A Beginner's Guide to Investing In Stocks & Equities
Investing in the stock market is a daunting and often misunderstood way of growing your wealth. Engaging in the stock market comes with a lot of warnings, and for good reason, because it’s easy to lose your money if you make the wrong investments. When you’re a beginner, that risk is even higher.
That’s why we’ve written this guide on investing in stocks. Reading this guide won’t make you a Wall Street pro but it will give you the skills you need to find success in the stock market. From there, time, experience, and a willingness to learn more will enable you to build those skills far into the future.
It may look like a lot but we’ve kept things simple and easy to understand, for beginners who will be new to some of the terminology used. We have also used links to supporting materials, as references to some of our claims and also for further reading, for those who want to get even deeper into the stock market.
Keep in mind none of the below is investment advice, but rather just meant to be an introduction for you to begin to understand the stock market and equity investing at a decent level.
You should likely supplement the below information with more educational resources on investing in stocks and equities before going all-in regarding investing. We’d recommend watching YouTube videos or taking a stock market investing course if you’re super new to investing, sometime to help you understand how to value stocks better.
Anyhow lets get into the content — now that you know what to expect from the rest of this guide, let’s start at the very beginning.
What Are Stocks & Equities/Securities?
Before you can learn about the stock market, you need to know what stocks are and what you’re actually investing in.
If you know anything at all about stocks, it’s that they’re related to the world’s largest and most profitable corporations. That’s because a stock, which can also be referred to as an equity, is a security that represents ownership of a tiny part of the company.
So, what’s a security? Securities are complex. For a beginner entering the stock market, you should know that equity securities are just the financial instruments that are being traded to give ownership rights to traders. Tesla, Inc.’s security is TSLA, for example. Most companies only have one security. Some companies are large enough or are organized in such a way that they have multiple equity securities on offer.
With that covered, corporations issue stock to allow public traders to have a stake in the company. This is a great way of generating capital and getting public interest in the business. Those that buy stock, which is offered in units that are called shares, own a small number of the corporation’s assets and an equal profit amount. If you buy stock and the company does well, your investment will increase proportionally to the corporation’s success. Of course, the opposite is also true, so you can also lose your money if the company doesn’t perform well.
Stocks are traded on exchanges for most retail traders. Stocks also outperform most other types of investment too, providing a great opportunity for savvy investors to build wealth and climb the economic ladder. While stocks were historically considered a rich man’s game, the rise of stock trading apps like Robinhood and the freedom of information offered by the Internet has enabled beginners to get their foot in the door. You’re using the Internet to read this guide, after all.
An Overview Of The Stock Market
Now that you have some idea of what stocks are, let’s flesh out the stock market as a whole and how it functions. Once we understand how the stock market works, even in just a vague sense, we can start talking about strategies and the skills that successful stock market traders need to have.
Knowing what stocks are, you can take an educated guess at what a stock market would be. The truth is that it’s a generalized term for the venues where the buying and selling of stock occurs. We’ve already used the term stock exchange above, which refers to a specific institution in the financial world, often based in the largest and most financially successful cities. Well, all of those exchanges fall under the umbrella of “the stock market.”
Exchanges are often physical locations in the real world, like Wall Street, which is home to America’s (and the world’s) largest financial markets. Naturally, the Internet and other emerging technologies have virtualized the stock market nowadays, allowing for much faster trading by professional and amateur traders alike.
Here are some of the largest and most notable stock exchanges in the world:
- The New York Stock Exchange, or NYSE
- The Nasdaq Stock Market
- The Shanghai Stock Exchange
- The London Stock Exchange
- Euronext N.V.
- The Japan Exchange Group
- The Hong Kong Stock Exchange
- The Bombay Stock Exchange
- The Toronto Stock Exchange
- The Australian Securities Exchange
There are many more stock exchanges in the world, though most traders in the West will only ever engage in the NYSE, the NASDAQ, and then maybe European or Asian exchanges for corporations that only trade in those continents. Fortunately, most corporations trade through the two American stock exchanges because they’re the largest in the world.
Companies get into the stock market by petitioning these exchanges and proving that they meet the required thresholds, to safeguard both the company and the traders who will be trading their shares.
To know about the stock market, you should also know about stock market crashes. You may have heard about them in the past, whether it was the 1929 crash during a history lesson or the 2008 crash within many of our lifetimes. There was even a crash at the beginning of the COVID-19 pandemic. Crashes are where stock prices drop dramatically, across the whole market, which then triggers mass sell-offs that push the prices down even more.
Crashes can be caused by any event with economic implications. As we said, the COVID-19 pandemic and the subsequent lockdowns triggered a crash in many corporations, at least in the first few weeks. In 1929, it was the wild speculation of the roaring twenties that came to a screeching halt when wages weren’t going up, the agricultural sector fell behind, and debt became common and accepted among the American population. In 2008, it was the collapse of the housing market due to another speculative bubble that was encouraged by subprime mortgage trading, something that had been brewing since 1999.
Speculation, for those that don’t know, is exactly what it sounds like. Just like you’d speculate on something when you don’t have the evidence, speculation in the financial world is where you invest while hoping for gains. It’s not a sure thing, by definition, as many amateur investors speculate by buying shares of future companies that they hope will succeed, not buying the company based on its fundamentals now and where it can realistically go.
A speculative bubble is where that speculation gets ahead of the hard facts of the companies and industries involved, and so trading interest drives prices higher and higher until they inevitably fall back down. The bubble bursts, so to speak.
The dot-com bubble is a great example. Take a look at websites nowadays. They are a dime a dozen, if that, and only very few are used by the majority of people. Back in the late 90s, just having a dot-com domain opened the door for very, very high valuations despite not demonstrating profitability yet. It was the big new thing, the future, and so everybody poured in to buy up every dot-com stock until it ended in a bloodbath when 2001 came around and they hadn’t turned a profit. Of the big names, only Amazon and eBay survived and kept their relevance going forward.
Naturally, some have identified similarities in cryptocurrencies today and how new, amateur projects with poor prospects are highly valued, but that’s beyond the scope of this guide.
Getting Started Down Your Investing Path
Now that you have a broad understanding of stocks, the stock market, and how financial markets can and have failed in the past, you’re ready to get started. In fact, you’ve probably done more preparation than most. Many new investors just download a trading app and try to figure it out as they go.
Preparing to enter the stock market, both economically and psychologically, will pay off no matter how skilled you are. If you need the help, it will help you be more profitable. If it turns out you have a knack for trading, preparation will still allow you to make more money in a shorter period.
So, where to start? Let’s make a checklist, you will need:
- The disposable income that you can afford to lose.
- A bank account to use when opening a trading account.
- An email to use when opening a trading account.
- Some form of ID verification to use when opening a trading account.
- A computer or a smartphone.
- A trading app or service downloaded onto the computer/phone.
If you have those five things, you can get started with stock trading. If you’re here, you probably already have most of the above. Most people only need to download the app, make an account, and get started. You can get started but that doesn’t mean you should, you still have a lot to learn yet.
Many involved in the stock market and financial advice would recommend that you have some emergency fund and be free of any high-interest debt before you wade into stocks. The conventional wisdom is that your emergency fund should be anywhere from three to six months of your paycheck, if not more.
If you have that, you’re ready to get started. However, you need to have a game plan…
Establishing Your Investing Game Plan
When you start investing, you need to avoid being too loose or rigid with your investment strategies. If you’re too loose, you’ll be too casual with your investments and won’t stick with your winners. If you’re too rigid, you’ll hold onto losers and won’t take a few risks, which are often where there is money to be made. The most important thing is that you mitigate your risk, so you’re not losing money even when a trade starts to go south.
Different strategies work for different people and we have no idea who you are, so let’s try this – which of these word sets describes you the most?
- You are analytical. You enjoy crunching numbers, have the time to research different topics, and you’re not afraid of spreadsheets.
- You are studious. You have the time to dive into different companies and industry-specific subjects, though you prefer to avoid math.
- You are casual. You hate math, either because you can’t do it or you find it boring, and you don’t have much time to do laborious research either.
- You are busy. You’re busy doing other things, like working a job or raising a family, and so would prefer a hands-off approach to investments.
All four of these investing archetypes are capable of trading, in the right conditions and with the correct strategies.
Casual and busy investors are better served by ETF investing or using a robo-advisor so that they can do other things while passively investing in the background. Studious and analytical people may do better when they’re researching and choosing individual stocks because they have the time and the focus to do so.
That doesn’t mean a busy investor can’t do a one-off trade after finding time to research, or that more active investors don’t have passive investments too. If you want to invest frequently, however, then you’ll fall into the strategies and an active or passive investor.
How are you Investing?
First, you need to understand that there are multiple ways to invest in the stock market. Your decided method of investing will dictate a lot of your investment style and your approach to trades. There are three main ways you can trade:
- Individual Stocks – When buying individual stocks, you research the company behind it and its prospects to beat the market and make a profit. It is very risky and unadvised for those who won’t or cannot research their investments.
- Index Funds – Index funds are a great way to passively invest and grow your wealth. They are a type of mutual fund or ETF that buys stock in a certain index, which is a list of corporations. Some, like the S&P 500 or the Dow Jones, track the whole market while others track specific industries. When you buy into a low-cost index fund, you can make small returns without dedicated research.
- Robo-Advisors – Another more recent development is robo-advisors. These are exactly what they sound like, brokerages that have a lot of automation involved. After giving them money, they will automatically invest in index funds that are appropriate for your risk tolerance and your stated investment goals. They can also change over time and optimize for tax. As you can imagine, their effectiveness is only as good as the technology behind them. We have more information on robo-advisors later in this guide.
How Are Your Assets Allocated?
With that understood, you should now have investable money set aside and some idea of how that money will be invested, even if it’s a vague idea. Now you need to think about asset allocation, which is how your investments will be arranged.
Age plays a big factor in how you should allocate your assets. This is because markets tend to yield better returns over time, so younger investors can afford to invest more of what they have, leave it in there for much longer, and then get higher returns when they take profits. Stocks become a less desirable place to hide your money when you’re older.
So how do you figure out the relationship between age and asset allocation? Try taking your age and then subtracting it from 110. That’s how much of your investable cash you should play in the stock market, in a percentage. For example, if you’re a reader who’s 25 and you’re looking to grow your wealth as you head towards your 30s, you should consider throwing 85% of your investable funds into stocks.
You can further split that percentage into individual stocks that you’re bullish on along with index funds and other passive investment opportunities. This brings up a new question – what do you do with the other 15% or however much else is left behind? It’s still investable cash, after all, so you should consider placing it in bonds, high-yield CDs, and other fixed-income investments.
As always, risk tolerance and your investment goal also factor into how you allocate funds. From here, once you’ve established your percentages, you change your risk tolerance by increasing or decreasing your stock investment percentage. If you’re an older reader who does high-risk investing, let’s say a 50-year-old with a stock investment percentage of 60%, then increasing the percentage increases your risk.
What Type of Account Should You Get?
There are multiple types of investment accounts you can get to buy stocks and engage the stock market. The most common are standard brokerage accounts offered by services like Robinhood, TD Ameritrade, and Charles Schwab. Opening an account can take only a few minutes.
Most platforms are free to use and even allow for commission-free investing, if not close to it. However, some of the more sophisticated brokerages offer educational material and tools that allow you to conduct technical analysis and other investment research.
However, there are different types of brokerage accounts available besides the standard investment account. For example, you’ve no doubt heard of IRAs, or Individual Retirement Accounts, and Roth IRAs.
All of them allow for buying stocks, the main differences being how easy you can access your money and the taxes you may pay on that money. IRAs have contribution limits, so we’d suggest getting a standard account for now and considering an IRA account in the future if you’re building a nest egg.
Common Mistakes to Avoid
With the basics covered, let’s take a break to discuss some common mistakes that you need to avoid. These will hobble your investment attempts before they even start, so we’d best cover them before we get into some of the more technical advice we have.
Not Taking The Time To Be Well Informed
You’re here, so you at least show interest in being informed about the stock market and how you can invest in it. Even passive investors can stay informed, being informed isn’t necessarily dependent on how many hours you put into research or TA. Remember that staying informed becomes more demanding when you have more investments open.
Not Having An Investment Plan
While being informed is great, it’s not the same as having a plan for your investments. As we have covered above, the most important parts of your plan are how your funds are allocated and how much risk you’re taking on. You need to plan for risk, taking on unplanned risk is a surefire way to lose your money while you can minimize losses with a plan.
Not Getting Quality Advice
Some people have made eye-watering profits from stock trading. You should accept that you’re not ‘some people.’ At best, you’ll be pleasantly surprised if you turn a decent profit. At worst, you avoid a lot of the hype and the bad advice that surrounds investment circles.
Any industry that can promise big gains, for relatively little physical effort, will attract people who want to sell bad advice. There are successful traders out there who offer information for free, and finding them is easy thanks to the Internet, but remember that almost everybody keeps the best plays close to their chest.
Those who build entire platforms off selling guides to aspirational investors should make you ask – if they’re making so much on trades, why do they need to sell advice? That said, some traders do both and do both well, but you’re better off researching for yourself. If in your research, you find influencers or communities that have arrived at the same conclusion as you, then that’s just another bullish sign for your thesis.
Investing Money You Don’t Have
This is a point that’s worth reiterating – you should never invest money you don’t have. Stocks may tend towards a positive outcome on a longer time scale but, in the short term, you can lose it all. It’s not unusual for 20% to 40% swings in stock prices whenever something comes along, like a pandemic, to name a completely random example.
So, what money is off-limits?
- The money that’s in your emergency fund
- Money reserved for paying bills or paying back debts, including tuition fees.
- Money that is reserved for leisure activities, like upcoming vacations.
- Money for buying a home or other big financial obligations, like a wedding.
Letting Emotions Drive Investing Strategy
So far, we have avoided using the F-word – feel. There will be moments where you feel like you’re onto a winner, and maybe your feelings are even right, but you should never, ever let those feelings dictate your investment strategy.
The stock market isn’t a game for those who think with their hearts or their stomachs. Perhaps the closest you can get is ethical investing, where you invest in projects that are close to your own interests, but even then you need to be discriminatory and ruthless, cutting losses wherever they emerge.
That doesn’t mean there’s no place for feelings in the stock market. One of the most successful investors of all time (and one of the largest cheerleaders for index fund investing) is Warren Buffett. One of his many sage pieces of advice is “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” and he has echoed similar sentiments about holding companies forever.
If you like the company behind your investment, and it looks like a good opportunity, you can hold through nearly anything. When emotions back up your investing strategy, that can be great and help you find the willpower and discipline that stock traders need to have, but emotions should never lead.
Buying After Hearing Tips Or Rumors
If the advice given to you by other investors can be bad, think twice about the accuracy of tips or rumors. There are exceptions, of course, and the Internet is making it easier to identify good tips and get in before the party is over.
That said, the general rule is this – if you’re hearing about a financial trend, you’re probably too late. This is especially if people in your personal life, like a financially illiterate uncle or a random Uber driver, were the ones repeating the so-called tip.
Ways to Begin Investing Once You're Ready
Having covered what you shouldn’t do, let’s go into more detail about ways you can invest. We have covered brokerages and robo-advisors above, in a little detail, but here we have more information about how each works. We have also included information about investing through your employer.
As a small-time retail trader, you don’t walk onto the trading floor at Wall Street and start placing orders. Instead, most investing is managed through online brokers. These are services that open accounts for retail investors and then buy and sell through exchanges on behalf of them. This typically came with a commission but commission-free investing is on the rise.
If it isn’t obvious, online brokers have very little physical presence at exchanges. Instead, they make trades electronically, matching buy and sell orders with the help of computers and ensuring fast order fulfillment times.
We have mentioned robo-advisors above. They are automated investing services that make use of algorithms and complex software to manage your trading. Many of them come at a low cost and have features that optimize your taxes, so you don’t lose more money to the taxman.
Now, if there was a robot that could game the market, everybody would be rich. These robo-advisors are better for managing long-term portfolios that make use of index funds and other similar investments, like retirement accounts. They come with questionnaires to identify your risk tolerance and investment goals.
They’re also cheaper than a human advisor, but you lose the intuition and adaptiveness that a human brain has, at least until the technology behind these advisors improves. You do get tools like retirement calculators and other software types that can help you figure out your investment journey.
Investing Through Your Employer
Many employers offer investment opportunities as a form of pension, most often in the form of a 401(k). These are where an employee can throw some pre-tax salary into a retirement account where it will grow over time through investments into mutual funds, bonds, and stocks.
If you have one of these accounts, you should give as much as you can. Your employer needs to match your contribution, up to a certain amount, so you should maximize contributions and get the free money that’s on the table.
Factors to Consider Before Investing
To finish off this guide, here are some other factors that you need to consider when investing. With these and the rest of the information contained above, you should know the basics of the stock market and how to get started.
Minimums To Open An Account
You don’t just need cash to invest responsibly, it’s also necessary in many cases. Many accounts have minimums that stop you from opening your account if you haven’t got the money.
This is a good thing as it shows that the brokers are trying to safeguard their clientele and comply with regulations. The minimums typically aren’t high unless you’re going with some elite investment service that’s out of your league. For many, it’s under $100. We would be wary of brokerages that don’t have investment minimums as they no doubt benefit from attracting people who don’t have much money and then help them lose it.
Commissions And Fees
Remember that brokerages and other stock-trading platforms are providing a service, and that service doesn’t come for free. These commissions and fees can eat into your profits and are typically taken from your executed trades, not from your bank account.
Robinhood has pioneered commission-free investing but, as the old saying goes, if a service is free it’s because you are the product.
Mutual Fund Loads
Similar to commissions and fees related to stock trading, mutual fund loads are where you are charged for the purchase or sale of a fund. When purchasing, you incur a front-end load while back-end loads (sometimes called a contingent deferred sales charge) are applied to the sale of mutual funds. The charge can be either a flat fee or a percentage of your investments.
Diversification And Reduction Of Risk
Some investors swear by diversification while others, like Buffett, disagree. Diversification is simply the process of allocating your funds into multiple areas so that one unfortunate trade doesn’t blow up your account. That’s right, it’s “don’t put all your eggs in one basket” when applied to the world of finance.
If you have an intense, dedicated, deep-value investment style then you may benefit from sticking to a few winners that you have meticulously researched. If you struggle with actually finding winners, however, then splitting your investments across multiple securities can help mitigate loss.
This is textbook risk reduction that many beginners will benefit from. Once you’ve honed your skills and you can pick winners, then you can consider trimming your portfolio to become easier to manage and research.
Always Remember That Investing In Stocks Is A Risk
Last but not least, never forget that you are always taking a risk. No matter how much risk reduction you’re implementing or how careful your investments are, there could always be a downturn around the corner that wipes out your money. Even with index funds and other slow-burn investments, a market crash or other industry-wide issues can hamper progress.
Trading stocks is about nerves, about trusting your head instead of your gut, and you hone that skill by taking risks. Some risks will pay off, some won’t, but all of them will improve your skills as an investor and may help your investment efforts in the future.
Summary & Closing Thoughts
That brings us to the end of our guide on investing in stocks. While we can’t hand you trading picks on a silver platter, and it would be irresponsible to do so, we can give you all the info you need to get started.
You should now know what stocks are, how the stock market generally works, and how you get started and develop an investment plan. We’ve also told you what not to do, which is often more important than what you should do when money is on the line. Once you’re established with a brokerage and you can interact with the stock market, remember that you should research your stock picks, only invest what you can afford to lose and that even the surest thing has an element of risk attached to it.