How to Become an Investor in the Stock Market
Becoming an investor sounds more complicated than it really is. Here’s how to invest in stocks for a lifetime of wealth.
So, you want to learn how to become an investor?
Becoming an investor in the stock market is one of the easiest ways to grow your wealth, yet many people avoid it.
Why?
Well, there’s plenty you need to know before making your first investment, and all the information out there can seem quite intimidating and even confusing.
That’s why we’ve put together this easy guide with the simple solutions to your investing questions — no matter how big or small.
Here’s what we will go over:
Can I learn how to become a good investor?
What are the keys to investing?
How do I choose which stocks to buy?
And how do I even get started investing in stocks?
We’ll cover it all.
By the time you're through reading this, you should have the confidence you need to know how to become a savvy investor in the stock market.
What is Investing?
Investing involves allocating money with the intention of receiving a profit in the future.
When you invest, you're putting your money into an asset with the hope that the future value is higher than what you paid for it.
That asset can be anything from a home, business, piece of art — you name it. However, one of the best places to begin investing is in stocks and the stock market for beginning investors.
In this guide, we will stick to showing you how to become an investor in the stock market, including, the best stock investments available to beginners.
How to Be a Good Investor
Becoming an investor is easy, but learning how to be a good investor is the tricky part.
So many investors — both seasoned as well as newbies — tend to underperform.
Why?
They either follow their emotions or follow the crowd — or both.
If you can control your emotions, and invest off of your research rather than your impulses, you’ll be just fine.
See, fear and greed are an investor’s worst enemies when it comes to the stock market.
Fear can prevent an investor from buying a good company, simply because the price is cheap…
Greed can make an investor buy a bad company simply because they are convinced the price will go up, despite the already high price.
What’s more, emotions tend to take over during a downturn in the market or even a crash. Folks tend to sell falling stocks in hopes of saving a few pennies, when in most cases, having patience and waiting it out hands you a better outcome.
According to a recent report, 82.51% of funds underperformed the S&P 500 while only 17.49% of funds outperformed the S&P 500 over the last decade.
The bottom line?
Most investors tend to develop bad investment instincts, but you don’t have to.
In order to become a good, or even great, investor, you must be able to make rational decisions about when to buy and sell stocks and what stocks you should buy.
During the investment process, rational thinking will allow you to commit to a sensible investing strategy and will allow you to reduce your risk while amplifying your reward.
Here are 3 simple rules you can follow to become a rational investor:
Never put all or a lot of your investing capital into one single stock
Now, why should you become an investor in the stock market?
The answer is simple: to make money.
Let's say you have $10,000 set aside, and you're not sure what to do with it.
You can…
Stuff it under your mattress.
Stick it into a savings account — where the highest interest rate available is currently 0.55%.
Invest it in the S&P 500, where the average return over the last 10 years has been 14.5% and leave it alone.
Which one would you choose?
(Hint: 3 should be your answer.)
Keys to Investing in the Stock Market
1) Understand How the Stock Market Works
Understanding how the stock market works is key to your investing journey.
Think of the stock market as an auction where the buyers and sellers are individuals, institutions, or governments... And they send the price of a stock up or down based on the idea of supply and demand.
Investors hold a lot of power when it comes to the price fluctuation of a stock. If the company is performing well, investors are happy, and the stock price typically goes up. If they're worried about poor performance, or possibly a bad earnings report, they can react irrationally and sell quickly, driving that stock price down.
Part of becoming an investor requires you to understand the process behind each stock move in the market, and why it’s not a good idea to follow the masses for your information. Afterall, there’s a reason Wall Street is looked at as the big bad wolf to novice investors. Check out this article on the simple ways you can beat Wall Street at their own game.
2) Understand What Stocks Are and How They Work
You can’t become an investor in the stock market without knowing what stocks are and how they work.
It’s not possible. If you think you can get away with investing in a popular stock (like the meme stock craze) just for the heck of it, you could end up losing it all.
Learning how to become a good investor is learning how to control your emotions and impulses. Investing is more mental than anything else, just remember that.
What is a Stock?
A stock (also known as shares, equity, or securities) is a financial investment that represents ownership in a publicly traded company. When you buy stocks to invest in, you become an investor or shareholder in that company, and you now have a legal claim to the business’s assets and earnings. Therefore, the more shares of a company you buy, the more of it you own.
Part of the investment process requires you (the investor) to buy a stock. This means you are putting your money into a company with educated faith that future investors will value that same company more after some time.
In turn, if and when that stock price goes up, you (the investor) can sell the stock for a higher price. (When an investor sells shares for a profit, this is known as a capital gain. If the investor loses money on the sale of the stock, that is considered a capital loss.
It’s a pretty simple concept. But we never said understanding stocks was hard... It's the making money part that complicates things.
A Few More Keys to Investing in the Stock Market…
The stock market is a great way to generate passive income.
There are many different types of stocks to invest in. What's right for you may not be a suitable investment for another.
It's essential to understand the risks that come along with investing in the stock market before making any decisions.
You should always, always, always do your research.
Investing isn't about getting rich quick. It takes time and patience for your investments to grow over time to create long-lasting wealth.
Building Wealth in the Stock Market
Despite what you may have heard, you don’t have to be a genius to build a solid portfolio.
The key to becoming a great investor is simply being a rational one. Like I mentioned above, investing can be mostly mental.
But when it comes to the pressing question of: “How do I choose which stocks to buy?”…
It’s important you understand that anyone can make money in the stock market… But true wealth building comes when you put certain strategies in place for your investments in order to know how to buy stocks that work for you.
You’ve heard of Warren Buffet, right? He’s one of the greatest investors alive today. You’re probably aware he’s got a net worth over $100 billion and is one of the richest men in America.
Here’s something you may not know about Buffet…
Since the beginning of his career, he’s had the same stock-picking system in place — that’s all he’s ever used since he took control of Berkshire Hathaway in 1965.
So, what is this system and why don’t all investors use it?
It’s simple. Buffet’s system focuses on long-term growth.
And most folks don’t think about long-term investing to grow their wealth…
They want to make money, and they want to make it now.
Just know, you’d have to be extremely foolish and lucky to get Warren Buffet-kind-of-rich quickly from the stock market.
There is a way, however, to make a reasonable amount of money in the short term while you focus on growing your wealth long-term.
And it does involve Buffett’s strategy… and a powerful force called “Compounding.”
Compounding is when you put your money in an investment that pays a return. Then, you take that return and reinvest it into your original investment. When you continue to do this over and over, all your investments grow, including the amounts that are being reinvested.
Building your wealth by compounding will most likely hand you more money than you even imagined possible in the long-term. [You can read all about compounding your wealth, here.]
How to Choose Which Stocks to Buy
When you first become an investor, you want to stick to the basics. For instance, if you’re just starting out, options trading, or short selling isn’t a good idea.
That’s where growth stocks and value stocks come into play. These are two of the more popular approaches to stock investing, especially for building wealth. A steady blend of both is a great way to become a good investor.
Keep in mind, when you’re learning how to choose stocks to buy, you’re going to want to think about compounding too.
Luckily, compounding works best with stocks over other asset classes like, gold, cash or bonds. A professor of finance at the Wharton School at the University of Pennsylvania found this when he studied the returns of different types of assets over a 211-year time frame.
These were the results…
From 1802 – 2013:
$1 kept in cash was worth 5 cents
$1 invested in gold was worth $3.21
$1 invested in bonds was worth $1,505
$1 invested in stocks was worth $930,550
In this study, Professor Siegel also found that, $3,000 invested into the S&P 500 between 1950 — 2003 was worth $1,323,936…
But, if that same $3,000 was invested into three companies (that follow Warren Buffett’s strategy) instead, the return would be worth $5,080,054.
That’s why the quality of stocks you invest in, combined with the power of compounding can make all the difference.
Trading vs. Long-Term Investing
By now you should know that the key to investing and building real wealth is focusing on long-term investing.
Nothing keeps an investor up at night more than volatility and constant worrying about how a stock is performing.
With long-term investing, you have more of a set-it-and-forget-it mindset where you won't even have to stress about downturns or anything of the sort. Long-term solid investments have a way of stabilizing themselves and riding out dips, crashes, and even recessions.
But there's more to long-term investing — there's the good feeling of knowing you can create steady flowing income for as long as you'd like. This can be accomplished by investing in stocks that pay strong dividends.
Dividends are quarterly payouts from a company to shareholders. So, if you are invested in X company that pays a dividend, you’ll see automatic payments from that investment depending on the yield amount.
Not all stocks pay dividends, so finding the ones that pay strong dividends is key. You can even find stocks to invest in that pay dividends more frequently, like every month, which will help accelerate your compounding effectiveness.
[Check out this report: Favorite Super Dividend Stock to Fund Your Retirement]
Finding investments that are best for you will take some time as you become an investor.
How to Start Investing in Stocks in Just 3 Steps
Step 1: Figure it out. Are you ready to become an investor?
You're ready to get started on your investing journey, but are you in a position to do so? Have you figured out what kind of investor you are? Do you have money to start investing?
There are a few things to "figure out" before jumping headfirst into the deep end, like…
How much debt do you have?
We're not referring to student loans and mortgages. What you really need to consider is how much credit card debt you have. If the answer is "a whole lot," then you may want to focus on paying it down before making any type of investment. Taking control of your credit card debt should be your priority.
Why are you investing?
"To make money" isn't a good enough answer here. Sure, if you're investing in anything, you're looking for a profit of some kind. But when you are first starting out, you must pinpoint what you are investing for to determine how to choose stocks to buy.
Are you investing for your retirement? (Check out our Retirement Planning Guide.)
Are you looking to get a steady monthly income? (Get started with these monthly-paying dividends.)
Do you want a rainy-day fund for your family?
How you invest will come down to the timeframe of your needs. This means, the sooner you need the money, the more conservative your investments should be. While if you are focused on investing for the future, you can choose riskier investments.
Do you have emergency funds?
You never know when an emergency will pop up, and this is why we firmly recommend that you have your own emergency fund. At first, you can start small by saving $500, but after a while, we recommend that you save up to six months worth of expenses.
What's the right investing budget for your lifestyle?
Figure out how much you can realistically invest each month? Here’s how to set up a realistic monthly budget.
Step 2: Choose the right investing approach.
Now, it's time to decide how you're going to invest.
Core Investment Accounts
Individual Brokerage Account
IRA
401k
Full-Service Brokers
What is a full-service broker?
Simply, it is a financial broker-dealer firm that is licensed and provides a variety of services to its clients, such as retirement planning, advice and research on trading, which includes investment advice, and even tax assistance.
This type of broker can prove to be valuable to people who have complicated financial situations and who want to outsource any kind of decision making to a broker who will make decisions for you.
With this type of service, it’s important to take some time to evaluate the different brokers. Is the one you are choosing able to give you sound and strategic investment advice? Do they have other types of qualifications like being a Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA)?
You also need to think about different questions that could be a conflict of interest for you. Is your broker’s advice truly what’s best for you or is it just a way for them to generate more income for themself? Make sure that, when you do choose a full-service broker, that you monitor them and continually decide whether the cost of having them is worth it.
But, with all these services, you end up paying high commissions that are higher than what you’d pay at a discount broker, which I’ll touch on next.
Discount Broker
What is a discount broker?
It is simply a broker that carries out your buy-and-sell orders at a lower commission rate. This type of broker is an excellent choice for those who do their own research and don’t need to rely on the guidance of a broker. You’re able to become your own investor with this type of method and find your own stocks to invest in.
This kind of option is also great because, with so many online trading options, you’re sure to be able to find one that fits your needs. It can be tough to sift through all of the different options you have to pick from. There are brokerages like:
Fidelity
E*TRADE
TD Ameritrade
SoFi Active Investing
All the above brokerages don’t have any fees per trade or any account minimums. Some discount brokers may still charge fees, but they are minimal and generally less than 1%. Depending on the type of tools that a service provides, some discount brokers may charge more.
Robo-advisors
A robo-advisor is an automated investing service that uses an algorithm and advanced software to manage and build an investment portfolio. It uses passive indexing strategies for its clients. A robo-advisor generally gathers information from its clients about their financial situation and goals and then gives advice. It then automatically invests its client’s assets.
Robo-advisors are pretty inexpensive and don’t require much of an opening balance.
Keep in mind that a robo-advisor is best used for very straightforward investing and shouldn’t be used for complicated issues such as estate planning.
Some robo-advisors include:
Betterment
Wealthfront
Personal Capital
Acorns
Ally Invest
Once you have that figured out, it's time to choose the right investing account that fits your needs.
Step 3: Open a Brokerage Account
There’s no substitute for experience. It’s time to start investing your hard-earned dollars — even if it’s just a small amount at a time. Learning how to become an investor is a process. Putting your own money on the line will help you take it seriously.
Start small. As you gain experience and confidence, you can allocate more funds to your portfolio.
One rule should always remain, though: Never invest more than you are comfortable losing. Which brings us to a quick bonus point.
Bonus Step: Adopt a Risk-Management Strategy
Making money in stocks is a two-part formula: Buying and selling.
It’s no secret that most investors fail because they buy and sell at the wrong times. They usually buy stocks when they’re too hyped up (and therefore too expensive relative to their intrinsic value). And they usually sell once the stock has been beaten up and sold by everyone else.
This is completely normal behavior that manages human psychology. We tend to move where the herd goes. When everyone is buying stocks, we buy stocks. (Overbought, too expensive.) When everyone is selling, we sell. (Oversold, beaten down to half-price.)
To make money in the markets, it often pays to be contrarian. That is, to do the opposite of what everyone else is doing.
Because this requires us to fight against our own innate tendencies, it’s very difficult to consistently adopt this approach.
One way to strip out the human emotions is to lean on a set of concrete tools that make the decisions for you. Specifically: asset allocation, position sizing, and trailing stop losses.
Then, the more time you spend investing and informing yourself on the many dynamics that influence markets, the better the investor you’ll become.
You don’t have to make investing your job, though, to be successful.
For some people, they enjoy spending hours a day looking at charts and forming hypotheses. For others, they prefer to make “set-it-and-forget-it” decisions every six months, and then spend their time doing other things.
There are ways to make money doing both. But these two very different approaches to investing require a different set of tools. We can help you figure out which investor profile fits you and your lifestyle best. From there, we’ll give you the tools to be most successful.
But the first step is the same. If you haven’t yet, be sure to subscribe to our weekly Finance Daddy e-letter. From there, you’ll quickly discover what to do next.
Want to Dive a Little Deeper into Stock Investing?
If you’re ready to broaden your investing knowledge, we have plenty of resources you can use to get started.
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