Investing in stocks could be one the easiest ways of making money on Earth. The very basics of investing when understood will produce a reliable passive income source that can weather recessions and economic storms.
A beginner can start with the basics of investing by following time tested investment strategies. The key is simplicity and clarity, with step by step layouts of the stock buying process, and portfolio management routines. Stock investing literally beats the economic durability of all existing online passive income strategies outlined by modern day gurus for the purpose of financial freedom, and to retire early.
Defining the Basics of Investing
There has never been a better time to start investing for beginners than there is today. What is investing? With many definitions of investing circulating around it would be wise to restrict the scope to only investing into stocks for now. This is the asset class of our focus.
Investing Money for Beginners 101
The basics of investing are simply the putting of money into good (financial) assets, and the management of a basket of those assets over time. The investor should either have a great deal of knowledge about the investments; or have a fair understanding about its cash flow expectations.
Investments that have been well examined and analyzed that have fair protection against the loss of the principal (starting sum). This is a key safety standard that will lead you to financial freedom, and help you retire early once you master it.
A Tale of Caution
It should also guarantee a fair profit or gain overtime (above one year). If the Investor is able to find a handful of assets of this same kind to bundle inside a low cost investment account, he will have a good portfolio to nurture in the long run.
There you have it. Anything else out there that calls itself an investment could be speculative, unless it can give a comfortable protection to your downside risk. Also a reasonable potential to your upside opportunity must be required.
Taking the Long-Term Approach
I’m not saying good Investments don’t break. Neither do I imply that massive gains are unusual. Risks and returns are well-placed ideas. The more risk you take the more chances of exceptional growth. This is a fair argument.
Investing ought to be a long-term passive income activity, that grows and compounds over time. If you have any other objective besides the above stated you could give yourself a more suitable description such as a trader or speculator. The very basics of investing also require the beginner to be familiar with these differences.
The Basics of Investing Mindset
The stock market in the United States, as well as the capital markets in other parts of the world have very few true investors. The majority of players are speculators and traders. They get in and out of the markets without a long-term perspective of the durability of the businesses behind those stocks.
The use of the term Investor is sensitive. Followers of Warren Buffett, Charlie Munger, and Ben Graham understand its subtle placement. The frequency of trades consequently give rise to big losses. Beginner investors see that as barriers of entry into investing; the get cold feet when it comes to buying individual stocks.
Profitable Expectations
Investment returns called Dividends are paid to investors who hold the stock during the prescribed period of time. The rate is set by the company, and it is based on profits made. They are typically paid one or more times a year to the eager investor.
A Capital Gain, on the other hand represents the stock’s numerical growth (upward change in stock price). An investor can sell or hold the position in expectation for further rally in the underlying security. Holding a growing stock makes you bullish. Meaning, you’re expecting further growth from that asset. On the other hand, when you sell, you might be doing it out of a profit taking motive; or you might be bearish – meaning, expecting the stock to fall after that rally.
The Basics of Investing For Financial Freedom
Investments come in all shapes and sizes. Walking your dog each evening could also be an investment in your health. Wouldn’t it? Even before you begin to commit real money to an asset class, the first things to do may not even be related to stocks. But in the long run, they will pay you for the rest of your life.
Invest in yourself
Your first investment will make room for you. It is obvious you have started the very basics of investing your money. The journey to financial freedom is more of a marathon than a sprint. You have found this material online because you set out to invest in yourself. Keep this momentum going for the balance of your investing lifetime.
Invest in books
There is a treasure trove of knowledge hidden in books. Non-fiction titles in the categories of personal finance, investing, and money will help you build your investment acumen overtime. Many of these books teach readers the basics of investing, saving, budgeting, and much more.
Search for some of the great books such as The Intelligent Investor by Benjamin Graham, The Warren Buffett Way by Robert Hagstrom, One Up On Wall Street by Peter Lynch, and Iron Habits of Financial Freedom by Simon Quayson. A book I wrote stating some 25 habits that are crucial in attaining financial independence to help readers retire early.
I’ve also conveniently put together a list of 20 best investing books for beginners reviewed.
Reading online articles published by personal finance blogs also enriches and nourishes equally.
Paper Trading / Simulator Investing for Beginners
Paper trading is the idea of trying out your investment decisions on a piece of paper or napkin with a real investment asset such as a stock. You place the buy order of a stock you have in mind by writing down the ticker symbol and current market price without committing real money or taking any risk whatsoever.
Today, you term really refers to doing this with an app or using a web based stock simulator of some sort. You get real time visuals of the buy/sell decision you’ve just initiated.
You can watch and document the price changes over any period of time. This strategy will give you a preparatory insight on how an actual live stock position will perform. This does not include the stress of carrying investment risk, fees, or transaction costs.
The best approach to using paper trading strategies is by the signing up to a free stock simulator site. The simulator’s trading platform uses virtual money to perform hypothetical trades that mimic real-life stock exchange scenarios. You get real-time feedback without committing real money to that activity.
Financial Freedom Role Models
Role models come in handy as you cultivate the habit of investing. You will look up to them for inspiration. Learn from their wealth of experience and philosophy. Copy everything they’re doing that have produced their outstanding investing results.
When picking them look no further than the G.O.A.T. list. The greatest of all time shortlist.
In my personal list, I have Warren Buffett and his partner Charlie Munger. Benjamin Graham who was Buffett’s mentor was also known as the father of value investing. Others include: Carl Icahn, George Soros, Peter Lynch, John Templeton, and John C. Bogle, and Hetty Green (1834-1916 nicknamed the Witch of Wall Street)
This is a nice boring list with a couple of them deceased. Your role model need not be flashy or modern. Just focus on great men and women with great track records of beating the market. They have the results to show. Not proving anything to anyone, but etching their name in the history books through intelligent investing.
Your Financial Freedom Emergency Fund
An emergency fund is a rainy day hoard of cash equivalents or money market instruments and investments kept to be used in the event of a job loss, or unexpected personal or family emergencies.
Having such a provision is an essential move before you invest in stocks. The stock market was designed and operates to utilize money that would not be needed for use for about 1 to 5 years or more. Emergency funds enable you to access cash at short notice without any consequence.
Assemble A Simple Emergency Fund:
- Build up a minimum of three months of living expenses (6 to 12 months is even better)
- Save a fixed amount of dollars ($100 to $2000 monthly)
- Have deductions from your paycheck.
- A percentage of 10% to 20% would be an excellent start (if you asked me)
If you do not already have this fund in place then start now while you read this investing for beginners article. You do not need to wait to achieve a three months worth of living expenses threshold either. Begin to work both the emergency fund and stock investments at the same time.
Types of Investments to Help You Retire Early
There are a wide range of investments available worldwide today. These are found in many countries around the world. What you invest in will definitely affect the returns you get. Some are definitely more risky than others. A few do not even qualify to be called investments, although they may be labeled as such across the internet.
The following represent a good range of approved and regulated investments. They are not complicated but make up the very basics of investing to grow your nest egg if you desire to retire early.
Individual Stocks
Stocks or shares are financial instruments that represent a small piece of ownership of an existing business or entity. They are easy to find and own. More often than not they are listed and traded on a stock exchange.
A few basics of investing in these instruments are as follows:
Stocks may fall under the category of unlisted, because you cannot buy them through the stock market, but rather over-the-counter. There is no market to organize the processes, nor a broker to mediate. Prices of securities of unlisted stocks are not disclosed to the public either.
After an initial public offering (IPO) is completed by a new business entrant to the stock exchange, the new shareholders of that business are holding stocks that will be traded on a daily basis. This distribution of stocks will fluctuate in price by the supply and demand in the subsequent trading on the stock exchange. It’s important to note these basics of investing in an IPO.
Stocks are traded successfully on a daily basis in the stock market because there is always a buyer and seller match which occurs with settlements and transfers all day-long.
Shares give you an unlimited upside advantage with limited downside risk. Your downside risk rarely results in a zero share price. But if you employ adequate diversification, as well as good research and analysis of the sector, you will have a positive outlook. Shares have the highest investment return potential.
The use of leverage (borrowing on margin) and derivatives like Options can boost returns exponentially, but this is not without significant risk to the investor.
Index funds
An index fund is an investment that is a pool of stocks or bonds that mimic the constitution and performance of an existing financial market index in the US or abroad.
The basics of investing in an index fund is to deliver a low-cost alternative to buying all the under listed stocks yourself. For example, an Oil and Gas Index Fund will have a portfolio of oil company stocks and other interest bearing financial assets limited to the Oil and Gas Industry.
This passive income strategy gives you full exposure to the asset class. You can also zone in on a particular industry or sector. Within that sector, you would possibly weed out and select only the largest companies.
You can achieve all this with a minimum investment capital or periodic contributions predetermined and outlined by the fund company.
You can invest in an index fund through your broker, the fund provider, or via an exchange traded fund ETF.
Mutual Funds
A mutual fund, like an index fund, is a portfolio of stocks or money market instruments or a combination of both. There are also a few that are neither of the two.
The fund is operated by a professional fund manager who buys or sells the individual instruments on behalf of investors. A mutual fund could be actively managed or passively auto-piloted.
Most funds may not trade as much, and use very passive strategy to minimize management costs, fees, and expenses. Costs are usually passed on to the investor as fees. The basics of investing for beginners in these kinds of investments, allows them to use very little savings to buy into a vast array of stocks or instruments.
Robo Advisors
Robo advisors are automated investment platforms that use client information obtained through a survey to make investment allocations, diversification strategies, and trades based on the underlying investment objectives of the client.
The advantages and basics of investing with Robo Advisors are their small opening balance requirements, and minimal fees. They are algorithm based non-human operated investment vehicles suited for a certain class of investors.
Industry regulators monitor these investments to make sure the investor is adequately protected.
401( k) Plans
A 401 k plan is a good place to begin investing if you haven’t done this already. If you work in a company that has such a provision, it will be wise to take advantage of its tax benefits.
This employer-sponsored retirement plan can provide income during retirement. You should find out how to maximize your benefits in the case of matching contributions from your employer.
You get to choose from an array of investments, such as mutual funds. A percentage of your paycheck will be invested accordingly. Save your money for investments, along side this investment vehicle.
Investment accounts allow you to invest and trade shares. The account will give you the flexibility of accessing individual stocks, bonds, index funds, mutual funds, and ETFs to build wealth over time.
A few of them worth mentioning here as follows:
- Standard brokerage account
- Retirement accounts
- Education accounts
Online Stockbrokers
An online stock broker that offers low fees, investor tools, investor research and a good trading platform is the way to go. Look out also for tutorials or a learning academy link that covers the basics of investing for beginners; who do not have prior knowledge of the platform’s environment. Quality customer support is also essential.
For small investors a reasonable investment minimum with no hidden account fees is preferable. A few brokers that fall into this category is as follows:
- Merrill Edge
- Fidelity
- E-Trade
- Zacks Trade
- Firstrade
- TD Ameritrade
- Interactive Brokers IBKR Lite
- Webull
- Ally Invest
- TradeStation
- Charles Schwab
New investors are entering into the Investment universe through crypto currency and Forex trading. Many of these are teenagers who are eager to learn the basics of investing in those instruments. The healthiest approach is to invest in stocks.
They have been around for more than 200 years and have a durable competitive advantage against other forms of asset classes. Stocks are units of business ownership. Buffett sees them as businesses and he treats them that way.
Step by Step Investing for Beginners in Stocks
The endgame is ultimately to become a hands-on individual investor. The very basics of investing through an online broker. You are now about to place your investment destiny into your own hands. The journey will protect you from paying high fees for low Returns. You will learn new jargon and use simple trading platforms. This puts you many steps closer to the financial independence goal. The ability to retire early would begin to seem possible.
1. Set up an online brokerage account
2. Research and analyze a stock’s value
3. Determine the shares to buy
4. Select your stocks order type
5. Manage your stocks
6. Sell your stocks
1. Set Up An Online Brokerage Account
Set up your account within a few minutes and get it approved almost immediately. Choose one of the brokers listed above such as Merrill Edge or E-Trade and if you live outside the United States, use a broker such as Firstrade and access their international accounts section.
Like any bank account you will provide proof of identification, along with your tax ID details or exemptions, if you live outside the jurisdiction.
After a few steps you can fund your brokerage account using several funding options in the list provided on their portal. These basics of investing through brokers will allow you to take charge of your own trades.
2. Research And Analyze A Stock’s Value
Research is essential to determine if a stock is a good enough investment to purchase. Your stockbroker’s dashboard will contain tools for analyzing a prospective stock.
For the very basics of investing, try searching the list of companies and find businesses whose products and services you are already using. Now from a consumer’s perspective you will have a feel of becoming an owner also.
Check out the available data of the stock from the panel. See their annual reports, SEC filings, latest news, earnings forecast, and all manner of public disclosures pertaining to the business.
Picking your first stock while learning the basics of investing could be quite tricky if investing for the first time. Always keep things simple. Do not be overwhelmed or distracted by the arrangement of data inside your broker dashboard
Purchase only a few shares at the time. This will allow you to test the waters. Buy periodically if you will. Consider a $500 investment for example. If the share price of your prospective investment stands at 5 bucks, your capital gives you a chance to own 100 shares (without taking broker fees into consideration).
That is $5 x 100 shares equals $500. You can spread this $500 bucks amount to 3 or 5 stocks in your portfolio. According to their respective share prices, quantities can be allocated accordingly.
See also: How to Invest $50 000 in Stocks for Above Average Returns
4. Select Your Stock’s Order Type
Choose the time of order you want and proceed to execute. There are several types of orders to use to indicate price preferences prior to your purchase. The few that are important for investing for beginners are noted here: Market Order, Limit Order, and Stop Order.
As always, remember to keep things simple. Your paper trading experiment if followed will give you a simulated experience to get a good feel of the basics of investing for the first time.
Market Order: A Buy or sell request to be executed at the current market price or better.
Limit Order: A buy or sell request with a strict limit on the price at which it is executed.
Stop Order: A fixed price limit to force sell a stock at a certain price point.
5. Manage Your Stocks
Frequently keeping an eye on the ball is important. But this does not imply that you mount a constant surveillance to monitor prices or charts. Warren Buffett once said that the simplest basics of investing or managing your portfolio is by turning off the stock market.
You should expect volatility from time to time. Market gyrations are not unusual while trading stocks and other Securities. Guard your emotions from getting the best of You. You would need
Shield a portfolio with diversification. Instead of holding just one or two of your favorite stocks, buy a handful of stocks. A collection of diversified stocks will stand a better chance at weathering a market volatility or economic storm than a single equity position. These basics of investing and portfolio management tips are the ideal path to a stress free financial independence journey.
6. Sell your stocks
Sell your stocks infrequently. Investing requires a certain degree of patience. But Traders and speculators may not share that ideal. Warren Buffett’s favorite holding period is forever. But there comes a time when you may need to exit your position. You may want to sell all of your stocks or make partial sales. You would lose out on compounding and the probability to retire early.
The trading dashboard of your broker will allow you to select the particular stock, together with the type of order to execute the trade. If you made a profit on the sale, you are said to have made a capital gain.
If you want to continue learning about the stock buying process, then learn to trade stocks step by step.
Concluding the Basics of Investing for beginners
The very basics of investing your money in the stock market starts now. Begin to actionize these basics of investing in stocks explained in this article. The amount of progress you will make depends on your passion for financial freedom, and your desire to retire early. The Comfort Zone trap of inaction postpones returns that favor the early bird.
Many new investors are entering into the investment universe through cryptocurrency and Forex trading. Stocks definitely provide the healthiest approach because they have been around for more than 200 years. This gives them and durable competitive advantage over many existing asset classes.
Have you acquired the basics of investing solo via an online broker already? Let us know in the comments below if you had any difficulty in the walk-through process, or had practice shots using a stock simulator. Your tweets are also welcome @FinancialFsage.
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