The Stock Market: Everything You Need to Know to Succeed as a Beginner
DISCLOSURE:
The information provided in this article is for educational purposes only and should not be considered as strict financial advice. It is important to do your own research or consult with a qualified financial advisor before making any investment decisions. The content of this article is meant to provide general knowledge and understanding of the stock market for beginners.
The stock market is one of the most iconically money-driven networks in the world and is where many people make their fortunes. Should you bother? Is it all a ruse? Let’s find out.
1. What is the Stock Market ?
The stock market is an electronic platform (it’s a not real physical market in case you were wondering) where companies and us regular folk can buy and sell shares of publicly traded companies.
2. How Does the Stock Market Work ?
Once companies get fairly big enough or wish to raise more money (capital), they may choose to become a public company and sell a portion of ownership (shares) to the general public. So the stock market is just basically people constantly buying and selling company shares throughout the working day.
Now considering the law of supply and demand, as you can imagine, many people buying shares of a particular company would increase it’s stock price, whereas everybody selling off shares would reduce this price. This is what creates those up and down line charts many people associate with the stock market.
So simply put, you buy shares at a price, the stock price goes up, you make some money. On the other hand, if it goes down, you lose some money. Don’t worry, we’ll explore this in more detail in section 4, but hopefully this is starting to give you a bit of an idea of how this whole thing works.
3. Should You Invest in the Stock Market ?
Long story short, YES. As I mentioned earlier, the stock market is where many people make their money and is without a doubt something you my dear reader should be doing as well. We can put it down to 3 primary reasons:
Reason #1 – It’s Much Better Than Savings
I suggest you think of it as your savings on steroids. Let’s face it. Normal bank savings accounts or god forbid plain cash saved aside are not going to make you rich. The miniscule percentage of increments you make (if at all) are negligible, especially considering how inflation is taking over the globe these days and making your existing money worth less. By investing in even a “basic stock” such as an exchange traded fund (more on this below), you would make 7-8% gains on average with little to no effort. Of course that can significantly go up if you pick a stock that shoots up in value. Think of the people who invested in Facebook before it became huge. Yup.
Reason #2 – It’s a Form of Passive Income
There’s only so much time you as a human have towards working and making money. Gentleman, you need to get your money to work for you. By investing in the stock market, you make money in two ways. By capital appreciation (i.e. the value of your stock investment going up) as we have been discussing all this time. But you can also simulataneously make money by receiving dividends. A lot of companies offer dividend payments to their shareholders by regularly (usually quarterly) paying a small amount per share directly into your account. So you take capital appreciation and regular dividends for multiple stocks over multiple companies compounding over time. Excuse the dollar signs in my eyes.
“There’s only so much time you as a human have towards working and making money. Gentleman, you need to get your money to work for you”
Reason #3 – Simplicity is King
Unlike other forms of wealth creation (check out our 8 Ways to Kickstart Your Wealth if you would like more info), the stock market is a great entry point into the world of making money. Yes, you do need to do some research on picking the right stocks, but that’s about as involved as you get. It’s not as laborious as starting your own business of acquiring and managing real estate. Also you can always start off with less money invested and gradually increase it over time to minimize your risk if you don’t have the appetite for it.
Just so you know, you can get really complicated with the stock market by doing things like options trading and all, but that’s generally inadvisable due to the risks. I personally stay away from it. Stick to the basics and you’ll be just fine.
4. How to Get Started
Alright if you’ve come this far, I can assume you are interested in getting started. Hats off to you. While it does vary a bit based on where you are in the world, there are a few ways you can go about it.
Firstly, you’re going to need a brokerage account. This is like a bank account where you can manage your stock portfolio (and other things usually but we won’t get into that).
Depending on what country you’re in, some banks may even offer brokerage services which could be worth looking into if it’s easy for you. Though note that many often charge a small percentage fee for each transaction while a lot of online brokerages now have 0% fees for stock trades.
When I was starting out, to my annoyance, a lot of sites online focused almost exclusively on USA-based users, so I will try here to suggest brokerage accounts which you can open online and are accessible to people around the globe.
Charles Schwab:
Details (International Customers) – Click Here
Open an account – Click Here
Details (US Customers) – Click Here
Open an account – Click Here
NOTE: I am not affiliated with either of these companies. I do use it for my own personal use which is how I am able to recommend it to you. Both Interactive Brokers and Charles Schwab are highly reputable companies whom you can trust. They offer low rates, great platforms including a mobile application and are all very straightforward to use.
Important to Know:
You will need to provide forms of identification and other personal details in order to open the account
If you’re looking to invest in the US stock market, as a foreigner, you will be asked to sign a tax form “W8-BEN”. While this makes you exempt from paying the majority of taxes (usually 30% on things like dividends and capital gains), by qualifying and submitting this form, your withholding tax will now become 15% instead (I am not a tax advisor, this is just what I had to do).
4. Once you’ve opened your brokerage account (congratulations, the hard part is done), all that’s left is to top up your account (preferable on a monthly basis) and choose which stock you want to buy.
5. What to Invest In ?
Now that you’ve set up your brokerage account and topped it up with some cash, you’re ready to invest in your first shares. Regardless of how much money you are willing to invest, there’s always something ripe for the picking.
Below are my personal rules that I follow and have had some success with and are things that are generally recommended from most sources you would find online. There are many ways of going about it of course, based on things like your risk tolerance, but these are some general “smart” ways to start.
NOTE: For the purposes of ease and common knowledge, I will be referring to the US stock market as it is often the most referred-to stock exchange and the one most people are interested in. However, the general rules are the same and would be applicable to all stock exchanges.
NOTE: For the purposes of ease and common knowledge, I will be referring to the US stock market as it is often the most referred-to stock exchange and the one most people are interested in. However, the general rules are the same and would be applicable to all stock exchanges.
Rule #1 – Do Your Research
It goes without saying that all investment decisions should be backed by good research. There’s no need to rush into anything. Do your due diligence on every stock before you buy.
There’s a lot that can go into researching a stock. Should you choose, you can get really detailed and do a technical analysis of the company and their financial documents. Some basic questions to ask could be:
- Look at things like the share price and their earnings. Is it profitable? Is it too expensive? Things like the P/E Ratio and earnings per share (EPS) can be a good start here.
- Has the price been going up over the years or going down?
- Does the company pay a dividend?
- Is the company already big and well established or are they new? Well established companies (blue chip companies) are usually safer in the long run, but because they’re already established, the likelihood of a big increase in stock price is generally low. On the flip side, small companies are usually riskier but their share prices are often lower, so there is potential for you to make a lot of money if their price goes up.
- Does the company have a lot of debt that isn’t covered by their earnings.
Websites like Yahoo Finance, Morningstar, Seeking Alpha can help you get this information.
Rule #2 – Invest in What You Love
Remember, at the end of the day, you are investing to be part of a company. If you were to physically go to a company, you wouldn’t give your hard-earned money to a company you don’t actually like. Don’t fall for trendy things you may see online.
You’ll often find people online say if you love a company like Apple, don’t pay $1000 for their device that costs you money (it’s not an asset), but instead put $1000 towards their stock and make some money.
By investing in a company you love, you are more likely to follow up with the business by looking into their updates and financials. Also very importantly, you are more likely to hang on to your shares through the ups and downs without panic-selling, which nicely brings us on to the next rule.
Rule #3 – Think Long Term
There’s no such thing as a quick buck. Many people just buy a stock in the hopes that it will go up and when it goes up a bit, they just sell it. Look, if you really want to do this, go ahead, but it is not a proven strategy in the long run because you cannot the market. You don’t know when things will go up (if they go up at all) and when things will go down. Nobody does. As the old adage goes, “it’s not about timing the market, but about time in the market”. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from making a quick buck in the market.
“it’s not about timing the market, but about time in the market”
By thinking long term, you are more likely to benefit from the overall ups and downs of the market over the years. You will also allow for more time to receive your dividends which, if you reinvest back into more stocks, will compound over the years. Anyone who knows anything about stocks will tell you this is incredibly powerful. If you are interested, you can find lots of articles online explaining the ‘magic’ of compounding.
“those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from making a quick buck in the market”
Rule #4 – Individual Stocks vs ETFs
While this isn’t so much a rule, it is very important to know the difference between these two especially when starting out.
An individual stock is basically individual shares for a specific company. This could be a share of Pepsi or a share of Microsoft etc. These are more specific and generally require a bit more research as the success of your investment will be dependent on the performance of this one company.
On the other hand, Exchange Traded Funds (ETFs) are made up of a collection of stocks, bonds, or other assets that are bundled together and traded as one stock. Think of it as grouping some of the more bigger/popular stocks into one. You may have heard of the S&P500 which is a more or less representative stock market index tracking the performance of 500 of the largest companies listed on stock exchanges in the United States. Instead of buying every single one of these companies, you could invest in an ETF of these companies. Some examples include the Vanguard S&P 500 (VOO) and SPDR S&P 500 (SPY).
While ETFs may not have the biggest upside potential and likely won’t make you a millionaire overnight, ETFs provide diversification, meaning your investment is spread across multiple companies, reducing the risk of failure if one company underperforms. Not to mention, ETFs are generally more cost-effective and provide a simpler way for beginners to invest in the stock market without having to research individual companies.
“ETFs are generally more cost-effective and provide a simpler way for beginners to invest in the stock market without having to research individual companies”
Rule #5 – Diversification
As mentioned above, it is very important to diversify your stock portfolio to include different companies across different sectors (e.g. tech, healthcare, consumer staples etc.). This will reduce your overall risk in failure if one company or one sector starts to have issues.
Think of the Dotcom (tech) bubble of 2000 or the real estate crisis in 2008. If you were only invested in stocks of these sectors, you would’ve gone through a really rough time and likely lost a lot of money.
By investing in multiple companies, either individually or via an ETF, you are less likely to feel the hit of a single problem.
6. When to Sell ?
One often overlooked subject is when to sell your shares. You’ve done your research and invested. I’m proud of you. But wait, how do you actually make that money? Remember, if your portfolio value goes up, you are richer ‘on paper’. However, you haven’t actually received that money, right? These are called unrealized gains. If you want to ‘realize’ those gains, you’re going to have to sell your shares.
As mentioned earlier, it is strongly recommend to buy and hold for the long term in order to maximize your earning potential. However, if you think that it may be time to sell, you should ask yourself some questions:
- Do I no longer feel the same way about this company? Have they changed?
- Has the company been acquired by someone else and/or is now doing different things?
- Are their financials consistently getting worse?
- Do I urgently need this money for something in my life?
- Is this too risky for my risk tolerance?
Conclusion
In conclusion, the stock market can be a lucrative investment opportunity for beginners looking to grow their wealth. It is important to do thorough research, diversify your portfolio, and think long-term when making investment decisions. By understanding the basics of how the stock market works and following some key rules, beginners can set themselves up for success in the world of investing. Remember, the stock market is not a get-rich-quick scheme, but with patience, diligence, and a strategic approach, it can be a valuable tool for building financial security over time.