Start Investing In Stocks The Right Way
There’s no shortage of information out there on the stock market and investing. Proof of that appears in every youtube ad with some new guru telling a story of how he became a millionaire as a stock day trader and how you can too. The best part is, he wants to show you how to do it too if you click his link. The question I always ask myself is, why are they running ads to teach you if they’re so rich? Why use that time and money to get you to start investing in stocks? Even worst, why would they be selling you on the most delicate and complicated part of the investing world? Instead, shouldn’t these gurus be off traveling the world and enjoying their newfound freedom?
Buying The Gurus Investing Course
For most of us average people, just the thought of investing is crippling and often paralyzing. The thought of giving away your money without seeing an immediate return sounds like a scam. After all, you worked so hard to earn that money in the first place. For most, buying a stock trading plan is a way of masking that fear and transferring the responsibility for success on to someone else.
Long Term Success In Stocks Is Found Within
What do you have now that can help you to start investing in stocks? What knowledge do you already have to give you an edge? That’s what this article will help you uncover. As a beginner, you can start investing with little money by following a simple 5 step process. In fact, being a beginner is an advantage because although your skill is low and conviction may be still lower, your common sense is high. You can begin to build a wealth account using only common sense without the need for Mr. YouTube guru. All the tools to invest come naturally to us, but fear of loss and greed prevent us from taking full advantage of those tools.
What are those investing tools?
- The ability to assess value
- The ability to click “buy”
- The relief to know that what happens next has nothing to do with you
All the tools to invest come naturally to us, but fear of loss and greed prevent us from taking full advantage of those tools.
TweetBenefit Of Being A First Time Stock Investor
See, the best part about investing in stocks for the first time is that you don’t really know anything. When you don’t know anything, you don’t see yourself as having influence over price or any sort of premonition. Investing troubles arise when investors feel like they can see what’s going to happen next (based on patterns, indicators, etc), they expect to win. When that happens, it impacts judgement. For you, a beginner investor looking to start investing in stocks, there won’t be any expectation in the short-term.
5 steps For Any Beginner To Start Investing In The Stock Market
1. Know What You Want
Having a clear vision of your goals is like a road map. In the world of stocks, it’s so easy to get lost. There are several thousand companies listed with charts moving lightning fast and a news media that releases information with an ulterior motive. So, what stocks do you buy? Well, that depends. For the purposes of this text, let’s assume that your desire is to invest for the long term and grow your money over time.
Buying Stocks Based On Your Goals
There’s two ways to accomplish the desire to invest for the long term and grow your money. Both of these options follow the buy low and sell high principle. However, there are differences in their application. For example, imagine buying a company like Uber vs a company like Apple. Uber is still aggressively working on growing their company. In contrast, although Apple still has a mission that drives its innovations, it has been around for decades and has established itself as a very strong and reliable company. In buying Uber, you’d be buying a less established company focused on capital reinvestment and growth. Buying a company like Apple is investing in a company that’s done much of its growth and can allocate their profits elsewhere, like paying back shareholders through share buybacks.
When you invest in a company’s stock, you’re also investing in their plan and vision. If a company wants to grow aggressively, then the goal in investing in them is to grow your money aggressively. If a company is growing more conservatively, so will your money.
2. Finding The Best Stocks To Start Investing
This is actually the easiest and most eye opening part, finding stocks. Everyone wants to know: how do I know what stocks to buy when I start investing in stocks? Here’s the first step to answering that question. If you’re reading this in the morning, pay attention to all the things you use throughout the rest of the day and make a list. Then, find out what company produces those items. If you’re reading this in the afternoon, just try to recall.
It’s Easier Than You Think
The car you drove to work and the gas station you went to are both probably listed on a stock exchange. The cup of coffee from Dunkin’ or Starbucks will be there. How about the phone you use or the clothes you’re wearing. The first thing to know when you start investing in stocks is, great stocks can be found anywhere. Most articles don’t want you to pick your stocks until later in their process, I want you to do it up front. Why? Because you just found out what you want. Let’s put a face to it while it’s fresh in your head.
List 5-10 companies that you use every day. If you’re having trouble, think really granularly. You probably wear underwear, go to the gym or buy groceries. Most of us eat out one in a while. Do you best to make a long list, it’ll help later.
The first thing to know when you start investing in stocks is, great stocks can be found anywhere.
TweetGrowth Stocks vs Value Stocks
Once we list these companies, let’s separate them based on what we identified earlier; what do you want? One side of the list will read “growth” and the other will be “value.” When comparing the things you find in your fridge: the bottle of soda might be produced by Coca Cola and the veggie burger produced by Beyond Meat. We would add Coke to value because they’ve been around for more than a 100 years. Their profits are steady and they pay a dividend to investors. Beyond meat is growth because they haven’t even been around for 15 years and are still aggressively pursuing growth through reinvestment. As of now, they can’t pay a dividend because their profits aren’t consistent. The goal of separating the list is to allow us to focus on the companies that fit the question we answered before: what do you want?
Benefits Of Investing With A List
What you want can change. Having this list split is beneficial because if you do change what you want, you already have a list of companies that fit the other criteria. In addition, having a list allows us to stick to the principle of buying low. For example, we might identify 5 companies on our growth side of the list. The next step would to look at their price chart and see if it is low. Low being a relative position to the time period you’re looking at. The general rule is to look to hold stocks for 5 to 10 years. Remember, the buy low and sell high or sell high and buy low is the law of stocks. If we follow it, we get rich. If we don’t, we feel pain.
3. Commit To An Investment
How much money should you start investing in stocks with? There’s no one person that can answer that on the planet besides you. The amount you spend will be determined by a few factors: how much do you earn and keep from your primary source of income? What is your stock investing goal? Do you have an investing strategy? What money management rules are appropriate for where you are in life?
As a father of 2 toddlers, to say I’m going to commit a large percentage of my income initially would be irresponsible. After all, diapers and wipes are a universal and unpredictable expense for parents. Then again, rewind a few years before I had them and the initial commitment could have been much more aggressive.
Examples Of Money You Shouldn’t Start Investing With
Don’t take a risk with these essentials: rent money, grocery money, daycare, car note/insurance, light bill, child support payment, and other payments that could make a negative impact on your life. Everything else is fair game. That means that you should eat out less, cancel your subscriptions, and live below your means in the short term.
Beginner’s Investment Strategy
Here’s a basic but very effective money management strategy that will help decide on an initial investment and eventually a recurring deposit. This comes from the book “Richest Man In Babylon” with some slight adjustments. If you’re just starting out investing in stocks, consider everything you earn: live on 80%, tithe 10% (commit to others or your God/faith), Invest 10%. So 80% goes to bills and your lifestyle (take care of your partner and children), 10% goes to the world as rent to continue inhabiting the planet and 10% goes to you.
Most people don’t pay themselves. You may get paid at your job and do things for yourself with that money, but that is not the same as paying yourself. Moving forward, when you get that paycheck, the first thing you do is separate that amount into those sections. There are so many apps and digital wallets that enable you to do that.
Personally, I’ve been using the Digit App for years.
Pull The Trigger
So you have 2 choices now: look at your savings and decide if you want to commit 10% of that to your investments OR calculate 10% of your next paycheck and commit to putting that straight into your investment account. As a beginning investor with a 401k or savings of 100k or more, you might get butterflies at the thought of transferring 10 grand from your account; I get it. But you have to do something. Whatever you decide is okay, it’s your money. As you get more comfortable, you want to do an income and expenses analysis of your life and find ways to live on a little less so you can invest more.
So we’ve now found an initial investment of 10% and a recurring 10% deposit for future investments.
4. Set Up a Stock Brokerage Account
Brokers facilitate transactions in the financial markets between buyers and sellers. When it comes to stocks, the only way to buy and store shares of companies you purchase is through the use of a brokerage. Setting up a brokerage account now takes less than 10 minutes. Personally, I use 2 brokerages: TdAmeritrade and Robinhood. When you start investing in stocks, the key is getting a brokerage that you can trust and use comfortably.
Traditional versus Roth IRA
When setting up a brokerage, you will have a few account types to choose from. Here’s a big question many people have: Traditional IRA or Roth IRA, which one should you get? We could do an entire article on just this question. However, here’s a super simple decision point: pay taxes now or pay taxes later. That’s the meat and potatoes of the traditional versus roth debate. If you want to pay taxes on your money now, go with a Roth IRA. Conversely, the Traditional IRA allows you to pay taxes on withdrawal. The one thing to consider is that taxes go up and rarely, if ever, come down. So when you withdraw years later with a traditional, you could end up paying more taxes on your money. No guarantee, just a consideration.
TdAmeritrade vs Robinhood
TdAmeritrade is among the most powerful platforms in this space. Execution is effortless and the information and education the platform contains is unmatched. For beginners, the website and trading platform will look very complex, and it is. But here’s the benefit of starting here…everything that’s not TdAmeritrade will be easy to use once you’ve invested on their platform.
In contrast, Robinhood is the easiest platform to use. They are SIPC insured, U.S based and have never had any security issues. However, the platform slows down with high activity quite often in the morning time and moments of increased volatility. When you get to a point where you begin trading stocks, buying and selling for a profit, these 2 work well together. I use the more powerful platform, TdAmeritrade, for research and I can execute and monitor the trade on the mobile friendly Robinhood App.
Start Investing With A Recurring Deposit
This is not required to open the account, but it does make for a more committed and less emotional investor. When the money just comes out of your paycheck or checking account, 2 great things happen: you learn to live on less, your investing account grows with less effort. How much should you set up to invest on a recurring basis? Well that depends on your income and living expenses. Remember the formula from above, 10% is a good round number. However, if 10% will impact your life in a way that you cannot adjust, then that is not a smart amount. If you can adjust your life to the point where you don’t notice it coming out, then great. Otherwise, choose an amount that you won’t notice, but big enough that you feel that commitment.
For example, if you earn $3000 a month and have $2000 in fixed expenses (rent, car note, daycare, baby food, etc) then that leaves $1000. If you commit 10%, then of that $3000 you’ll have $300 to your investment account and $700 to spend how you wish. If that’s a healthy amount, then great.
Lowering your expenses is far easier than increasing your income…though increasing your income is not that difficult either (start a side-hustle).
5. Start Investing With Your First Purchase
Purchasing the stock(s) is the easiest part of the whole process. We have a list of stocks to choose from that are comfortable to us. Our brokerage accounts have been set up. And, we have an overarching money management and investing strategy. Time to get our hands dirty.
For this last step, we’ll need our list on the table and the brokerage open on our device (PC, phone, tablet). Next, we want to pull up the individual charts of the companies that we’ve identified. Find the time period that the chart is showing and change it to the 5 year chart. This step is where your ignorance and common sense serves as a weapon.
Look at the chart. Is the stock price near the top or the bottom? Put your finger on the left side of the chart on the stock price and move your finger along the price toward the right side. Is your finger going up or going down? If you were going clothes shopping and you noticed the jeans you saw last week are now less expensive than last week, they’re on sale, would you buy them? Yes. Why? Because you’re getting the same value you desired for a cheaper price. That is exactly what we’re doing today, after all. Of the stocks that you identified, which one looks like it’s on sale? That’s the one we buy. That’s the one we hold.
And we just repeat this process of looking for deals in companies that we already use every day. As companies begin moving back towards their highs, we don’t buy them. We wait until those come back down and choose another on the list.
Bottom Line
All wealth starts from where you are and who you are. By using this approach, you’ll have your own unique investing style and portfolio that you can grow over time. As you begin to learn trading styles, the buy low and sell high philosophy will still be very valuable. Should your trading take longer to master than you’d like, you’ll already have a solid footing financially in the market.
You’ll have to do your homework. If that poses a particular challenge, the ETF space is something worth exploring as well. But just know, we all had to start somewhere. This is your beginning of a long and prosperous journey.
All wealth starts from where you are and who you are.
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