How to Get Into Stocks: A Beginner's Guide to Stock Investing
Thinking of investing in stocks as a first timer but don't know where to start? You've come to the right place.
Stocks have been a very popular investment instrument for decades, and not without reason: they have consistently beaten the performance of any prominent asset class, be it real estate, bonds, or others, by a wide margin.
Since 1926, stock investing has returned nearly 10% on average per year, showing how it deserves its place in any long-term investment plan.
However, although stock investing is definitely profitable, starting to invest in stocks can be quite a confusing task if you are just starting out. Yet, whether you have $100,000 in capital to get started or will only start with $10 every week, you can invest in stocks, and this is where this guide comes in.
Without further ado, let us begin this guide from the basics.
The Basics of Investing: Why Should I Invest My Money?
What, actually, is investing?
In layman's terms, investing is making your money "work" for you so that it makes even more money without needing you to do anything.
While your investment returns probably won't be bigger than your day job's salary (at least, not initially), unlike you, your money can work 24 hours a day, 7 days a week, and 365 days a year without getting sick or tired. So, if you know how to invest, your money can continuously generate money for you.
Yet, investing is not actually a luxury but a necessity due to the enemy we know as inflation.
Investment vs. Inflation
Inflation, in a nutshell, is the increase in the prices of goods and services every year. Inflation is there even in the best-managed countries in the world, and nothing is exempted from housing, food, electronic goods, and other necessities and comforts.
Inflation essentially causes our money to lose its value.
Let's use something popular as an example to illustrate inflation: the iPhone.
Back in 2012, you could get a brand new iPhone 5 at just $649, while the cheapest flagship iPhone (not the SE, Mini, or refurbished iPhone) we can get in 2022 is the iPhone 13 128GB at $799. We can even argue that the direct replacement of the 2012 iPhone 5 is the iPhone 13 Pro, which is priced at $999.
While the actual calculation can be complex, let's keep it simple and say that the iPhone experienced inflation of:
($799/$649) -1 x 100% = 23.11% in 10 years
Meaning if you had an annual salary of $50,000 in 2012, and your salary has not increased by 23.11% in 2022, you technically 'lose' against inflation. If you stop working? Then inflation will move you financially backward even more.
The good news is that we can fight inflation by investing.
A successful investment practice is when you can earn a return on your investment above inflation, and although this can be easier said than done, stocks are one of the best investment instruments for achieving this dream.
Why Should I Invest in Stock?
Convinced that you do need to invest but still not sure whether investing in stock is your best bet?
Of course, there are many investment instruments available aside from the stock market, and keep in mind that you don't have to pick just one investment. Diversifying your investment and putting your money in a wide variety of investment instruments to minimize your risks is a prudent approach.
Yet, there are at least two reasons why investing in stocks is considered the best long-term option:
1. Better economic performance
The first reason is fairly obvious, and as discussed, the stock market has historically given higher average returns over the past century compared to other major asset classes: real estate, saving accounts, bonds, mutual funds, and more.
Investing in stock will not give guaranteed returns. Nonetheless, long-term investment in the stock market has more potential for returns with low associated risks.
2. Stock investing encourages financial literacy
Investing in the stock market is a little more technical than, for example, purchasing real estate or making a bank deposit, and it requires more responsibility.
In short, investing in the stock market forces you to learn more about the stock market itself, as well as macroeconomics and microeconomics, and how companies work. Ultimately, you'll have a chance to improve your financial literacy.
Investing in stocks will help you grow as an investor and learn how to manage your money better and, especially, how to create wealth.
What is a Stock?
What, actually, is a stock? When you own a stock of a company, you essentially own a small piece or a share of the company.
As an owner, every stock share you own entitles you to a percentage of the company's assets and profits.
Not all businesses are available to invest in in the stock market. Only those companies that have publicly listed their stocks through an IPO (Initial Public Offering) are.
The Stock Market
The stock market or the stock exchange is a place where you can buy or sell shares of stock of publicly listed companies. The New York Stock Exchange, Nasdaq, and the London Stock Exchange are just some examples of prominent stock exchanges, and there are many others around the world.
Today, thanks to technology, we don't need to physically go to these stock exchanges to buy or sell shares. Technically, there are only select representatives, the stockbrokers, who can directly buy and sell shares of stock in these stock exchanges, and we just transact with these brokers.
In practice, a single stock market transaction involves three interactions between four different parties:
- Investor
- Trading participant (a broker or dealer)
- The stock exchange
- The publicly listed company selling the stock
These three interactions are as follows:
- Between the publicly listed company and the stock exchange: the stock exchange evaluates, screens, and accepts companies who would want to become publicly listed.
- Between the stock exchange and the trading participant: the stock exchange assigns brokers or dealers to interact with the public, enabling buying and selling of shares.
- Between the trading participant and the investor: the broker becomes the intermediary between the stock exchange and the investor (you) for the buying and selling of shares.
How Do You Make Money in Stock Investing?
Most asset classes only allow you to make money via price appreciation (price increase.) For example, if you purchase real estate, then you can expect to make money from the house by selling it at a higher price to another party, probably after waiting a few years until the price has increased.
In stock investing, however, you get another source of gain in the form of dividends.
1. Making money through dividends
By purchasing a stock, you are buying ownership of businesses, so you are entitled to get dividends.
The dividends are, simply put, the payments a company makes to share profits with its investors. For example, a company may declare a dividend to be distributed for $1 per share. If you owned 1,000 shares of the company's stock, you'd get $1,000 in dividend payments.
Why would the company be encouraged to keep declaring dividends? Not only do they do this to encourage stockholders (you) to keep investing in the company, but there are also internal stockholders (i.e., founders) in the company, and by declaring dividends, they are also paying themselves.
2. Profits from price appreciation
The second way to make money in stock investing is through price appreciation (also called capital gains).
Price appreciation simply means the stock you own is now worth more than when you first bought it. For example, Apple's stock in April 2021 was worth $60 per share. Now, in August 2022, Apple's stock is worth $160 per share, a difference of $100 or an increase of 266.6%.
If you bought 100 shares of Apple in April 2021, then, and sold them in August 2022, you would have made $10,000 in profits in price appreciation.
How to Get into Stocks
How Much Time Do I Need to Spend?
Interested in finally investing in the stock market but not sure if you have the time?
The good news is that you technically can be a stockholder and spend no more than 1 hour per year in the stock market.
While you can be a day trader and spend more than 8 hours per day buying and selling stocks (which we don't recommend for everyone), various studies have suggested that there's little to no relationship between the amount of time you spend buying and selling stocks to the amount of money you can make from stock investing.
The potential profits you can make from the stock market are more likely determined by the quality of investment knowledge and experience. In fact, 90% of successful millionaire investors in the US are not active traders at all, and 32% of them hold their stocks for more than six years on average.
How To Start Investing in The Stock Market
There are basically three options to get started investing in the stock market, each with its own unique characteristics and benefits that may better fit your style of investing and financial objectives:
1. Through a professional stockbroker
A stockbroker or dealer, as briefly discussed above, is a licensed professional who is assigned by the stock exchange to facilitate the buying and selling of stocks for you, and they are also licensed to give you professional advice on your investments.
Partnering with a good and reliable broker means you also gain access to useful advice that is custom-tailored to your investing needs, risk profile, and financial objectives. They can provide advice on what stocks to buy, when to sell and may notify you of upcoming opportunities.
Depending on your needs, you can even let the brokers completely manage your portfolio for you.
However, this professional advice and personalized service typically will cost you higher trading minimums and higher commission rates than the other two options.
2. Purchasing Equity Funds
Another way to invest in stocks is through Equity Funds, which is a specific type of Mutual Fund (or hedge fund) that invests in the stock market.
A Mutual Fund is essentially a collection of money pooled from many investors that is professionally managed by a fund manager or a firm.
By purchasing an Equity Fund, you are not buying specific company stocks but shares of this specific Equity Fund.
If, for example, this Equity Fund is invested in 20 different US tech companies, then your money is also invested in these companies.
A key feature of investing in Equity Funds is that you are transferring the decision-making responsibilities to the fund manager or firm you trust, so you don't need to decide what stocks to buy and when to sell. This can help you minimize risks as long as the Equity Fund is trustworthy.
However, a key downside is that you don't get any freedom/flexibility, and your portfolio's performance is tied to this Equity Fund's performance.
3. Via an online platform
Thanks to technology, now it's possible to invest in the stock market via an online stockbroker, allowing you to buy or sell stocks on your own, as long as you have access to the internet.
With these online platforms, you basically do everything by yourself. Since there are minimal personalized services, you typically pay a relatively low commission rate (and no rate at all with some transactions).
Some platforms and online brokers may still provide you with reports and market information, but you typically won't get any one-on-one advice.
How to Pick a Platform or Stockbroker
If you are just starting out, we'd recommend investing with an online platform or online stockbroker due to the minimum amount to start and low commission rates.
Besides, investing with these online platforms means that you are on your own, so you can learn more before getting a mutual fund or dealing with a traditional stockbroker/advisor.
Nevertheless, you should pick an online platform or stockbroker that fits your investing needs and objectives, and you should consider these three factors:
- Reputation and reliability: make sure the platform or online stockbroker is registered with the Stock Exchange in your area (and it's not a fraudulent person or company.) If you are not sure, the Stock Exchange's website should have a list of online and traditional brokers registered with them.
- Fees and commission rates: every time you buy or sell your stocks, the stockbroker or platform will get a certain percentage of that amount. Rates can vary from broker to broker, and besides commission rates, there can be other fees like VAT, stock exchange transaction fees, sales tax, and so on.
- Reports, market information, and advice: different online platforms and stockbrokers may offer different levels of information and advice. However, typically the more information you get (especially personalized information), the more they'll charge you in fees.
How To Pick The Right Stocks to Invest In
While there are various techniques and methods investors can use in deciding which companies to buy, there are two popular (and effective) stock analysis methods you should first focus on: technical analysis and fundamental analysis.
Technical Analysis
Technical analysis refers to estimating the future value of a stock by reviewing historical data, mainly via price history and charts.
Technical analysis only focuses on analyzing price history, with a key assumption that everything that has happened and is happening is already factored into the stock's price, so other factors like political, microeconomic, macroeconomic, market psychology, and others can be ignored.
In short, in technical analysis, you only consider the price of the stock, as opposed to the fundamental analysis that would take a lot of factors into account (more on this later).
However, despite only taking price data into account, technical analysis is much more complex than it looks and would require you to really understand the supply and demand forces in the stock market.
Technical analysis is typically used in short- or medium-term stock investing, where you can exploit opportunities when stocks are believed to be trending up or down.
Fundamental Analysis
The fundamental analysis technique, on the other hand, analyzes various underlying factors that may affect the company's business performance and growth, to determine the stock's intrinsic value and whether it is currently undervalued or overvalued.
Fundamental analysis would take a look at various macroeconomic and microeconomic factors surrounding the company, including:
- The company itself: a thorough understanding of the company you are evaluating. In this digital age, it's relatively easy to gather information about a company by visiting its website and social profiles, as well as studying publicly available reports and statements of the company.
- Analyze financial statements: a thorough evaluation of the company's financial situation (revenue, expenses, operational costs, cash flow statements, profit/loss statements, balance sheet, and so on). Assess whether the company's financial situation is healthily growing year by year.
- Competitive analysis: evaluate a company's performance compared to its competitors.
- Evaluating debt: a stock of a company with a lot of debt may not perform as well as the stock of a company with little or no debt, even if the other financial factors look healthy. In general, investors should look for a company with a debt-to-equity ratio of less than 1.
- Longevity: Evaluating whether a company is future-proof (i.e., whether its product/service would still be in demand 20 years in the future, expansion plan, diversification plan, etc.).
Common Stock Investing Strategies
There are three basic strategies for stock investing. Here we will discuss each one and why they work to help you decide on which strategy will fit you better:
1. Buy and hold
Pretty self-explanatory, the buy and hold strategy involves buying stocks and holding them until you need to get the money someday.
You virtually ignore the ups and downs of the market and invest for the long-term with this strategy, and the typical approach is to pick giant enterprises and established companies.
The advantage of this strategy is that it's stress-free and very easy to use, but the potential return might be lower overall.
2. Dollar cost averaging
In this type of strategy, you are investing a fixed amount of money in the same company at fixed intervals (i.e., the same date every month), regardless of the current price of the stock.
The idea is that by buying at a fixed interval with a fixed amount of money, you spread out the risk of buying too high and too low, averaging the long-term cost so you can take advantage of the price fluctuations.
This approach has a lower potential risk but higher potential profit than the buy-and-hold strategy but would require more discipline.
3. Market timing
Also known as stock trading, this strategy involves actively watching the stock market and timing the market to buy low and sell high.
The market timing strategy obviously requires more skill, time, dedication, and luck. While trading is a lot more exciting than long-term investing, it also involves more risk.
In fact, many would consider market timing as a form of gambling rather than investing.
Conclusion
If you are just starting to invest in stocks, keep in mind that you can start small, and many online stockbrokers will allow you to invest with relatively small minimums. You can use this opportunity to learn and hone your experience before making bigger investments.
The key to successful stock investing is to do your homework first: determine your financial objectives, risk profile/risk tolerance, budget, and especially perform your fundamental and technical analysis.
Once you've done your homework, investing in stock can put you in a very advantageous position to reward yourself financially in the years to come.
