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I’ve been wanting to write a post introducing the basics of stock market investing for a while. I knew I was going to be in Long Beach for work this week, so I reached out to my brother, who began investing at 18, and asked him to write a basic stock market introduction guide. I hope you enjoy!
People have an aversion to the stock market, typically because of misconceptions and lack of knowledge about owning stocks.
- Many people think it is a form of gambling and that they’ll lose all their money.
- Most people don’t understand how stocks, mutual funds, bonds, and ETF’s work (it really can be a foreign language)
- Often people don’t think they have enough money to invest
These are all legitimate concerns, but with a little research, anybody can invest in the stock market.
As someone who has both gambled and invested in stocks, I can assure you they are completely different. Gambling is designed to make you lose all your money based on odds that aren’t in your favor. Investing is focused on picking stocks in a business, you would own, based on an educated analysis.
Finding money to invest can be a challenge for anyone, no matter what your income level. But, everyone can set aside a little money to invest. You might have to sacrifice a few things such as eating out or going to the movies. If you are able to do this and save even only $20 a month by the end of a year you will have almost $250 to invest!
I first started investing right after High School. I didn’t have a clue what any of the terms meant or what I was doing. I did a lot of reading and research. It was a lot of work, but well worth the learning curve.
I’ve lost money on trades over the years, but for the most part through steady consistent investing and lots of research I’ve come out ahead.
The Stock Market is like Owning Your own Business:
Most people like the idea of owning their own business. These same people are often terrified of the idea of owning stocks, though. However, buying stocks is simply buying part of a business.
There is a huge disconnect between the concept of buying stocks and owning a business. Stocks are simply your ownership of shares of a large business. Almost any major business you use in your day to day life is listed on the stock market. By owning stocks you are investing in these major businesses and reaping a small part of their profits.
How and Where to begin your research
The best site I’ve found for picking stocks is Yahoo Finance. Each stock you review will have information such as historical prices, current costs, ratings, and several financial ratios. These terms sound complex, but sites such as Investopedia have detailed articles explaining every aspect of the stock market. You can use this information to determine which stocks are safe and which stocks are speculative.
Once you get to this point it’s hard to determine what stock to pick. It can be overwhelming! Warren Buffett advises people to invest in businesses that you understand. Pick something in your industry or a company you frequently use. Then analyze these stocks based on their financial ratios and decide which ones you would be interested in investing in.
The key is research, research, research!
After you have chosen your stocks, you need to choose an online brokerage. Like everything in investing, there are many options. Choose a brokerage firm based on your investing style.
Some sites cater to steady investing while other sites are more focused on quick trading. You can compare online brokerages at the Motley Fool.
You will want to start by looking at minimum account balances, price per trade, and account fees. Once you pick a brokerage you can sign up and you are ready to invest in the stock market!
I recommend Tradeking or Capital One Investing. I’ve been using Capital One, but Tradeking has significantly better fees. I’m just comfortable with Capital One’s platform so I don’t want to switch.
When searching for a brokerage firm look for the following:
- Simple and straightforward with easy to use research options
- Easy to use website with good reporting structure
- It must have low trading rates and no fees.
- No minimum balance requirements, so you can still trade if you don’t have a lot of money.
- Lower rates on automatic investments. This encourages steadily building your account, which fits my investing style.
I started by investing in dividend stocks and mutual funds. They are generally more stable and if the price goes down the dividend yield goes up which at least gives you something positive when the stock price goes down. You will have a steady stream of dividends coming in which can help you deal with the emotional roller coaster that sometimes comes with investing in stocks.
Once you pick your stocks it is imperative to stick with your choice. You can’t let your emotions get the best of you. Sometimes you will pick a stock only to immediately see the price of the stock drop.
Trust your research. If you thought the stock was a good stock when you bought it, then it should still be a good stock even if it has dropped in price.
However, you should also know your limits. Set a price point or a percentage drop. When your stock dips below your limit get out. Trust your choice in choosing stocks, but sometimes you can make a mistake. So by deciding on a price to sell a stock, you can limit your losses.
Even if you never invest it is important to understand the stock market.
Most people feel like it is something completely foreign that they will never use. Even if you never purchase stocks, the impact of the stock market affects all major companies directly and smaller companies indirectly.
If the businesses listed on the stock market are doing well, there is generally more investment and confidence in local economies. Conversely, if the stock market is falling you might feel a strain in your own personal finances. This is particularly true as you near retirement since many retirement funds are tied to the stock market.
By understanding the stock market you will be able to recognize when the economy is changing and be able to determine when to save or invest your money.
The stock market can be daunting for the beginning investor. But, by doing a little research it can become surprisingly simple and even fun. It is a little scary at times, but investment growth over the years makes it all worthwhile.
