How To Begin Investing: A Step By Step Guide

By: Loren Elmann  |  September 30, 2020
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By Loren Elmann

When it comes to investing, the first thing you need to know is that you should never invest more than you are willing to lose. Investing is a learning process and it is more than likely that you will make some bad calls at first as you get used to the market. The second thing you need to know is that you should always do extensive research on a company before investing in it. You should be able to iterate exactly why you chose to invest in the company before putting your money into it. 

Now for the advice you’re really here for: How to get started!

STEP 1: Read. Read. Read. 

Learn the jargon. Learn what a stock is. Learn the difference between bear and bull markets. Learn about buying and selling options. Learn about day trading. Learn about long-term vs short-term investing. Learn about penny-stocks. Learn everything. 

Get your hands on at least three of the following books:

  1. “Stock Market 101” by Michele Cagan
  2. “A Random Walk Down Wall Street” by Burton Malkiel
  3. “The Intelligent Investor” by Benjamin Graham
  4. “Rich Dad Poor Dad” by Robert Kiyosaki 
  5. “The Millionaire Next Door” by Thomas J. Stanley
  6. “Think and Grow Rich” by Napoleon Hill
  7. “Beating the Street” by Peter Lynch
  8. “The Essays of Warren Buffett” by Warren Buffett

By the end of this, you should be familiar with investment jargon and know what kind of investor you want to be and why. Are you risk-averse? Are you growth-oriented? Do you want to be solely a long-term investor or do you want to be a short-term investor and possibly get into day trading (buying and selling a stock within the same day or week)? Maybe instead, you want to have a balanced approach and change your strategy depending on the company. It is totally up to you, your goals and how much money you are willing to put on the line. 

Once you understand the stock market, you have two choices: you can start investing your money, or practice investing with fake virtual money. It is important to realize that if you start investing without having practiced or at least watching some stocks for an extended period of time beforehand, you will most likely lose money at first. This is not to say that if you do practice, you won’t lose the money — but that if you do practice, it is more likely that you will minimize your losses because you underwent the trial and error period with fake money.

STEP 2A: Practice. 

I recommend practicing with trading simulators for at least three months. 

Trading Simulators: MarketWatch Virtual Stock Exchange, HowTheMarketWorks, and Wall Street Survivor are among the top stock market simulations to help beginner investors understand the stock market better by investing fake money and watching it grow or decline over time. 

STEP 2B: Choose your stock broker/investment platform. 

A broker is the entity that buys and sells investments on your behalf. Usually, you pay a fee for this service. In the case of an online discount broker, you often pay a flat commission per trade. Other brokers, especially if they also manage your assets as a whole, just charge a percentage of your assets each year. Choosing a stock broker is very similar to choosing a stock. Research is the name of the game. Identify your needs and find the broker that meets them. Your choice of broker should match the investment style that you identified for yourself from your step 1 research. Investopedia has very thorough reviews of online brokers so I suggest doing your research on that site. Also: keep in mind that many brokers charge fees and make sure you are aware of them before getting started!!

The following two investor classifications should help you understand a bit better how to choose a broker that will fit your needs: 

Trader: Active investor. Traders don’t hold onto stocks for a long time. They are interested in quick gains greater than the market average based on short-term price volatility, and they may make many trade executions over a short time span. (If you identify yourself as a trader look for a broker with low execution fees.)

Buy-and-hold investor: Passive investor. Buy-and-hold investors hold stocks long term. (As a buy-and-hold investor, execution fees are not such a big deal because you will rarely pay them.)

Here is Investopedia’s 2020 lineup of online brokers and trading platforms:

“Fidelity Investments: Best Online Broker

TD Ameritrade: Best Broker for Beginners

tastyworks: Best Broker for Options

Interactive Brokers: Best Broker for Advanced Traders

TD Ameritrade: Best Broker for Mobile

Interactive Brokers: Best Broker for International Trading

tastyworks: Best Broker for Low Costs

Charles Schwab: Best Broker for ETFs”

STEP 3: Research and Invest!

Yahoo Finance is the best platform for stock/company research. You’ll want to look at a number of factors, from human capital to profit margin to revenue to the balance sheet, when deciding on a company.

So what are you waiting for? Time to hustle!

Here are 20 investment terms and definitions adapted from InvestorJunkie to get started:

  1. “Balance sheet: A statement showing what a company owns, as well as the liabilities the company has and stating the outstanding shareholder equity.
  2. Bear market: This is a market that is falling. A bear market has a downward trend, and someone who believes the market is headed for a drop is often referred to as a ‘bear’.  Bear markets can last for a few weeks or years.
  3. Blue chip: You might hear reporters and others refer to ‘blue-chip stocks.’ Blue chips are companies that have a long history of good earnings, good balance sheets, and even regularly increasing dividends. These are solid companies that may not be exciting, but they are likely to provide reasonable returns over time.
  4. Bull market: This is a market that is trending higher, likely to gain. If you think that the market is going to go up, you are considered a ‘bull.’ Additionally, the term, like bear, can be applied to how you feel about an individual investment. If you are ‘bullish’ on a specific company, it means you think the stock price will rise.
  5. Capital gain (or loss): This is the difference between what you bought an investment for and what you sell if for. If you buy 100 shares of a stock at $10 a share (spending $1,000) and sell your shares later for $25 a share ($2,500), you have a capital gain of $1,500. A loss occurs when you sell for less than you paid. So, if you sell this stock for $5 instead ($500), you have a capital loss of $500).
  6. Dividend: In some cases, a company will offer to divide up some of its income among shareholders. Dividends can be paid once, as a special use of them, or they can be paid more regularly, such as monthly, quarterly, semi-annually, or annually.
  7. Dow Jones Industrial Average: This average includes a price-weighted list of 30 blue-chip stocks. While there are only 30 companies included on the list, many people think of the Dow when they hear that ‘the stock market’ gained or lost. The Dow is often used as a gauge of the health of the stock market as a whole, even though it is only a very small portion.”
  8. Diversity: A portfolio characteristic that ensures you have more than one type of asset. It also means choosing to buy investments in different sectors, industries, or geographic locations. Diversifying your portfolio is the most popular way to reduce the risk of loss.
  9. Earnings Calendar: The schedule according to which various publicly-traded companies announce their earnings for a certain period such as a quarter or a year. The earnings calendar organizes these announcements by date and company. There are many different websites you can use to get this information.
  10. EBIT: Earnings before interest and taxes is an indicator of a company’s profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.
  11. “ETF: Exchange-traded funds, a type of investment fund that trades like a stock. Investors buy and sell ETFs on the same exchanges as shares of stock.
  12. IRA: This stands for an individual retirement account. It is a tax-advantaged account. There are several types of IRAs. Anyone over 18 with a job can open an IRA for themselves. However, not everyone will have access to every type of IRA.
  13. NASDAQ: This is a U.S. exchange for buying and selling securities. It is based in New York City. Nasdaq is also an index of the stocks bought and sold on the Nasdaq exchange. (In case you’re curious, the initials stand for the National Association of Securities Dealers Automated Quotations.
  14. New York Stock Exchange: One of the most famous stock exchanges is the NYSE, which trades stocks in companies all over the United States, and even includes stocks of some international companies.
  15. P/E ratio: This measure reflects how much you pay for each dollar that the company earns. A company often reports profits on a per-share basis. So a company might say that it has earned $5 per share. If that same stock is selling for $75 a share on the market, you divide $75 by $5 to come up with a P/E ratio of 15 to 1. The higher a P/E ratio is, the more there is expectations for higher earnings.
  16. Portfolio: A collection of investments owned by an investor makes up his or her portfolio. You can have as few as one stock in a portfolio, but you can also own an infinite amount of stocks or other securities.
  17. S&P 500: The Standard & Poor’s 500 is a stock market index that tracks the value of 500 companies in the United States. It’s similar to the Dow Jones in that it is also a stock market index.
  18. Stock: A stock represents ownership in a company. Companies divide their ownership stakes into shares, and the amount of shares you purchase indicates your level of ownership in the company. Stock is bought in the hopes that the company will be successful, and more people will want a stake, so you can sell your stake later at a higher price than you paid.”
  19. Vix: VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a measure of the stock market’s expectation of volatility based on S&P 500 index options. Basically, it tells you how volatile a stock is.
  20. Volatility: The liability of a stock to change rapidly and unpredictably, especially for the worse.

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Sources:

https://www.timothysykes.com/blog/trading-terms-you-need-to-know/

https://justcoded.com/blog/how-to-choose-the-right-investment-platform-for-your-needs/

https://investorjunkie.com/investing/profit-margin/

https://www.calendar.com/blog/earnings-calendar/

https://investorjunkie.com/investing/common-investing-terms-definitions/

https://www.investopedia.com/articles/younginvestors/06/firstbroker.asp

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