Last Updated on October 9, 2023 by David Shaw
Ever wanted to start your stock investment journey but don’t know how? Understanding the stocks market or getting into it is more relevant now more than ever. Here are 5 easy steps every beginner should know to get started, and the good news is they’re not as complicated as you think!
Understand the Stocks Industry Before Starting
Let’s face it, understanding the stock market can be easy or difficult depending and who you’re talking or dealing with. Many beginners today are interested in this industry because they heard someone on the internet becoming rich overnight with day trading or through crypto. Best yet, these might be the reason why you’re here! Like anything industry, the first step is to do your homework understand what you’re getting into, and we’re here to help!
So what is a stock? Let’s use the famous and simple analogy using a cake.
Imagine a stock market as a big bakery where various types of cakes are made and sold. In this bakery (stocks market), each type of cake represents a different company’s stock. When you buy a slice of a particular cake, you’re essentially buying a share of that company’s stock.
Now, the value of these cakes (stocks) can go up and down based on how popular they are. If a cake is really delicious and everyone wants a slice, its price (stock price) goes up. On the other hand, if people are not interested in that cake anymore, its price goes down.
Just like in the stock market, where investors buy and sell stocks hoping their value will increase, customers at the bakery might buy a slice of a cake, hoping its taste becomes more popular and they can sell their slices to others at a higher price.
However, just as not all cakes are equally tasty, not all stocks are equally valuable. Some cakes might become classics and always be in demand, just like stable, established companies in the stock market. Others might be trendy today but forgotten tomorrow, akin to volatile, high-risk stocks.
But Aren’t Stocks Typically Meant for Those With an Income?
That is so not true! Some company’s stock might be valued at $50 to $500,000 per share(or slice)! But you can still buy a ‘slice’ of it thanks to fractional shares. Many brokerages out there let you buy fractional shares of a stock, which is essentially a fraction of a slice (which means you can slice up one piece of cake into multiple slices). Crazy right? But it’s absolutely common for people to own micro-slices of many different types of cake in this industry.
Let’s take Apple’s stock (AAPL) that’s currently priced around $170/share as of the time of this writing. As of October 2023, Apple has 15,787,154,000 ‘slices of cake’ if you will. Fractional share lets you buy a fraction of one slice, so you can easily buy let’s say $17 worth of APPL stocks, and you will therefore own 0.1 of a share (or 10% of one slice) of the company, what a great additional to your monstrous stocks portfolio!
So, investing in stocks is a bit like choosing which cakes to buy – you want to pick the ones that are not only delicious now but will also remain popular in the future, ensuring you get a good return on your investment (enjoyment of the cake!). All that affects the price of these stocks is essentially governed by the concept of supply and demand.
Now, you might’ve already seen the term options, margin, future, shorting, day trade which are all different styles of trading strategies to fit different styles of investment. But let’s hold on those big words first, because those trading styles aren’t not beginner friendly at all. However, the good news is that all these trading styles are dealing with the same ‘stocks’.
Hopefully that sugary and delicious analogy made sense, and or overwhelm you. (It’s really just that simple)
Rule of thumb when investing in anything:The bigger the risk, the greater the reward or loss. This philosophy holds true in many industry, and stock investing is no exception. Whichever the style of trading or investment there may be out there, it’s basically leveraging the stock market in different ways.
Picking the Right Style for You
To keep it simple for this article, let’s focus on the 3 most popular trading styles most suitable for beginners.
- Buy and Hold
Just like the term suggest, this strategy is typically when someone buys stock and holds it for typically more than 24 hours, months, or even years before selling it. People who ‘buy and hold’ are also commonly referred to as long term investors. Some people might also say people who ‘buy and hold’ are swing traders, but I will explain further why they’re not exactly the same.
Example scenario: Let’s say you bought one share of Apple’s stock (AAPL) at $175 a share today, and you hold it for 3 years and their stock price has gone up to $250 a share. Selling the stock at $250 a share 3 years later would give you a profit of $75 dollars in profit, equivalent to 43% of percentage gain.
So just by picking the right stocks, diversifying your portfolio, hold (or practice patience) and you will start seeing in profits in capital gains.
Risk level: Low risk if right stocks picked for beginners
- Swing traders and Day Traders
Let’s start with swing trading, which basically is a trading style where people buy and hold for more than 24 hours, and typically for weeks, or less than a year. Swing traders tend to follow the trend in the stocks market and leverage the stock price of a company that is much more volatile, hence the shorter window of their buy and sell window.
A good recent example to describe swing traders are during the GameStop and AMC stocks short squeeze frenzy during early to mid 2021. People were buying in and out of the stocks within the window of days, weeks, or within 3 months as they were following and greatly influenced by the sudden trend from the media.
Swing Trading Risk level: Moderate to high for beginners
Now let’s talk about day traders, which is likely the most controversial as it is the riskiest, but can also rake in the highest profits in the shortest amount of time among the other options. But like I mentioned before, the bigger the risk, the higher the stakes. The chances of winning big or losing it all depends on whether if you really know what you’re doing, accompanied by the mix of emotions and sentiments caused by the current market trend.
Let’s put it this way, to be ‘successful’ with day trading requires great time dedication and is considered a full time job. Experienced day traders who can consistently rake in high profits most days spend years of practice learning about the stock market before being considered a skilled and successful trader.
Generally, I heavily advice against day trading for beginners, or at least with real money. Always try day trading with ‘paper trading’ to know what you’re dealing with. Hopefully, this goes with saying that day trading is a path you take at your own risk depending on your dedication to attain this skill.
Another reason day traders might not be suitable for beginners is that you need a large sum of capital or usually more than $10,000 as a fixed deposit in their trading account to be eligible to day trade. And not to mention many costly trading courses you might be tempted to buy, and the losses from trial and error before you start making profit.
Day Trading Risk level: Very high for beginners
- Dividend investing for those with bigger budget
Dividend investing is one of the smartest strategies of stock investing, and best of all, is it considered a buy and hold strategy, which can be really low risk given if you pick the right stocks. Dividend is basically a cash or stock incentive a company rewards its share holders with. This is primarily to promote new investors, as well as retain its current investors to hold or invest more into their company.
How does it work? Let’s say you invest $10,000 into Coca Cola’s stock (KO) which has a dividend yield of 3.23% (as of September 2023). That means Coca Cola will pay its you $323 per quarter (payouts interval vary across companies) just for owning its stock! I like to think of it as the best form of reward for being a patient investor.
One might ask, who would choose dividend investing over just buying and hold? Generally, it is for those who wish to play the long game, and we’re talking years, or even decades. ‘Buy and hold’ investors usually sell their stocks when they see favorable profits after a year or several years, but you will find many dividend investors continuing on despite already having a good return on their stock.
Before you go and make a decision, the best part of dividend investing is yet to come! What really makes dividend investing stand out among other strategies is the power of compounding interest.
Compounding interest on your stock is when the returns you earn on your stock investments generate additional returns over time. In simple terms, it’s like earning interest on your interest, and it can make your investment grow faster. Some stock brokerages offer DRIP investing plans for stocks that pay dividends, which automatically reinvests your dividend payments back into the company. In short, it’s another automated tool offered by certain brokerages to snowball your profits snowball into bigger gains.
Risk level: Low, shares many aspects of ‘Buy and Hold’ strategy
Why are there so many strategy options?
Think of it as a track and field sports category like relay. In the relay category, there is the 100m, there is 4x100m, hurdles, marathon, race walking all with the same goal—to race against the same clock to win. They all may look somewhat similar to the audience, but there are so much unique fine details and challenges athletes in each category have to deal with.
Im short, like I previously mentioned, it’s all about different ways to leverage the stocks market, and the greater leverage strategies usually comes with more risk.
Which strategy is the best?
The big question all beginners will definitely ask—which trading strategy is the best? The simple answer is none! But we can assure you the safest option is always the best to start with. This is because stocks prices and movements are extremely hard to predict given they infinite number of factors, which are also hard to predict.
If you think of stocks price movements are hard to predict, think of the factors influencing it as 100 orders of magnitude more difficult to predict. This is why there’s no one magic tool all stock investors heavily rely on or use to help them make profitable choices in the stock market.
Planning Your Budget
The next step after you’ve gained more knowledge about this industry and decided to start is to set aside a budget for investing. Ledger and look at your monthly expenses, cut off unnecessary spendings, and maximize your savings that can be put into investing. Don’t underestimate the power of investing 10-20% of your total monthly living budget.
Some might think it’s ridiculous, but investing in stocks can start off with $5 a day, and there is absolutely no shame in that! For some, this might mean cutting back on your coffee shop run everyday, or cut back on one meal eating outside.
If you think of the bigger picture, setting aside just 3$ a day is $90 a month, $1,080 a year. And I can bet you there are so many stocks out there that can easily make you a profit of over 20-30% return a year.
Opening a Brokerage Account
Of course, the leap of faith is to now open a brokerage account, which is really not as scary as most might thought. To play it safe, never invest a lump sump of more than $500 in a single trade as beginners or your emotions will get the better of you into making more bad choices. Instead, spread small amounts over a few stocks you like to diversify and learn as you go.
If you find that you’re consistently glancing over your brokerage account starting out, set a recurring fee of as little as $5 or $10 on stock weekly or monthly, and look back after 3-6 months to see how you’re doing. If you end up losing your first $100 in stocks trading, I can almost guarantee the lessons and knowledge you gained is far more than the value lost.
Before you forget, you can always trade fake virtual money for free through what most brokerages offer called ‘paper trading’. It basically offers users a fake trading account and fake buying power (cash) with access to real stock market. So if you’re still skeptical to trade with real cash, paper trading has your back all covered until you’re comfortable to trade with your hard earned money.
As you can see, there are so many different trading strategies offered to fit each’s person style of investing. From my experience of navigating through the rabbit holes or this field, I’ve broke down these 4 strategies I learned about and thought is worth sharing.
My final advice for you is do your own research before investing in a company, definitely try out paper trading for absolutely free to see what it’s all about. Happy investing!