Beginners Guide To The Stock Market

Investing in the stock market is easier than ever; all you need is a brokerage account and small capital to start trading. In a nutshell, trading stocks is buying low and selling high. You need to look for the right opportunity to buy the stock at an attractive price and hold for a while until it trades for higher than the original value to sell.

The stock market is widely accessible to anyone today. Trading requires an understanding of how the market works and a good financial background to save money for your investments.

The following are six steps you can follow to get started investing in the stock market:

1- Save money for your investments

This step might sound simple, but money invested in the stock market is money you do not need for at least the next five years. Anyone can invest in the stock market; it does not matter how much you make as long as you can lower your expenses and save a certain amount of your income toward your investments.

It is not about how much you make, It is how much you keep

Living below your means is the first step to finance your investments; if you cut back on expenses that are not necessary, you can save enough to start investing. Although you can begin investing at as low as $100, you should know that brokerage fees can eat away your money, and if you want to take investing seriously, you have to build a strong portfolio.

To save money, start writing down all your expenses and see where you can make necessary cuts to redirect that money into the share market. On average, saving 10% of your income is a good start which, over time it can build up to a respectable amount.

2- Have an emergency account

Make an emergency account that can keep you going for at least three months if you lost your job or are in a crisis – Like a Pandemic! – that can keep you going without the need to take your money from your investments. This account should only be for emergencies, not unnecessary expenses.

This step ensures that you are protected from any unforeseen bills or fines that you might get where you do not have to ask anyone for money or, worse, exit your position in the stock market and end up with a loss. In addition, having an emergency account will make sure that you are not stressing about money every time something happens, and you can pay anything and become self-sufficient.

Find out how much you spend in a month on rent, gas, food and other expenses and then multiply that number by three. Then open an account. You can start with a balance like $2000 and then find out how much you need to save a month to get to your target within six months. Then keep growing this account slowly by allocating a small percentage of your income to this account; an amount as low as $50 a month can help grow this account over time.

3- Understand the stock market

The stock market is not that complicated, but it is also not a gamble. There is a company behind every stock you buy. If the company does well and increase its profit year after year, the stock price follows the company success. Therefore, you need to ask yourself few questions before you buy a company:

  • Does the company make sense to you?
  • Is the company going to be in business for the next 5-10 years?
  • How is the company going to increase its earnings in the future?
  • Does it have good management?

The questions above are what every successful investor should ask, which will help you understand the company financial position.

Every publicly traded company must publish its financials periodically, which are available to investors to review to decide if they want to invest in that company. In addition, investors look for the company’s competitive advantage or moat and management to make a firm decision before investing.

Peter Lynch, the author of One up on wall street and the former manager of the Magellan Fund, says that investing in the stock market should not be complicated if you stick to what you know, which is also known as your circle of competence.

It would help to read a few books to understand the stock market deeper. You can check my book collection here. Here are a few recommendations for stock market beginners you can buy on Amazon:

4- Find a low brokerage fee account

You need to realise that with investing, you have to factor in the brokerage fee, conversion fees, and capital gain tax, which eat up your profit. Therefore, finding a low brokerage free is the first thing you need to do before investing. This is what you need to find in a good brokerage account besides low fees:

  • Have good exposure to the international market
  • Allow you to buy a variety of assets: stocks, bonds, ETFs, commodities
  • Does not sell order flows to third parties such as Robinhood
  • Have options such as stop, limit and market orders.

It is essential to get a brokerage with all the necessary options because you will have the freedom to buy and sell stocks based on market value or a value that you allocate, as it gives you the ability to trade stocks at your terms and what you see fit.

5- Have a strategy

There are many strategies people follow in the stock market, and because of that, people tend to analyse stocks differently that best suit their situation. In general, we can breakdown stock market investors into two types:

Active Investors

Investors pick individual stocks by analysing companies. There are two types of analysis for active investors:

Fundamental analysis: which depend on economic factors through analysing the company quarterly reports. In general, companies with increasing profits do well over time, making them good candidates for fundamental analysts. This type of analysis is for long-term investors who buy stock and hold for a long time before selling.

Technical analysis: This investing strategy depends on the stock price using technical analysis tools. The tools help investors to see trends in the stock market, such as moving averages. This investing is not based on anything fundamental to the company, making it high risks. This strategy is suitable for day traders because this analysis is only suitable in the short term.

Passive Investors

Those types of investors who do not have time to pick individual stocks can invest passively through a poll of stocks that you can buy through Exchange-traded funds or ETFs that track a specific market by following the top-performing companies. The S&P 500 is the most well-known ETF, which track the top 500 companies in the U.S.

This type of investing is passive because stocks tend to perform well in the long run. Therefore, if you invest in ETFs, you need to understand that the longer you invest, the higher your return will be.

6- Know when to buy

Now, you know that there are few strategies you can follow to purchase stock based on your goals, but when exactly you should buy stocks? In general, you buy a share when it is available at half its trading value; in other words, you buy stocks when they are on sale.

Therefore, you should have a watchlist of stocks and a strategy to analyse the stocks you want to buy. It is essential to know that the following applies only to active investing. If you are interested in going the passive route, I have made a guide to help you invest in ETFs.

Have stock watchlist

It will serve you well to have a watchlist of companies you understand and are interested in owning. Watchlist companies are stocks you analysed and want to own, but the current price is too high that you will not be able to make a profit. Therefore, you put those stocks in your watch lists until they are available for an attractive price to buy.

Buy Stocks as a day trader

Day traders use technical analysis tools such as MACD, Stochastics, and Moving averages to see the trend and determine if the stock will go up or down. This is only possible in the short term, where the risk is relatively high. You can learn more here.

Buy Stocks at the margin of safety

A value analysis of companies is buying companies at the right time when the stock is trading for half its value. The margin of safety enables you to minimise your risks by buying stocks when they are available at a price below their intrinsic value.

Pro investors such as Warren Buffett use this investing strategy, which requires patience and knowledge of the company financials. In addition, buying at the margin of safety can reduce your risks and give you high returns in the long term. Learn how to calculate the Margin of Safety here.

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