How To Invest In Stocks - A Beginner’s Guide To The Stock Market
A Beginner’s Guide To Investing In Stocks
Are you new to investing and looking to learn the tricks of the trade to begin this exciting journey? Here we have created the perfect beginner’s guide that will set you up nicely to begin a successful trading journey.
A Beginner's Guide To The Stock Market
If you are new to investing and looking at stocks as your go-to investments, you may be looking at the stock market as a daunting and scary place. But in reality, there is nothing to be afraid of despite what many may say.
Investing into stocks can be extremely rewarding, yet at the same time naturally such investments can also be just as risky. But if you conduct as much research into how the stock market operates and look into each specific stock's fundamental analysis, this should not only lower the risk elements but should also look at providing you with more confidence. Even more so, when you take a look at how investing into stocks has made many individuals wealthy overtime.
Before you begin your trading journey it's wise to know that it all starts with preparing yourself and your mind mentally including thinking of the bigger picture as to why you are looking to invest. Whether it be for retirement, to make money quickly in the short-term or perhaps you are looking to invest for a challenge, regardless of what your reasoning may be you still have to calculate your finances into the equation seriously to provide the right investment balance in order to be successful.
In the society we are all living in today saving for retirement at an early age is vastly becoming ever more popular, with many individuals looking beyond just your general high-street savings accounts. Although these accounts do offer benefits starting from an early age, these accounts do hold low to average interest rates along with many savings accounts offering variable rates proving that returns can be uncertain in the long-run, especially as your factor in economic circumstances such as inflation into the equation. In reality, high-street savings accounts will not provide returns realistically that investing in stocks could bring you in the long-run.
Contents - What's To Come Within This Guide:
- Why Invest In Stocks?
- Investing In Stocks For Beginners
- Different Types Of Stock Investments
- Three Best Stocks To Invest In
- How To Invest In Stocks
- 3 Top Tips For New Investors
Why Invest In Stocks?
According to data, the leading S&P 500 index returned under 16% in 2020 and over the past 10 year outlook the index has returned an annualised return of just above 13%.
If you are completely new to investing in stocks, the S&P 500 index is an index that gets looked at heavily by investors when looking to see how well stocks have performed and or are performing, as this index consists of a broad basket of stocks. This means it has a collection of stocks sitting within different industries at different sizes that proves to be a great useful market and economic indicator to investors.
To put it in simple terms stocks can be extremely valuable, and having a collection of stocks within your portfolio will strengthen and maximize your returns including adding diversity and holding stronger secruity.
The main objective of investing in various stocks is ultimately looking to build your savings, protecting your money from inflation or any form of tax implications (although be mindful as you will pay capital gains tax on your profits) and lastly, looking to boost your income over a certain period.
Here are three key benefits for investing in stocks:
- Building your savings. If you are looking to invest in your future, i.e for retirement or if you are looking to archive higher returns off the back of stocks, historically by investing in these investments for the long-term is how investors will seek and gain the greatest returns, greater than safer investments such as bonds. Secondly, stocks can be volatile meaning that the market can fluctuate but these fluctuations will stabilize themselves over the long-term confirming that building for the long-run will be more beneficial for investors.
- Protect your money. As mentioned inflation happens, it's a natural occurrence, so are taxes no matter where you are looking to invest around the world and subject to all legal investments. As discussed with high-street savings accounts these can be subject to variable rates subject to inflation and other economic factors. However, investing in stocks for the long-term can look to give better tax treatment as they can slow and prevent these negative effects.
- Maximise your earnings. Whilst investing in stocks is your main focus it's also worth noting that you can look to maximise your returns by looking at dividend stocks. Note not all companies on the market are dividend payers so this is where research comes into play. These payments offer investors a regular income stream commonly paid out quarterly to their shareholders, increasing your return but these payout are still subject to tax implications that can differ within various countries.
Read Also: Best Long-Term Investments
Investing In Stocks For Beginners
Before jumping into investing in stocks it’s wise to analyse and create a good financial positioning meaning that you are able to begin and carry out this journey, as well as being prepared if any unexpected turns happen along the way.
Here are three key points to take into consideration when looking into this first key part of the process:
1. Firstly, make sure you are in a stable financial position in order to carry out such activities into investing. This includes setting aside your personal liabilities such as mortgage or rental payments, household bills and more aside from your personal disposable fund that you are looking to use in order to place your investments. Also allow room for extra funds in case needed.
2. Secondly, on the subject of allowing room for extras you also need to factor in an emergency fund. Whether it be cash savings or savings that have been set aside within your personal bank, either way it's strongly advised to open a high-yield savings account in order to set up for a rainy day, just in case any unplanned events happen to come your way. Depending on your personal situation try and save a minimum amount you see as reasonable each month.
3. Lastly, if you were under the impression that investing in stocks is a one off payment, then you are mistaken. Investing into stocks is a contribution that is built up by regular contributions in order to grow greater returns. This should also be factored into the first step when looking over your finances in order to begin this journey.
After pinpointing these important steps it’s also strongly advised that you do take the time to research further and educate yourself about investing, especially when looking into stocks. A good rule of thumb is to never ever invest in anything that you are unsure on or do not fully understand as this can be extremely costly.
Different Types Of Stock Investments
There are plenty of different stock investments available on the market that all hold their own advantages for investors, along with some of these major assets holding great risk elements over other stock investments. Let’s take a look at the four primary ways investors can hold stocks within their portfolio along with some pros and cons that these stocks offer:
1. Individual Stocks
If you are unsure of what a stock is, a stock basically represents a share of ownership of a company. When an investor owns a share or multiple shares investors are entitled to receive gains that the stock has made from its profits it has produced. Investing in individual stocks is the most common and the simplest way to invest in a stock, and the most common form of investment that beginner investors typically look to when starting out within their journey.
Investing in just one individual stock can be advantageous if the stock performs, take Amazon Inc (AMZN) as a prime example. When Amazon Inc first entered the Nasdaq exchange it was at $18 per share back in 1997, then fast forward to 2021 the tycoon stock now sits on a share price of $3,239 per share meaning for the investors who invested thousands in the stock back in 97 the stock would of generated a whopping growth, in some cases a growth of over 120,000% if they invested at least $10,000.
Stocks like Amazon Inc as you may already be aware are hard to come by, but that doesn’t mean that there won’t be stocks that can archive impressive growth. But the strong disadvantage of investing in just one individual stock is that it holds stronger risks as investors are holding out for this one stock to perform. For that reason, this is why investors should look at diversifying their portfolio with a good limit of maximum 10 stocks to start in order to limit risk elements as they look to gain good returns.
Check Out: How Beginners Can Buy Individuals Stocks
2. Dividend Stocks
A dividend is a regular payment that is paid from the company’s earnings that is then paid to a class of the stock's shareholders. Dividends can be paid in different forms which include cash dividends or dividends that are issued as further shares to investors, but keep in mind that not all companies pay dividends.
These investments hold many advantages with the first one being that dividends provide investors with a regular income stream which typically gets paid out quarterly. Secondly, dividend stocks look to reinvest their earnings in order to create further growth which also means that the returns can be potentially greater for shareholders, especially in the long-term outlook. Lastly, these stocks tend to be sitting in a good cash position in order to execute and deliver future growth making these stocks in some way an even safer investment in the long run.
A good metric to look at when looking at dividend stocks, aside from looking at a stock's fundamental analysis is to look at its dividend yield. A stock's dividend yield enables investors to see what percentage it is returning to shareholders, so if a company has a high-dividend yield the more money investors will receive. A good example, in this case, is the biopharmaceutical company AbbVie Inc (ABBV) as the stock holds a 4.45% dividend yield and holds a YTD return of 11.3%.
On the flip side, dividend stocks may not appreciate as well as growth stocks and stocks that pay dividends can look to cut or withdraw their dividend altogether if they wish. But in reality, this would normally not happen unless in extreme circumstances.
Top tip - Be aware that not all high-dividend yielding stocks are good stocks to invest in. Some companies will look to increase their dividend in order to make the company look more attractive to investors, yet that specific company may be sitting in an extremely bad situation. Make sure you carry out additional research before jumping to invest, if something seems to be good to be true, in most cases that is because it is - it pays to be wise.
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3. Exchange-traded funds (ETFs)
Exchange-traded funds or ETFs are a portfolio of stocks that tracks indexes such as the S&P 500 and other leading indexes. These stocks trade just like individual stocks on the market throughout the day and can contain various types of investments including bonds, stocks, commodities and more. Likewise, there are also ETFs that are made up on investments that are based in certain industries like the bank industry or in different countries.
ETFs are great investments for beginner investors as they provide strong diversification as they are a collection of various assets and they also provide lower costs for investors in regards to brokerage fees, as you are investing in one asset to gain a collection rather than individually paying on different assets. Based on the fact that ETFs are passively managed to follow indexes, these are often used by robo-advisors and professional investment managers in order to create a portfolio collection for investors.
If you are looking to begin your journey into stocks, ETFs are highly recommended assets that all investors should consider to invest in at the beginning of your journey, as you further build your knowledge of investing in individual stocks.
Read Also: Top FTSE 100 Stocks To Buy
4. Mutual Funds
Similar to ETFs comes mutual funds. A mutual fund is another investment vehicle that holds a collection of stocks. These funds do work similarly to ETFs with the key differences between the two being that mutual funds are more actively managed meaning that a fund manager will buy and hold stocks within the fund that are looking to outperform leading to show stronger returns. Likewise, this also means that stocks are bought and sold more frequently as opposed to ETFs.
Secondly, mutual funds do trade at the end of each trading day whereas ETFs are available to trade throughout the day like stocks.
Due to these stocks being professionally managed this does come at a higher cost ratio which reduces the funds overall payout. From the moment you purchase a fund to the point of selling, these funds do hold fees of between 0.50% up to 3.0% of the value of the fund. This is regardless of how a fund performs leaving these investments to be expensive if a fund does not perform well, reducing investors overall returns.
Three Best Stocks To Invest In
Now that we have taken a look into various different types of stocks that investors can look to invest in, here are three of the best ways to invest into individual stocks whilst it is strongly advised that you diversify your collection with having a mixture of all of these stocks within your portfolio.
The first type of stock that all investors look to invest in are growth stocks. Growth stocks are companies that are growing at and looking towards growing at such an impressive rate above the average market growth rate and growing past other companies within their industry.
You will see that growth stocks tend not to be dividend payers as they will look to take their earnings to reinvest back into the company in order to achieve greater growth. Typically, investors will see stronger returns from growth stocks if they perform because as they build momentum this enables investors to receive gains from capital appreciation.
When looking into possible growth stocks to invest in take a look at these three key metrics below:
- Historical earnings growth - Looking into a stocks history will show investors how well the stock has grown over a period of time and the profits the stock has generated in order to understand the returns shareholders have gained.
- Future earnings growth - Although looking into a stock's past history is great, this doesn't necessarily mean that it will perform in the future. Take a look at the stocks recent quarterly reports and look at how the company is performing, along with looking at a company’s statements in terms of future growth and guidance.
- Take a look at a company’s return on equity (ROE) - By taking a look into a stock's ROE this will give investors an indication of how well a company is managing capital that shareholders have invested into the stock. Typically, the higher the ROE the more chance a company has in generating future income and expanding growth looking ahead.
Although growth stocks can be extremely rewarding it is wise to know that these investments are one of the riskiest investments an investor can make. Reasons being that if a growth stock fails to perform you can lose your initial investment, more time is needed before looking into investing in these stocks because of the stronger risk factors and lastly, it can be an emotional roller coaster as stock prices can be extremely volatile which leaves some investors to panic and sell shares ending up taking loss, on this point it's wise to ride the storm.
Depending on your investing strategy, growth stocks are designed for both long-term and short-term trading. Adding one or two of these stocks to your collection at the beginning is strongly recommended.
Read More: 10 Best Growth Stocks to Buy
Value investing is a strategy used by many successful investors including billionaire Warren Buffett who uses this form of investing as his go-to strategy.
When you look to value investing you will see that these stocks look to be trading at lower prices, less than their intrinsic value. The reasons as to why these stocks look to be undervalued can be for a number of reasons that could include market crashes meaning that when the bubble has burst this could look to a huge investor sell-off causing the stock to decline, bad press can dampen a company significantly even if they are good companies - bad news sells and lastly, these stocks may just be flying under the radar unnoticed which is another reason as to why you have to do a lot of detective work when looking into these secretrativly discounted stocks that can be extremely handsome for investors in the long-term.
According to data, the Russell 1000 Value Index has a YTD return of 48.16% beating the Russell 1000 Growth Index that has a YTD return of 40.13% confirming that value stocks can outperform the general market and even beat growth stocks, especially in a challenging market.
High dividend stocks
If dividend stocks are looking to be investments of interest then looking at dividends with higher yields above the S&P 500 average dividend yield of 2.00% look to be more attractive dividend investments.
When comparing dividend stocks to growth stocks, dividend stocks can look to have a better balance sheet and stronger cash flow as these stocks do not reinvest all their earnings back into a company like growth stocks. According to data, around 75% of the total returns of the leading S&P 500 index has been made up from dividends, making investing in high-yielding dividends a perfect investment option for the long run. Especially if you start investing from an early age these stocks can be extremely handsome as they look to grow their dividend over the long-term period.
Dividend stocks are perfect for the long-term but looking to the short-term these stocks may not offer you the returns that value stocks could earn you within a shorter period. Secondly, just because a company does hold a higher-than-average dividend yield this does not mean that it is for the right reasons, it could be that the company is falling and is wanting to look attractive on the surface in order to stay afloat. This is why it pays to study a stock thoroughly before you look to invest.
Check Out: 5 of the Best UK Dividend Stocks to Buy
How To Invest In Stocks
Once you have made your choice on which stocks to invest in, now it's time to look at a couple of different ways in which you can look to purchase them. Here are the most popular ways of investing in stocks, all that you have to decide upon is which form is the best option that suits your personal investment needs.
1. Online brokers
In today’s society digital online trading platforms are leading the way to being the most efficient, convenient and offer investors the opportunity to invest in almost every investment that is available on the market including stocks, bonds, ETFs, mutual funds or other forms of investments such as cryptocurrency and more all available for investors.
Each online platform comes with a selection of brokers to choose from that you will need in order to place your investments along with each platform offering their own commission fee structure with some offering very low or even zero commission fees leading to stretching your money further.
Online trading platforms are a great way to invest regardless of where you are at within your journey as each platform offers their own unique services that seek to help investors as they look to create their own diverse portfolio.
As you are more than likely new to investing in stocks another popular way of investing is by using a Robo-advisor.
A Robo-advisor is an automated investment service that can be fully automated or some may even have a small amount of human interaction when building a portfolio. The way in which they primarily perform is by using computer software algorithms in order to create a portfolio.
Two strong advantages that Robo-advisors offer is that they come with very little fees, with many Robo-advisors charging an annual fee of between 0.2% to maximum 1% of an investors total balance of their portfolio. Secondly, there are no more hidden fees that investors should incur as they do not trade like individual stocks. Due to lower costs and providing a safer way of being exposed to a collection of stocks that are professionally picked out through looking at a stock's fundamental analyst makes using a Robo-advisor a much safer option for beginner investors.
Before you look to use a Robo-advisor it's wise to keep in mind that these advisors do not offer great flexibility. Upon signing up to use this service you will be required to fill out a form detailing your investing needs and goals in order to create your portfolio, as it will be tailored around your requirements. But in some cases due to lack of human interaction, investments can sway off course from your needs from time to time which is wise to be aware of from the start.
3. Traditional financial advisors
The opposite to Robo-advisors you have your classic service of using a traditional investment advisor.
These investment professionals are basically what they seem: a face-to-face or an over-the-phone human advisor that helps you with your investment endeavours. From taking all your personal investment needs into account to creating and managing your collection mixed with an array of all investment types suited for your personal profile.
If you are new to investing and are not looking to invest huge sums into stocks just yet, it's unlikely that you will look to use a traditional advisor as they are tailored to be designed for investors that are typically looking to create a large diverse portfolio that begins in the thousands.
A second factor to consider is that traditional advisors do hold higher annual fees which could range up to 3% annually, and some advisors may also charge you a set up fee depending on how much you are looking to invest. Alongside, there may also be fees when advisors look to buy or sell investments that investors must take into account.
3 Top Tips For New Investors
As we have now discussed all the general basics of how to invest in stocks, the best stock options and why you should invest in stocks, here are three key tips that beginner investors should strongly consider before starting their journey:
- Consider a Robo-advisor or invest in an ETF to begin with. By looking into these two options at the start of your journey you are enabling yourself to be exposed to an array of investments but at a much safer cost than if you were to invest straight into individual stocks alone. This is because both are professionally managed and all that is required from an investors side is to place funds into the account to operate activity.
- Consider opening a high-yield savings account. As your investing journey moves forward, in time you will more than likely make the move to invest in individual stocks alone. This is why it is wise to open a savings account and set aside funds to save up for reinvestments or new investments whilst building income off the back of interest rates.
- Don’t get carried away. The last point is one of the most important points when you're a beginner investor is that it can be easy to get carried away with excitement. But by keeping a tab on your spending it will not only be a wise move but also will prevent you going into any debt which then can be more costly when you are then liable to pay out more outgoings, especially if these are subject to interest rates if you have outstanding debt on credit cards.
As you can see by making stocks your primary investment can be extremely satisfying as they perform, especially if you begin this journey from a younger age. Now that we have explored the in’s and out’s of what is entailed in investing in stocks, the whole idea may not be as intimidating as you initially thought. And as time moves forward you will gain further knowledge on the stock market and will wonder why you were so worried from the start.
If you follow the simplest and basic guidance and sound out all the doubts that may be surrounding your mind, then you are ready to get the ball rolling. It’s a fact that investing in stocks does hold strong risks but if you organise, prioritise and invest wisely by separating your personal finances to your disposable income and create a diverse strong portfolio the right way, those risk elements will be at a lower stance whilst you look to build up good returns in order to set yourself up for a brighter future.
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