How to Invest in Stocks for Beginners

Understanding why??

There's often a myth that investing is too risky, and you might lose all of your money. But the truth is, is that not investing is just as risky. If you choose to just put all of your money into a bank account, then your money is losing buying power due to something called inflation. 

And so if it's sitting in a bank account for too long and not growing, then it's actually losing value. Additionally, you can actually take steps to mitigate your risk on the stock market.

Setting up Foundation (Emergency Fund)

Step number two is a really important step. And it's to make sure that you have your emergency fund set up. No, it's not very exciting. But so many people recommend having an emergency fund before investing because it gives you more power and more freedom to take on riskier investments. And the reason is that you have to fail-safe liquid cash sitting in a bank account.

So that if anything goes wrong, you don't have to try and pull out your investments, and they can stay there and grow. This means that your emotions are taken out of the equation. Because investing is a very highly emotional activity. 

And so you want to make sure that you have an emotional buffer in place in your emergency fund so that then you can take on more risk with your investments with your emergency fund, all you need to do is look at your three to six months of expenses, and then save that out and put it in a high-interest savings account.

How much Can You Invest?

Step number three is to set up a bulletproof budget, you will use your budget to examine your finances and really work out if is there enough money for me to put aside into investing at the moment. can I really afford to part with this money for a long period of time is this money, something I'm going to need in the next few years?

And if it is that I'm not ready to invest yet, maybe I need to work on building my income so that I can have extra money to invest in this step. it is super crucial in your investing journey and making sure we're laying down your foundations, setting up a proper base to then start investing, and having a bulletproof investing plan.

Eliminate High-Interest Debt

So within this budgeting step, it's super important that I mentioned if you have any high-interest debt, you need to eliminate this before you start investing. And the reason is really very simple. It really comes down to two things, one, the mathematics of it, and two the psychological benefits of paying off your debt. 

So with the mathematics, say you have credit card debt, that's 18%. If you put your money into investing, and you're only earning an average of 8% per year, your money is much better off and it is much more effective. Paying down a debt that has an 18% interest. 

Don't panic, like a year or two off your investing journey. It's not going to change things up too drastically. Okay, so once this is all sorted, then you can actually look at investing. 

What type of Investor?

So the first thing that we'll be doing is deciding what sort of investor you want to be. And to do this you need to look at your goals. Do you want to solely focus on the stock market or do you want to diversify a little bit and have some investments in property and some investments in the stock market this question let you know how many men You have to play with it? 

The second question to ask yourself is, are you investing in the stock market for quick cash to earn some money that you can use within the next five years? Or are you happy to part with that money and invest it for 20 to 40 years, this is the difference between short-term investing and long-term investing. 

But always make sure that any money that you need within the next five years whether that's for a down payment in property, a new business venture, or really any specific purpose does not get invested into the stock market. 

The reason for this is that the prices of the stock market, actually very volatile, in the short term, they go up and down, like crazy. But in the long term, if the market really evens out, you're more likely to lose your money if you invest for the short-time game.

Superannuation

Step number two is to look at your superannuation. I know it doesn't sound super exciting, but Superannuation is actually a form of investing the money that your employer is putting into your superannuation account is not just sitting there in a savings account, it's actually being allocated across investments.

You have a lot more control over your superannuation than you might think is the best place to start. Because you can save a lot of money on fees as soon as you consolidate your funds. And it's one of the best ways to legally reduce your tax. So do this as soon as possible can. 

Some people have multiple superannuation accounts, and they don't even know because they have multiple different jobs. And so you're paying only different sets of fees, you're paying multiple life insurance.

You don't need multiple sets of life insurance and these huge fees that are coming out of your retirement fund. So definitely get on top of this, and do it as soon as you can. It makes you feel so good once it's done, and it's the best thing you can do to get ahead with your investments.

So once you've consolidated then you can actually go ahead and look at how your money is being allocated within your superannuation fund. As I mentioned before, you can have some sort of control over where it's been allocated. 

If you're younger, you might want to take on a little bit more risk in your superannuation. And so you might choose to invest your superannuation in a higher-risk portfolio. 

Decide which Product to Invest in

Step number three is to decide how you want to invest. So index funds exchange-traded funds or ETFs, mutual funds, and individual stocks are the ones I looked at as beginner index funds and exchange-traded funds. 

Index Fund

With an index fund, instead of buying an individual stock from an individual company, you're buying a pre-packaged basket of stocks, it's sort of like if instead of buying one flower, you're buying a bouquet of different flowers.

Index funds are often chosen because they are diversified stocks, you'll often hear people talking about diversifying their portfolios. So what this means is if you invest in one company, and it doesn't do very well, it just bombs, and then you've only invested in that company, then you've lost all of your money.

But if you invest in an index fund, which is multiple companies, and one company does bad, you still have all of these others to pull you up diversification and buying things like index funds or ETFs are really good for managing your risk and reducing your risk is basically just the principle of not putting all of your eggs in one basket. 

How To Invest In Stocks: Guide For Beginners

An index fund tracks an index. So instead of trying to beat the market, an index fund that tracks the market will just try to mimic it. For example, if you bought an index fund that tracks the s&p 500 index, then you will be buying an index fund that mimics the results of the s&p 500. 

By the way, the s&p 500 is the top 500 company on the stock exchange. So if you've bought an index fund that tracks the s&p 500 you'll own a little bit of each of the top 500 companies and so on Instead of trying to pick the companies that you think will do really well.

So instead of going, I'm going to buy Apple, Facebook Tesla, I'm going to group all of these together, and hope that they do really well, all you're doing is tracking the s&p 500 index, which is historically given an average of 8% return per year. So instead of trying to beat the market, you are just mimicking the market.

ETFs

ETFs are also a diversified basket of stuff, but they're traded on the stock market. So index funds, you can only buy at the end of the trading day and an exchange-traded fund or an ETF you can buy at any point during the day. Now you can also buy ETFs that track an index. 

And for a beginner, the benefit of buying an ETF over an index fund is that they usually have a much lower barrier of entry. What I mean by this is that to buy into an ETF, the minimum price is just the price of a single share because it's listed on the stock market.

Whereas an index fund can be upwards of 1000s of dollars just to buy into the index fund. So obviously, this is going to be a barrier to entry for a lot of people who don't just have $3,000 ready to invest. And so an ETF is a really good way to get started. As a beginner, it's really important to try and mitigate your risk. 

And so whilst ETFs and index funds aren't as exciting as more speculative investments like cryptocurrency or individual stocks, it's important to remember that building wealth isn't always super exciting. Sometimes it's the most simple and stress-free method that will get you there. 

Local VS International Share Market

Step number five is to decide where you want to invest your money. Which market do you want to invest in? Do you want to invest domestically? Or do you want to invest internationally? The question to ask yourself here is how has each market historically performed. And what are the barriers to entry?

How much does it cost me to trade on a particular market? For example, the ASX? Can I get zero brokerage are there fractional shares available for example I personally started investing in the US market. The US market is home to some of the biggest markets in the world. 

What I found was that the top 500 companies for the s&p 500 historically gave an average return of 8% per year. And this outperformed the ASX 200. And this is not to say that the Australian market doesn't hold any value because it does. But for me as a beginner with not too much money to invest. I personally wanted to hedge my bets and go with something that had historically performed better. 

Fractional Shares

The US market also gave me access to something called fractional shares. fractional shares allow you to start investing with basically whatever money you have. So instead of having to say about $3,000 to purchase an individual share, you can purchase just a portion of that share. 

Decide your Strategy

Step number six is to decide your strategy and a strategy that's called dollar cost averaging. This is a strategy that values consistency and regular investment. Dollar-cost averaging is where you invest the same amount of money across regular intervals. 

So for example, you might invest $100 every single month. That means that you are investing in the stock no matter what the price is at some points you'll be buying at a discount. And at other times you'll be buying at a premium but over the long run.

It all balances out effectively what dollar cost averaging does to reduce the impact of the volatility of the market. That way you don't need to worry about trying to time the Market dollar cost averaging is particularly attractive to new investors.

Because trying to pick the low point of a stock is really actually quite difficult who's to say where to skip dipping or that if you wait hoping that it will keep going down, it might just go up and you've missed? the dollar cost averaging strategy was another reason why I needed fractional shares and hence I went to the US market. 

Final Tips

Okay, so some final tips with the stock market, you definitely want to be investing over the long term, you'll get a capital gains discount on any of the profit you make or invest which means that you will pay less tax on that profit to get the capital gains discount, you need to hold it for a minimum of a year. 

The second one is diversification. You want to be looking at a diversified portfolio. And so buying into something like an index fund or an ETF is best at the beginning. Don't try and time the market. Try and invest regularly and consistently no one that can beat the market.

It is a highly irrational being and it is too hard to try time and time in the market is always going to be timing the market. And finally, most importantly, do not invest in anything that you do not understand. Don't take blind advice from your friends, family, or strangers on the internet, research everything thoroughly.

Take extra time to do your research. It's so much better to wait and research thoroughly than to jump into something that you don't understand and lose everything a lot of people say the best time to invest was yesterday. 

But really the best time to invest is once you understand you need to understand how the market works, and the risk you're taking on how the companies or index funds or ETFs are performing.