Everyday, I often get asked,
“How do you start in the stock market?”
So today I want to guide you on how to start buying stocks if you are just beginning. Many new investors 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 you might think. There are many online brokers out there that make things much easier for new investors and getting started doesn’t take more than a few hundred dollars. Here are some practical tips to help you get started:
First, be prepared.
Take it slow and learn all that you can before investing your money to help minimize the risks that are inherent in buying stocks. Failed investments are often due to psychology and lack of preparation (and experience). Preparation must include an understanding of biases such as:
- Anchoring bias — This comes in many forms such as ‘absolute historical values’, which is when investors hold on to an idea that a stock must stay or exceed a certain price (such as the acquisition price) while ignoring fundamentals that may suggest otherwise. It tends to go hand-in-hand with confirmation bias (see below).
- Commitment bias — Otherwise known as the ‘sunk cost fallacy‘, which tends to show itself when investors have bought into poorly performing stocks and decided to hold on to them with the hope of it recovering, despite all signs pointing towards letting go.
- Fear of missing out — In other words, getting caught up with emotions of greed and either buying into stocks too early, or blindly following ‘stock hype’ generated by media/friends/family.
- Confirmation bias — When investors seek out only information that supports their beliefs while ignoring information that contradicts them.
You should also be ready for your emotional response when a stock falls after buying, and learn to manage emotions of fear and greed — the 2 emotions often responsible for all the psychological biases listed above.
➜ Related Article: Are You Prone to Trading Impulses?
Second, you must create a safety net and pay off debts first.
An important task to take care of before you can begin buying stocks is to set up an emergency fund or safety net and to pay off your debts including credit cards and high-interest rate loans. You should try and maintain a fund with enough cash that can sustain you for a minimum of six months should you experience a job loss or unexpected expenses like large medical bills. You also don’t want to be paying more interest than what you receive in returns of your investments so it’s best to pay off all debts first.
➜ Related Article: How To Save Money in 10 Simple Steps
Third, set up an online brokerage account
A brokerage account is set up just like a bank account, but rather than showing your cash balances, it will show what stocks you own and how much they are worth. The brokerage account is where you conduct all of your buying and selling of stocks. There are fees associated with a brokerage account since brokers charge a commission to act on your behalf. And one of the things people don’t realize until they actually start buying and selling stocks via brokers is the ridiculous fees you can rack up – which then end up eating into your profits and capital gains.
For example, in Australia, brokerages tend to overcharge on their fees and personally, I hate seeing that.
So make sure when you start investing or trading, aim to find a brokerage that is less than $5 dollars a trade especially when you’re investing overseas or in the U.S. markets. You must find one that is low in cost and can minimize the number of trades you make. Not choosing the right broker can take a significant bite out of any returns.
A simple google search will help you identify the best one for you.
Fourth, decide what stocks to buy
The ultimate goal is to invest in high-quality companies that you plan to stick with for the long term. You want to buy them when they are trading at a discount to their intrinsic value.
In other words, you want to maintain a margin of safety.
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.
An important 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 the likelihood that you will be overpaying.
➜ Free Tool: If you’d like some help identifying the top 1% of companies to research further for your investing, I highly recommend downloading a FREE copy of my 10 Must-Have Stock Checks. It’s saved my students hours of research everyday, and only requires 5 minutes to implement.
Warren Buffett has said that investing is a no-called-strike game. That means that you 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 you are comfortable investing in for the long term than rushing into the wrong investment opportunity. In summary, take note of these 5 tips as a guide when starting to buy stocks:
- Be prepared.
- Create a safety net and pay off debts first.
- Set up an online brokerage account.
- Decide what stocks to buy
- And, patience.
I hope these practical tips will serve as a good starting point for you since you are considering in investing in the stock market. Remember to enjoy and learn a great deal as you embark upon your investing journey!