big losses.
Investing is really fruitful if it is done right. You should always keep in mind that investing for beginners is not a quick rich scheme rather think of investing as a journey and art that you should master as you go along.
Also if you have not yet started investing then there is no better time than today. The earlier you start the more benefit you will see with the simple compounding effect.
Keep in mind all the points that we have discussed in this article and hopefully, you will have a great investment journey ahead.
Happy Learning and Investing.