In the beginning, many investors may feel intimidated and overwhelmed by the complexity of the stock market.
However, I first want to reassure you that investing is not as difficult as we might think.
There are many online brokers out there that make things much easier for newer investors and getting started doesn’t take more than a few hundred dollars.
Here are 7 practical tips to help you get started:
1. Getting prepared
There’s no rush.
Taking it slow and learning all we can before investing our money will help to minimize the risks that are inherent in buying stocks.
Failed investments are often due to psychology.
Preparation must include an understanding of biases such as, anchoring, commitment bias, fear of missing out and confirmation bias. We should also be ready for our emotional response to having a stock fall once you buy.
I suggest reading ‘The Intelligent Investor’ by Benjamin Graham, specifically chapters 8 and 20.
The Mr. Market and Margin of Safety concepts described in Graham’s book are over 60 years old, but they are two of the most essential pieces on investing advice you will come across.
2. Create a Safety Net
One more important task before we begin buying stocks is to set up an emergency fund.
We want to maintain a fund with enough cash that can sustain us for a minimum of six months should you experience a job loss or unexpectedly large expenses like medical bills.
So before investing, we also want to pay off our debts including credit cards and high-interest rate loans. This is because we don’t want to be paying more interest than what we receive in returns on our investments.
— Invest for the long-term. Not the short-term
We should always keep in mind that whatever money we invest should stay invested for the long term.
Long-term investing allows us to wait out any shorter-term market volatility. If we think we are going to need access to our money within one to two years, then our best bet would be to put the money in a high-interest savings account.
Once we have taken care of everything above, we are now ready to begin investing.
— Start with a small amount of money first
As I mentioned earlier, we don’t have to start with a lot of money. It isn’t a bad idea to start with a smaller amount at first, even just $500 will work.
Yes, we will forfeit a portion of the returns to pay for brokerage fees, but it is a good way to learn without having a large amount at stake. Reading about investing is important, but investing actual money will be an invaluable learning tool.
3. Set up an online brokerage account
A brokerage account is set up a lot like a bank account, but rather than showing our cash balance, it shows what stocks you own and how much they are worth. This account is where we conduct all of our buying and selling of stocks.
There are fees associated with a brokerage account since brokers charge a commission to be able to act on our behalf. Generally, the commission is $10-$20 per transaction or for larger amounts, there may be a fixed percentage. Some cheaper brokers go as low as $1 per transaction.
We want to ensure that we research brokers to find one that is lower cost and minimize the number of trades we make. Not choosing the right broker can take a significant bite out of any returns.
Any of the big banks have brokerage accounts and their pricing is generally around the same amount. Personally, I would suggest Interactive Brokers, which is significantly cheaper.
4. Decide what stocks to buy
Now that we have established our brokerage account and added funds, we are all set to make our first purchase.
The ultimate goal is to invest in high-quality companies that we plan to stick with for the long term. We want to buy them when they are trading at a discount to their intrinsic value. In other words, we want to maintain a margin of safety.
— Ensure you understand the company
Keep it simple. If we can’t explain what a company’s product or service is and how it makes its money to an 11-year-old, then it probably isn’t the right company to be investing in.
— Think like a Business Owner
Another good guide for us to follow is to ask ourselves if we are willing to hold on to the stock for the next three years. If the answer is no, then skip it.
What if we knew we would never have the option of selling a stock we were considering? Let’s think about it in these terms: would you buy a farm today and consider what we could make if we sold it tomorrow, rather than how much produce the farm could generate over a number of years?
Of course not. So, why would we do that when it comes to stocks? We have to start thinking like a business owner to be successful with investing.
— Invest in Blue-Chip Companies First
As beginners, aim to invest in large, high-quality companies known as the ‘blue-chip’ companies. Stay away from the less established companies, known as ‘small-caps’, as well as biotech companies until you have some more experience under your belt.
— Ignore the hype
One last piece of advice is to ignore hype as much as possible. Investing in companies that tend to show up repeatedly in the business news and are touted as being a good stock or industry may increase our likelihood that we will be overpaying.
5. Use limit orders and dollar-cost averaging
Now that we have made our decision to buy, the time has come to ask our broker to make a purchase on our behalf.
The process of using an online broker is simple.
On the brokerage’s website, all we need to do is find the ‘trading’ option on the menu. It will prompt us to input the stock’s code/company name and ask how many shares we want to purchase.
We will then be asked to choose between a ‘limit’ or ‘at market’ order.
I strongly suggest choosing the ‘limit’ option for all trades. With this option, you input the maximum amount you are willing to invest per share.
The second, ‘at market’ option instructs our broker to purchase the stock at the lowest cost available. With big stocks, it’s not too much of a problem, but smaller cap stocks with less liquidity means there is a higher chance of overpaying when there aren’t too many sellers.
For smaller investments (generally under $2,000), I would suggest buying the stock outright. However, for amounts above that, we want to consider ‘dollar cost averaging’. This means investing some now and gradually adding more over time.
Diversification helps to lower our risk, but it is not possible to adequately diversify with a small amount of money in specific stocks. For those of us who don’t have the desire to take an active role in managing our money, our best option would be a fund.
If our preference is to invest directly, we should plan to ultimately purchase between 15-20 stocks. That being said, this is not a race. We should take our time and focus on buying safe stocks with the least risk. These will become our main stocks upon which our portfolio will be built.
Finally 7. Patience
Warren Buffett has said that investing is a no-called-strike game.
That means that we are not going to be penalised for waiting for the right pitch to be thrown.
There may be an opportunity cost. But it is far better to wait for an undervalued, high-quality company that we are comfortable investing in for the long term than rushing into the wrong investment opportunity.
Having patience applies not only to buyers, but also to holders. It can take years for our investments to get to where we want them to be. I know it can be extremely stressful watching our investment’s value rise and especially, fall.
However, according to research conducted at the University of California, it is the frequent trader that generally lags behind the overall market performance by 6.5% p.a over time.
It is inevitable that our stocks will fall at some point. However, that is not a reason to panic and start selling. Take solace in the fact that despite a fleet of wars, recessions and financial crisis, over the past 90 years, global shares have returned 9-12% annually. That is more than any asset class.
Do not get scared off by short term fluctuations in the market. Baron Rothschild summed it up by saying, ‘the time to buy is when there’s blood in the streets‘.
I hope these 7 practical tips will serve as a good starting point for anyone considering in investing in the stock market. I think you’re going to enjoy and learn a great deal as you embark upon your journey.