How to Invest in the Stock Market for Beginners
For years, investing in the stock market, real estate, or commodities like gold and diamonds has been one of the greatest ways to generate generational wealth.
However, the stock market is always a hot topic in financial literacy. Some people also believe it’s a get-rich-quick thing, and some even mix trading with investing.
But new investors should make one thing clear from day 1: investing is a long game, and by long, I mean at least 5–7 years minimum. Becoming profitable in the stock market is not easy, around 90% of investors lose money in the stock market in the long run.
Becoming a profitable investor is not a piece of cake, as it is marketed in the movies and social media. And on top of that, several other factors determine your success.
If you are not profitable early in your investment journey, it doesn’t mean you will lose all your money. One bad phase cannot decide how you will end up, and vice versa.
What is stock and stock market?
Stock is a piece of ownership in an enterprise; if bought by an individual, he will be part owner of that company. And the market where you can buy and sell these stocks through different exchanges is called the stock market. New York Stock Exchange (NYSE) and NASDAQ are the biggest exchanges in the world.
But one thing may come to some people’s mind: What’s the purpose of all this? Why does the stock market matter?
For starters, the stock market’s main purpose is to provide a platform for private businesses to help them fund their businesses from retail investors and investment firms. And in return, these companies will give their shareholders a small part of their company.
If the company does well over time, the shareholder will get dividends from the company’s profit (if offered), and an increase in the stock price will increase the initial portfolio of shareholders.
For example, I have $1000. I bought 10 shares of Apple (AAPL) when its stock price was $100. After 2 years, if one stock is worth $120, that’s a 20% increase in my initial capital, making my capital $1200. During these 2 years, if the company offered dividends quarterly, I would also get those dividends.
9 Tips For Beginners on How to Investing in the Stock Market
- Where to invest, best fit for you.
- What are your risk appetite, patience
- Set your investment goal
- Importance of diversification
- Getting started
- Self-manage vs. hiring someone to manage
7. How much money is needed to start investing
8. Ignoring short-term benefits
9. Pro tips for beginners
Conclusion
Faqs
1. Where to Invest, Best Fit for You
As a new investor, it’s normal to feel stuck, and every new investor falls into that hole where he doesn’t know what’s good for him. First of all, you have two options.
First, you will manage your account, and second, you will hire someone who will invest on your behalf and will charge a certain amount. We will discuss option 2 thoroughly in point no 6, so here we will only talk about what should be your initial steps if you are managing your account on your own.
Fundamental analysis
If you decide to make your own investment decisions, you need to know fundamental analysis.
Fundamental analysis includes understanding the company’s financial statements, such as income statements, balance sheets, cash flow statements, etc., and different final ratios, like the ROE ratio, P/B ratio, P/E ratio, DER ratio, and many more.
Understanding the fundamentals of a company will give you a solid base for your stock market investment journey.
Best Investments in the Stock Market for Newbies
The best a new investor can do is only invest in index funds like S&P 500, ETFs, and blue chip stocks. If you invest in such big names in the market, it doesn’t mean that you will 100% become profitable, but the risk of losing your capital will decrease.
For Example, Abraham Phones is a company valued at $100 million, while Apple is a trillion-dollar company.
If I invest in Abraham phones, there is, of course, a chance that this company will become a billion-dollar company in the future, like every other company. Still, at the same time, the risk of losing a large amount of my capital is also there.
On the other hand, Apple, a blue chip stock worth trillions of dollars, might not have the crazy potential of skyrocketing its valuation because it already has one of the biggest foundations in the world, which minimizes the risk of losing money in the long run.
That is why investing in already proven giant companies and funds is less risky than investing in those considered “potentially great.” As a newbie investor, focus on minimizing risk and losses, then become greedy and opt for risky and volatile stocks.
2. What are your risk appetite, patience
Everyone has their own financial restrictions while investing. Some new investors might be open to taking risks and investing in volatile stocks because of their financial freedom. At the same time, some might be risk-conscious and want to avoid taking risks in the initial stage of their investment journey.
Not to forget that taking or not taking risks is in the nature of an individual, it is not entirely dependent on your capital. You can either have low capital but be open to high risk and vice versa.
Low Risk: In a low-risk investment, you would invest approximately 85–90% of your investment in an index fund and blue-chip stocks and 10–15% in mid-cap stocks.
Medium Risk: An ideal medium-risk strategy involves investing approximately 80% in index funds and blue chip stocks, 15% in medium-cap stocks, and 5% in small-cap stocks.
High Risk: A high-risk strategy would involve investing approximately 65% in index funds and blue chip stocks, 25% in medium-cap stocks, and 20% in small-cap stocks.
In your initial days in the stock market, try to stick with low-risk or at least medium-risk strategies to build more confidence and understand market structure.
3. Set your investment goal
Ask yourself this question before stepping into the stock market. What is your investment goal? Are you in for a long run of 10–15 years or just for 3–5 years? Why did you want to invest?
And tell yourself that you will just invest in the stock market, not gamble in the stock market. Do you have enough patience to stay calm during bad phases?
If you have answers to these questions, then well and good. If not, try to find the answers by looking at your financial needs for the future. This can be beneficial for setting up the base for your investment.
If you have a goal and a vision, you will try to act accordingly going forward. Always remember that patience is the number one attribute of a good investor.
4. Importance of Diversification
I am pretty sure whenever you heard about investing, you would’ve also heard about diversification and its importance. Diversifying your portfolio is one of the most proven and finest strategies in the stock market.
That’s why different indexes and mutual funds are highly rated: They offer diversification.
The S&P 500 index, which combines the top 500 companies in the US, offers much more stability because if some companies or industries suffer a drastic fall, the S&P 500 will not decrease drastically.
The same is true for common stocks; try to diversify your portfolio not only with different stocks but also with different industries. Sometimes, the stock of the same industry can go down if one serious issue occurs in one industry.
Diversification is key, regardless of where you invest, whether common stocks, bonds, or ETFs.
5. Getting Started
You can learn about each and every detail of the stock market from different books and articles, but none can match the experience you will get from the stock market itself.
That’s why try to start investing in the stock market as soon as possible. You can start with paper trading with no actual cash, learn about market structure, and know what it looks like to purchase a stock. Now, let’s talk about what you want to start investing.
Determine what kind of account you want. Regular or margin account.
Regular Account: In a regular cash account, you are bound to pay the entire amount of the stocks or securities you are willing to purchase. It is less risky because you cannot lose more than you have. You can’t leverage money.
Margin Account: A margin account is where the broker offers you leverage, and you can purchase more securities than the total amount you initially funded in your account. It is interest-based, with different brokerage firms having their own policies.
This is just basic information about your account. Choosing an online stock broker requires thorough details. This article from Investopedia will be more helpful.
6. Self-manage vs. Hiring someone to manage
Self-Managing Your Investment:
In this method, you are the one who makes every decision about buying and selling stocks. Those with good knowledge about the market and those just entering the market with little capital to gain first-hand experience manage their own investments.
It offers cost savings, flexibility, and control, and most importantly, it is one of the best learning experiences.
Hiring a Professional to Manage Your Investments:
Hiring a professional investment manager is a good but costly way to start your investment journey. This method is generally used by those who have a good amount of capital but little to no knowledge about the stock market.
Different investment managers and firms have their own charging rates, but on average, it costs around 1% to 2% of your initial capital, with some charges in profit as well.
A robo-advisor, however, can be a cheap way to hire someone. Here, an algorithm will make decisions about your investment, almost the same as a human, with less cost charged than a professional investment manager.
7. How much money is needed to start investing
As such, there is no minimum amount to start investing in the stock market. Many brokerage firms have made it easy for users to start investing with no minimum capital requirement.
At the same time, the option of buying a fraction share (a portion of 1 single share) so that you can buy any share you want, with whatever balance you have.
However, if you hire a professional manager or a robo-advisor, there will be a minimum balance requirement in your account. Different managers and robo-advisor firms have their own policies.
8. Ignoring Short-Term Benefits
First, decide to invest your money in the long run, not trade in the short term. Trading in the short term is extra risky, and different factors must be considered when making the decision to buy or sell.
In investment, when you are looking to gain maximum profit from a particular stock or fund in the long run (at least 5–10 years), don’t fall into the trap of short-term benefits.
Suppose you purchase a stock for $100, and after 2 months, if the price reaches $110, don’t become greedy by booking your long-term investment profit in just a few days and months.
Many new investors fall into this trap and some also book losses after some months when they see a dip. This is not how investment works. Investment requires patience in both good and bad times.
But if you also like to trade in the short term, like day trading or swing trading, make sure you are making a separate account for trading purposes.
Never merge your trading and investment accounts.
9. Pro Tips for Beginner Investors
- If you have invested for a long time, say 8 years, then there is no need to check your portfolio daily.
- Make a plan like after every 50 days, i will thoroughly analyze my portfolio.
- Never let your emotions make any decision for you. Your every decision should be backed by facts and data.
- Diversification of your portfolio minimizes the risk you take in investing. Never put all of your eggs in one basket.
- In the stock market, you can be lucky for some time, but the luck factor doesn’t necessarily work in the long run.
- Stay disciplined and always stick to your plan, especially during a dip and bull run.
- You can choose passive investing by not catching a few swings for the short term, and can be equally successful.
- If you have already decided to invest for a long time, don’t fall prey to short-term day trading, which is marketed like a get-rich-quick scheme. Short-term trading requires different skills and carries enormous risks.
- Never fall prey to those who say that they will give buying and selling calls if you join their subscription-based group or channel. This is one of the most common scams marketed on social media.
- Never stop learning. Just because you invest in funds or stocks doesn’t mean that the game is over. There is a lot to learn about the stock market.
Conclusion
In the end, always remember that investing is not something you can master just by watching YouTube videos and reading articles. If you really want to invest on your own, then start investing as soon as possible. Learn from your mistakes and take advantage of the experience you will get from the market.
FAQ’s
- What is the minimum amount needed to start investing in the stock market?
There is no minimum amount in many brokerage firms to start investing on your own. However, hiring a professional manager or a robo-advisor will ask for a specific amount in your balance to start.
2. Is it necessary to constantly monitor my investments?
No, for long-term investors, analyzing your portfolio in 50–60 days is sufficient.
3. Can I lose all my money in the stock market?
Yes, you can lose all of your money in the stock market. That’s why diversifying your portfolio is a key element for securing your capital.
4. What is a diversified portfolio, and why is it important?
Already explained briefly in point no 4.
5. How can I protect my investments from market volatility?
Diversifying your portfolio and investing in index funds and blue-chip stocks can protect your investment from market volatility.
6. Should I invest in individual stocks or index funds?
Index funds are considered less risky in the long term than individual stocks. However, in individual stocks, blue chip stocks are also considered less risky in Consider your risk-taking ability before making a firm decision.
