How to start investing in stocks as a beginner
Investing is a great way to make your money work for you. However, when starting out it can seem quite complicated. I myself am investing for around 2 to 3 years now. So I consider myself a beginner still. Being a beginning investor has led me to research the topic a ton whilst trying to learn more from others. I try to get the most widespread information by reading different website’s, listening to podcasts, and reading investing related books. Below you will be able to find all these resources.
The idea behind this post is to first address the topic of investing in stock in a more general fashion. So in this post, the important topics will be named, but I will not dive into great detail. My following post will be on these individual topics and will explain the details. These upcoming posts will then be linked to this one so that all the information I have is available and easy to find. I hope you enjoy reading it!
What are stocks?
The most simple explanation of stocks is that they are an investment you put into a company. After investing you now own a share (or a partial share) of the company that issued the stock. Stocks give people the opportunity to invest in a company they believe in without needing to have millions of dollars like angel investors.
When buying a stock you often buy a tiny percentage of all of the stocks the company has put out. This means that your share of the company is relatively low. Therefore you don’t have to sit in the board room during one of the shareholder meetings. You often do get to vote at those meetings.
Issuing stocks is a source of income for a company, they can use this money to make their business better, to invent new products, pay off debt, etc. Once a stock is on the market, investors can buy and sell the stock. This trading oftentimes happens through a stock exchange with a broker representing the investors.
So owning a stock, essentially, means that you own a share of the company’s profits or losses. Which can be represented in the stock’s value or the paid dividends.
Why invest in stocks?
As described above, by owning a stock you own a share of the companies profits or losses. Of course, the idea behind investing is for the company to do well whilst you are its shareholder. Normally, shareholders can expect a return on their investment in two different ways:
An appreciation in stock price, meaning that the stock price goes up. If you decide to sell the stock at this moment you will gain the difference between your buying price and the selling price (minus some brokerage fees).
The stock pays out dividends. Dividends are payments the company makes out of its revenue to its shareholders. These are typically paid quarterly. Not all stocks pay out dividends, it’s important to check this before buying.
Generally, when holding stocks long-term an average annual return of 7 to 8% should be possible (adjusted for inflation). With index funds (see the paragraph below), this means that the total of the index has an average return of 7 to 8% yearly. Of course, this does not mean that every stock on the market has this kind of return. Therefore, researching what you buy is very important.
The different sorts of stocks
Stocks can be divided into different categories or groups. However, there are two main types of stocks:
As the name suggests this is the most common type of stock, suggested to beginners. With this stock, you own a share of the companies profits and have a right to vote.
This type of stock normally pays investors a fixed dividend. The pay of dividends, in case of bankruptcy or liquidation, will first be paid to the preferred shareholders only after this the common shareholders are paid. The price of this stock is less volatile, making it less prone to losing or gaining value. This type of stock could be interesting when investing for long-term growth.
It is also possible to divide stocks into categories or groups based on company size, company sector, location, and the number of companies within the stock.
Stocks can be divided into categories by their value or market capitalization. The three divisions on size are 1) large-cap, companies with a value of 10 billion or more; 2) mid-cap, companies with a market value between 2 billion and 10 billion; and 3) small-cap, companies with a market value between 300 million and 2 billion.
Stocks can also be divided by the industry (also called sector) in which their companies run. Stocks can, for instance, be in the healthcare industry.
Based on the location of the company it’s possible to group stocks. With this, you could choose to not only have U.S. stocks in your portfolio but invest internationally. Do keep in mind that you will often have to deal with different currencies and an unstable currency can impact your earnings. The political situation of a country should also be taken into consideration.
The number of companies within the stock
Besides stocks of an individual company, it is also possible to invest in a stock that is made up of multiple different companies. These are called index funds. One index fund consists of a whole lot of (fractions of) different companies. The S&P500, for instance, holds the 500 largest U.S. companies.
Investing knows different risks, and losing your money on the market is possible. Therefore, it is extremely important to diversify your portfolio.
This means that the investments you make are spread out over different stocks that don’t correlate with each other. In the chapter above the different sorts of stocks are explained, this can be used to diversify your portfolio. For example, you could buy stocks of different sizes in different sectors.
Another great way to diversify without too much effort is by investing in index funds. I myself have at least 80% of my portfolio consist of index funds with 20% in different (minimally correlating) individual stocks. When investing in stocks it is smart to think about the amount of risk you are willing to take and base your investment strategy on this.
Reviewing stocks is an art on its own. There is no one way to do it and it can become quite complicated. Therefore, I will only touch on the subject here and will make a separate post diving into the details of reviewing stocks (can be found here, once it is online).
The importance of reviewing stocks heightens when you are investing in individual stocks. Investors often call this review “a fundamental analysis”. In this fundamental analysis, a range of factors will be reviewed. It often starts with a quantitative review of the financials of the company, followed by a qualitative review which dives into things like the company’s management.
After the fundamental analysis, technical analysis is often done. This technical analysis studies the supply and demand of the stock. Diving into the historical performance of the stock.
Choosing the right stocks for you
With this post, we dove into the basics of investing in stocks. I highly suggest you do some more research before starting to invest. However, if you are interested in investing in stocks don’t postpone the process forever. Remember that you can also start small (to minimize risk) and build-out when you feel more comfortable. You could also contact a financial advisor to speak about your specific financial situation and needs. This can be really insightful.
I am not a CPA, attorney, insurance, or financial advisor, and the information in this post shall not be construed as tax, legal, insurance, or financial advice. When in need of such advice, please contact a qualified CPA, attorney, insurance agent, or financial advisor.