How to Start Investing?

A Beginner’s Guide to Investing in the Stock Market

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Introduction

You’ve come to terms with the fact that inflation is always there to take a big chunk out of your savings. By the time you retire, your savings will have reduced by a great margin. Just in August 2022, the YOY inflation came out to be a whopping 8.3%. How do you fight against this monster of inflation? Well, you invest!

According to Forbes, if you use S&P 500 index as an example, the yearly returns on investments can be as high 10.51%, which makes investing in stocks a wise choice. Do keep in mind that the returns can fluctuate from one year to another. So, the numbers you are looking at are suitable more for an investor who’s in it for the long haul. 

Moving on, if you think you are ready to invest in the stock market, you’ll surely learn where and how to start in this guide. 

Beginner’s Guide to Investing in the Stock Market

Before you get into the technicalities of investing, you should know if you are mentally ready to make the move. Unrealistic expectations and too much optimism can be your enemies when you become an investor. So, here are a few things you should consider before you start investing in the stock market.

Know the Risks Involved

There is no shortcut in the world of investments. Let people tell you how easily you can make money by trading this or that, but never fall for such claims. If investment can make you money, it definitely can cost you money too. 

Keep Emotions Out

You probably know this one already because everyone keeps saying this. However, a reminder wouldn’t hurt, especially when most people continue to make this mistake. Always take calculated risks and base your investment decisions on practical factors.

Have a Clear Goal

You’ll feel lost and directionless without a clear goal. To tell you the truth, your investment strategy relies on your goal. Do you want to earn a fixed income or preserve the value of your capital? There’s more to come on this subject later in the guide.

Understand the Importance of Diversification

Yet another one of those clichés you keep hearing, but crucial nonetheless. Don’t put all your eggs in the same basket. That’s kind of like setting the same password for all of your important accounts. Invest in multiple assets so you don’t lose our entire investment when a particular asset loses value.

If you look closely, all of the points above are mental reminders or markers. Once you have set those markers, you can move on to the part where you determine your investment goal.

Determining Your Investment Goals

You have to have a clear goal because every investor is aiming for something different with their investment. Your goal here is to know the exact objective for which you want to invest. You may want to base your investment strategies on one of these common objectives that most people have.

Continuous Cash Flow

You want your investments to create a continuous stream of income. Most people associate investment goals with age, but that’s just subjective. You may want to generate income as a young investor so you can retire early or maybe you’re near retirement and want to supplement your retirement paycheck. 

If you are looking to generate frequent or fixed income from stocks, you would want to go for treasuries, municipal bonds, or stocks that pay dividends. When investing in these assets, you have to constantly weigh returns vs risk. In most cases, higher risk means bigger dividends and vice versa.

Quick Growth 

This strategy makes sense if you want to significantly increase the value of your investments. However, don’t let the word ‘quick’ confuse you here. It does not mean that you will get your desired results quickly. These companies are usually new and emerging, which means they usually reinvest whatever returns they get on their stocks.

The price of their stocks is relatively higher because they have something to offer that their competitors don’t. Also, their uniqueness is considered future-proof or future-ready, which means they continue to grow at a fast pace for many years. In the long-term, their growth results in your stocks being valued way higher than you originally bought them for. 

Capital Preservation 

Preservation of capital is suitable for those who already have an established portfolio or ample wealth. Usually, these people are approaching retirement and the best tradeoff for them is to let go of big returns in favor of capital preservation. 

If you take up this strategy, you would do your best to avoid risk and lean more toward safer investments. A usually route such investors take is investing in certificates of deposits and treasury bills. The main idea is for you to maintain the value of what you already have because your time horizons are short.

Allocating a Budget for Investing

At this point, it should be clear to you which investment strategy will suit you best. Once that’s done, it’s time for you to find out how much you should invest in stocks. Let’s learn 2 basic yet crucial rules first. 

  1. You’re not going to invest all of your life’s savings at any cost. 
  2. You’re not going to wait until you have hundreds of thousands of dollars.

The two rules above tell you how much not to invest. Now, let’s get to the important of how much you should invest. A general rule from most experts is that you should allocate no more than 25% of your savings for investments—that’s your income after you have paid the taxes. 

As you can see, your investment budget being defined as percentage means it does not matter how much you earn. You just have to make sure that you invest some part of whatever you earn. A recent Pew Research Center study shows nearly 52% of families in the US are investing in stocks regardless of their income.

You’re talking about families whose annual earnings are below $35,000. If they can invest, so can you. Once you have decided how much to invest, the next question should be ‘when’. You don’t have to wait to be wealthy to invest. 

If you need more clarity on how you should spend your monthly post-tax income, you can use the 50/30/20 rule, wherein 20% should go toward investments, 30% to your wants, and 50% to your needs. 

Types of Stocks You Can Invest In 

When you become a part of the investment world, you have to learn a whole list of new words and terminologies. Learning them is not compulsory, but doing so would help you pick up any training materials faster. 

By knowing the types of stocks, you can also narrow down a list of the assets that you think will best suit your trading strategy. Now, it is important to explain here that you can define stock types in two ways. One, you can define them based on their fundamental definitions. Second, you have classes of stocks based on their similar characteristics. 

The following are the types of stocks by definition:

  • Value Stocks: Highly valuable for investors due to low PE ratio and offer a much reasonable share price than the financial indicators of the company reflect
  • Blue Chip stocks: Safe stocks for low-risk investments and are companies with several years/decades of reputation and a huge market capitalization
  • Growth Stocks: Usually new companies based around emerging technologies, and usually boast very fast growth
  • Penny Stocks: Their value is below $5 and usually not available on large and well-known exchanges—returns depend on a lot of speculation
  • Income Stocks: Generate frequent dividends but returns are usually low
  • Preferred Stocks: Allow you to receive dividends but don’t entitle you to select company’s board of directors or vote on policies
  • Common Stocks: Give you ownership of the company and entitle you to vote for board of directors
  • IPO Stocks: The first stocks issued by a company before going public 
  • Cyclical Stocks: Go up and down in value based on economic conditions and are great for value generation in stable and progressive economic conditions

These are the types of stocks based on their fundamental definitions. However, based on their characteristics, you would place them in the following categories. 

Main Category: Risk

  • Blue Chip Stocks
  • iBeta Stocks

Main Category: Price Changes

  • Cyclical Stocks
  • Non-Cyclical Stocks
  • Defensive Stocks

Main Category: Value

  • Undervalued 
  • Overvalued

Main Category: Income/Dividend

  • Income Stocks
  • Growth Stocks

Main Category: Ownership

  • Derivative Stocks
  • Hybrid Stocks
  • Common Stocks
  • Preferred Stocks

Now, based on the categories given above, you can always choose the ones that you think go well with your investment strategies and financial goals.

Ways to Invest in Stocks

By now, you have finalized your trading strategy and the budget needed to begin your investment journey. The next step is to know the channels that you can use for investing. 

Robo Advisors

Also called roboadvisors, these are algorithm-based platforms that trade on your behalf based on the trading strategy and financial goals you define. How do they know about your investing and financial goals? You fill out a form before you open an account with them. 

Are they a safe place to start? Let’s answer that with how much the investors have or are willing to accept them. The fresh statistics from Statista show the market will reach a whopping $1.66 trillion on 2022 and $3.22 trillion in the next 5 years. 

The main reason you’d pick this method to invest in stocks is its affordability. Their annual fees are usually no more than 0.5% of the value of the assets they are managing for you. You can also opt for a monthly fee that can be as little as a dollar.

Another factor that people usually like about them is their customer service, which is available around the clock. However, you do yearn talking to a human when you have signed up with a roboadvisor. Another downside to using roboadvisors is that they usually employ only basic investment strategies.

Brokerage Account

You can open an account with a full-service online broker. These are humans, expert and seasoned brokers to be precise, who provide you with a platform, educational resources, trading tools, and other features to help you with your investments. 

While they are usually costlier than roboadvisors, their costs have significantly come down in recent years. You can either open a brokerage account or an IRA when you sign up with them. Most of the brokers today don’t charge you any commission on your trades and don’t have an account minimum either.

However, you do want to check out the number and types of assets that you can trade once you sign up with them. With a brokerage account, you also have the opportunity to open a margin account, which allows you to obtain a loan from the broker to execute a trade.  

Retirement Account

You don’t have to sign up with any third parties if your employer offers you a 401k or 401(k). Not all employers offer this option but if yours does, it won’t hurt to know a bit more about it. Firstly, if you get onboard with your employer for a 401(k), a specified amount will be taken from your paycheck every month. 

Your contribution to the account offers you tax deferment benefit. What makes a 401(k) so special is when your employer makes a matching contribution. As a result, if you invest a dollar in this account, your employer will contribute a dollar too. 

You can always choose from Roth 401(k) or the traditional 401(k). The former offers you tax break when you withdraw your savings, whereas the latter offers the same on all the contributions you have made to that account in the tax year.

How to Pick the Best Stocks for You

You have now learned about the trading different investment strategies, the amount you should invest in stocks, and the channels or accounts through which you can make investments. The next and probably the most important part is to pick the best stocks based on their anticipated returns. Here is how you can pick the best stocks.

Know Your Investment Strategy 

You will now get a clear idea of why defining a clear investment strategy is important. It’s the first step of picking the right stock for you. With that in mind, if you want to grow your wealth, you would want to invest in new and emerging companies with premium share prices.

In a similar way, if you want a continuous stream of income from your investments, you would want to invest stocks that offer you dividends. Depending on the stock you choose, you could receive quarterly, semi-annual, or annual dividends. Monthly dividends do exist but are extremely rare.

Lastly, you have the capital preservation strategy and in that you would want to pick stocks that yield dividends, albeit small but confirmed. Corporate bonds are a good fit for this type of investment strategy.

Invest in What You Understand 

Warren Buffett said that and you have to believe the words of someone who has been investing since he was 11 and has reached a point where he made a $46 billion donation to various noble causes. It is not that hard to pick such companies or businesses that you understand. 

You just have to look around to find the products that you use on a daily basis. You will usually find these companies on the stock market. It could be a food manufacturing, fast food, or soap making company. 

FOMO (fear of missing out) can usually make people invest in businesses they don’t understand. Cryptocurrency investments are a good example of people investing due to the fear of missing out. It’s not that crypto investments are bad per se, but to invest in them without knowing what they are is not wise at all. 

Understand the Economic Moat

Often associated with Warren Buffett, this term defines a business that has such a competitive advantage that it can continue to grow over the course of many years without letting its competitors come close. 

You can benefit from what’s called a fundamental analysis of the business to know how wide its economic moat is. A huge market capital, an array of patented technologies, and a product or service that make it a sort of monopoly in its industry are signs of a wide economic moat. 

As soon as you look at these terms, you’d instantly recognize some of the big companies that have this advantage. Common examples would include Apple, Google, Amazon, etc. These companies would offer you the most peace of mind when you invest in them due to stable and growing returns.

Know the PE Ratio

Before you invest in a stock, you have to know how much it’s worth. PE (price to earnings) ratio tells you how much you will have to invest in each stock to make a $1 return. How do you calculate this ratio? Take the price of the asset, divide this number with 1-year earnings of the company per share. 

The number you get tells you how much you will have to invest in the stock to get a return of $1. If you calculate this value for the current and the previous year and find this value to be rising, it means the earnings of the company per share are going down. 

Best Stocks to Invest in 2023

Now that you understand so much stocks, it’s time you know about the ones that have the highest probability of giving you great returns. Do keep in mind that this is not professional financial advice. What you read about these stocks is only for the purpose of information. 

How you define ‘best’ in terms of stocks can be quite subjective. However, the following entries are based on EPS (earnings per share) and revenue growth of the company. 

Best Growth Stocks 

When you look at the EPS growth percentage, some of the companies that have outperformed their competitors are American Airlines Group, Equitable Holdings, and Marriott Vacations Worldwide. On the other hand, the best stock based on its revenue growth has been Coterra Energy, with a growth of 693.8% in 2022. Other names that you would like to keep an eye on include Amazon, Alphabet, Block, Shopify, and Tesla.

Low-risk Stocks

You want to invest but keep your risk as low as possible. Perhaps, you are more interested in preserving your capitals’ value. Some of the stocks best suited for this type of strategy include Apple, Starbucks, The Walt Disney Company, etc. In fact, you can think about investing in any company that has been around for several years and is well-established as a leader in its industry. 

Income Stocks 

Would you like to generate continuous income from your investments? If that’s the case, you want to go with stocks that give you monthly, quarterly, semi-annual, or annual dividends. Some of the most reliable names that have been yielding dividends for their investors for years and decades include Realty Income, Target, Walgreens Boots Alliance. 

American Express and Microsoft also make it to this list with the latter seeing a growth in its dividends for more than a decade now. With American Express, the company is known for not letting its dividends slip even in situations where an increase isn’t possible.

Final Thoughts

You have hopefully learned what stocks are, their basic types, and how many ways you can invest in them. It should also be clear to you how different investment strategies work for different people and why you must pick one before you start investing. Irrespective of which assets you pick and which strategy you implement, you shouldn’t start your investment journey with unrealistic expectations.

It’s best that you start with an investment simulator that simulates the stock market and lets you invest in your favorite stocks with dummy credit. It’s just like investing in real but without putting your money on the line. Good luck with your investments!

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