For many people, there seems to be a divide between knowing that investing in stocks is a prudent financial decision and knowing how to invest in stocks. Without a doubt, the stock market can be incredibly confusing to the uninitiated, and for many would-be investors that confusion is enough to scare them away from investing.
With that said:
The benefits of investing far outweigh the time and effort it takes to learn how to invest in stocks. And, with the right information available, the stock market need not be confusing at all.
In this blog post, I’m going to explain how to start investing in stocks from A to Z.
Consider this guide a crash course in investing that will provide you with a workable understanding of the stock market and investing in little time at all.
While even the most knowledgeable investors never truly stop learning, the information outlined below will provide you with a great foundation to wade into the wonderful world of investing.
Now let’s get started!
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Investing in Stocks 101
When a company makes the decision to go public, shares of that company become available for purchase, allowing anyone to purchase a stake in the company. Companies may choose to go public for a variety of reasons, ranging from the need to raise money to the wish to provide their owners with a nice profit and an eventual exit strategy.
Here’s what you need to know:
For investors, the benefits of buying shares in a public company are two-fold.
For one, they hope that the value of the company they are buying will grow over time, allowing them to sell their shares at a later date for a nice profit. In addition to this, any profits that the company makes along the way which are not reinvested back into the company are distributed to the shareholders in some form or another.
These profits may be distributed as dividends, which are quarterly payments made to the shareholders, they may be distributed in the form of share repurchases, which help drive up the price of the stock, making the shareholders money, or they may be set aside in order to be used at a later date to grow the company and increase the value of the shareholders’ stock.
Of course, that’s not the only way:
Not all companies pay dividends to their shareholders, but this doesn’t mean they aren’t using their profit to make their shareholders money. Instead, it may simply mean that they are using their profit to buy back shares and/or grow the value of the company.
One factor that is the key to investing success and the principle by which investors are able to make immense returns on their investment over time is the principle of compounding interest.
When a stock makes you money, you can use that money to buy more stocks. Ideally, those stocks will make you even more money, which can then be invested again and again in an ongoing process. If you make good investments, the net result will be that your money grows exponentially over time.
This is the principle that investors such as Warren Buffet have used to turn just a few thousand dollars into billions of dollars in wealth.
How Does Investing in Stocks Work?
Investors are able to buy and sell shares in any public company at any time. Of course, as with any form of business, the goal is to buy a company when it’s on sale relative to its actual value, and sell when it’s fully valued.
A simplified look at a successful investment is one where an investor buys a company at X amount of dollars, holds on to the company for an extended period of time until its value has grown to the point that they feel comfortable selling it, and then sells it for a profit. If the company offers dividends, they may also accumulate profits along the way without having to sell any of their shares.
How Do I Begin to Invest in the Stock Market?
Figuring out how to invest in stocks starts with learning the fundamentals of investing. Once you are comfortable with how investing works, the next step is to choose the companies you wish to buy. This is the step that can make or break you as an investor, and we will cover later how you can go about choosing companies that will bring you success.
For now, though, it’s important to realize that buying shares in a company is not something that should be taken lightly.
Before buying anything, you need to do this:
Before you buy shares in a company, it is essential to thoroughly investigate that company’s mission, management, goals, outlook, fundamentals, and more. Remember, you would never buy 100% of a company without thorough due diligence, and, likewise, you shouldn’t buy a small percentage of a company without the same.
Once you’ve chosen a company you would like to buy, it’s on to the next step:
Actually purchasing shares in that company.
How Do You Buy Stocks?
After you have found a company you would like to invest in, buying shares in that company will require you to go through a broker. Brokers enable you to easily buy and sell shares in any public company, but they do charge a fee for their services.
Once you are working with a broker, though, buying shares of a company is as simple as ordering something out of a catalog or making a purchase on Amazon. Simply choose the stock you want to buy, the number of shares you want to buy, and complete your purchase.
One great option that has come available in recent years is online brokers. Online brokers are a little bit more “self-serve” than going through a traditional broker, however, their fees are also much lower.
Here’s the bottom line:
For beginner investors, online brokers are perfect since brokerage fees can often eat up any profits that would otherwise be made unless you are investing large amounts of money. In a later section, we’ll go over how to choose the right online broker.
Investing in Stocks for Beginners
There are two fundamental keys for beginner investors: investing for the long-term and investing in companies that have meaning to you personally.
It’s easier for beginner investors to have success investing in the long-term than it is for them to try and make short-term profits.
Knowing when to buy and sell in the short-term requires much more research, knowledge, and, more often than not, a little bit of luck.
Here’s the best thing about long-term investing:
With long-term investing, all you have to do is choose a great company at a reasonable price and allow it to increase in value over time – the potential for costly errors is greatly diminished the longer your investing horizon is.
By the same token, it’s easier for beginner investors to avoid mistakes if they invest in companies that they are already familiar with and companies that have meaning to them.
For example, if you work in the tech industry, it’s going to be much easier for you to understand the goals of a tech company as well as their potential to reach those goals than it is going to be for you to evaluate a company in the pharmaceutical industry.
Over time, you can begin to research companies across various sectors and expand your knowledge-base and comfort zone, but for beginner investors, it’s a good idea to start by investing in companies that they are already familiar with.
The 4M’s of Investing
In Rule #1 investing, we have a process of evaluating a company called the 4M’s. This process can be used on any company in any industry and is extremely helpful for finding companies that have a high probability of growing in value over time.
The 4M’s of Rule #1 investing are:
Meaning is something we’ve touched on already, but it’s also something that many investors sadly overlook. If a company has meaning to you – if you are inspired by and interested in what they do – you are going to be more likely to understand that company, more motivated to research them, and thus more likely to make wise decisions about when they should be bought and sold.
In the end, meaning is often the factor that differentiates between truly investing in a company with confidence and simply gambling on whether or not they will grow in value.
Any company you invest in needs to have a moat. That is, they need to have something that prevents their competition from coming in and stealing away the control they have over their market. For example, Coca-Cola is a company with a great moat. Anyone can make soft drinks, but Coca-Cola has entrenched itself in the market. No new soft drink company is going to be stealing away their customers anytime soon.
By investing in a company with a moat, you can ensure that you don’t lose your investment due to that company being watered down by competition.
Like a fighter jet without a pilot, every company is only as good as the people who are leading it. Before you invest in a company, you need to make sure that company is led by people with competence and integrity. Far too often companies are sunk due to dishonest or poor management.
It’s important, then, to take your time to research the people who are leading a company and make sure they have a track record of integrity as well as success.
4. Margin of Safety
To understand margin of safety, let’s take a look at the example of buying a brand new car for $2,000. Now, that car may have problems down the road which you didn’t foresee, or it’s value may not be quite what you thought it was when you bought it, but since you got it for such a low price you are almost guaranteed to have made a good investment.
Buying a great company isn’t good enough:
In other words, you had a high margin of safety. It isn’t enough to buy great companies – you also have to buy them at a price that gives you a good margin of safety if you want to reduce the potential for loss as much as possible. As Rule #1 investors, we like to buy companies with a margin of safety that all but guarantees a 15% annual return over the next ten year period so that your money will double every ten years.
I call this buying $10 of value for a $5 bill, and I’ve developed a calculator to help you calculate the margin of safety for any company that you are considering.
By using these four points to evaluate a company, you can greatly increase your chances of buying companies that will grow in value and make you money over time.
How Much Should I Invest in Stocks?
The amount of money you should invest in stocks is entirely dependent on your own personal situation.
Keep in mind that you shouldn’t invest more than you can afford to lose. Even the wisest investments sometimes turn sour, and if you aren’t going to be able to afford your mortgage payment next month if you lose the money you invest then it’s probably a better idea to keep that money in a savings account.
With that said, if you have an expendable amount of money, it’s a good idea to invest as much as you can afford.
The more you invest now the greater your returns will be in the future.
What about Diversification?
Another concept concerning how much money you should invest has to do with diversifying your portfolio.
Diversification doesn’t mean you have to spread your money across the entire market like many financial advisors will tell you to do. Instead, it simply means that you probably don’t want to have all of your money in one company or even one industry. Choose a handful of companies across a few industries and spread your money across them.
How do I Start Investing with Little Money?
Investing doesn’t require you to start off with a fortune already.
In fact, some of the most successful investors in the world started out incredibly small with just a few hundred or few thousand dollars.
When you’re starting small, though, it’s especially important to choose a company or two that you have thoroughly researched and that you deeply trust.
Allow that company to make you money, reinvest that money again, and then you’re off to the races.
Here’s a quick video on how to invest a small amount of money, like $1,000:
How to Invest in Stocks Online
As we’ve already mentioned, online brokers are one of the best options available for beginner investors.
These brokers charge a much lower fee than traditional brokers while still providing you with all the tools you need to be successful.
There are also plenty of options available, and choosing which one you want to use is ultimately a personal choice. Take a look at the fees the online broker charges as well as whether or not they allow you to buy and sell individual companies.
If an online broker has low fees and gives you the option to buy and sell individual companies, they’re probably going to be a fine choice for a beginner investor.
To get started choosing an online broker, a simple Google search of “online brokers” should provide you with all the options you want to consider and more.
How to Start Investing in Stocks
If you’ve made it to this point, you’re now armed with all the information you need to start investing in stocks. Before you make a purchase, though, your first and most important step should be to go out and start researching companies.
Learn them inside and out, apply the 4M’s of Rule #1 investing to them and see how they stack up, then go with your gut. The final step is to make a purchase and start reaping the rewards.
Stock Trading Courses for Beginners
While this guide is meant to cover everything you need to know to begin investing in stocks, learning how to invest in stocks is a process that never truly ends, and the more you know the more likely it is you will be successful.
By taking a stock trading course, you can learn some of the finer nuances of successful investing as well a few highly useful investing tips and secrets you won’t likely find anywhere else on the internet.
In the same way that furthering your education in any other field makes you more equipped to be successful in that field, furthering your education in investing is the best way to learn how to choose the right companies at the right time.
In the long run, this type of knowledge can pay for itself many times over.
With all of that said, I highly recommend you consider checking out my Intro to Rule #1 Investing course.
Here, you will learn the strategies that myself and other Rule #1 investors have used to find great companies at bargain prices and earn upwards of 15% returns each year.
It is my honest belief that the strategies contained within this course are the best way for beginner investors to see early success as well as prolonged success in their investments, and I look forward to teaching you all there is to know about the power of Rule #1 investing.
Are you ready to learn how to invest in stocks for real? What’s holding you back? Let me know in the comments.
Related investing resources:
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