Stock Investing for Absolute Beginners
Why should I invest?
The Federal Reserve tries to balance the inflation of the US Dollar to average about 2% annually. What that means is that the government attempts to make cash lose 2% of its value every year.
Throwing money into a savings account might be the safest thing to do, but you’ll lose money year over year doing it.
On average, $100 saved this year will only have the buying power of $98 next year due to the 2% loss to inflation. You can carry this buying power loss out for, say, 20 years as you approach retirement. The buying power of $100 saved this year will only be around $67 in 20 years. By “saving” cash you’re actually losing 1/3 of your buying power.
On the other hand, stock market returns generally average around 6% to 8% per year over 20 year spans. Even if we knock off 2% of that to account for inflation, we should still expect to gain an average of 4% per year on the low end. That means your $100 invested this year will have $219 of buying power in 20 years.
Compare gaining 119% buying power versus losing 33% buying power. It’s a no-brainer: socking away cash is a losing game.
Isn’t my money safer in cash?
The FDIC (Federal Deposit Insurance Corporation) insures bank accounts up to $250,000 per account.
If you invest in stocks or bonds, your investment itself is not insured against the stock value dropping. All investments thus carry the risk of depreciation: If you invest in a risky startup and they go bankrupt, you will lose that investment.
However, the SIPC (Securities Investor Protection Corporation) and SEC (Securities and Exchange Commission) exist to ensure that if you are the victim of fraud or your broker/dealer goes bankrupt, your assets are protected.
Thus, it’s possible to lose money by buying stocks and then selling them for less than you paid, but you’re generally safe otherwise as long as you choose a reputable broker (like TD Ameritrade, E-trade, Vanguard, or Ally).
What is a share of stock?
A share of stock represents a partial ownership of a company. If a company exists on the stock market and there are only 100 public shares, then owning 1 of those 100 shares would make you the proud owner of 1/100th (1%) of the company. Of course, in real life corporations are made up of more staggering amounts of shares. For example, there are over 5 billion shares of Apple.
How do I make money from investing?
There are two ways to make money from buying stocks.
1: Price goes up.
You can buy shares of a company whose value you believe will go up over time. You later sell those shares for more than you paid for them. Straightforward, right? If you buy a share for $10 and sell it for $12, you just made a 20% return. That $2 probably doesn’t sound very exciting until you consider what you’ll be making as you save and invest more: that 20% return on a $10,000 stock portfolio will net you a cool $2000 (Your portfolio is the whole list of stocks you own). But you have to start small and build up to a portfolio size that can make a difference in your life.
The second way is through something called a dividend. Many companies will pay shareholders a percentage of profits from the company. This is an incentive to hold onto the stock, and in many cases will offset any loss to inflation all by itself. Dividends are usually paid out quarterly (four times a year) as a percentage of the stock’s value.
For example, if you buy a share of a stock valued at $100 and it has a 2% dividend, you will receive 50 cents four times a year (totaling $2) for holding that stock. Again, that $2 doesn’t sound like a life-changer. But consider this: as the value of the stock goes up, the value the dividend’s percentage represents will go up, too.
A $100 stock averaging a 6% price increase per year over 20 years should be worth around $320 by the time you hit retirement. In the 20th year, that 2% dividend will be paying $6.40 a year instead of the $2 it did in the first year. Not only are you “up” $220 on the face value of the stock, but you will have made $79 just through the dividend. You’ve turned a $100 bill into $400 by buying a stock once and simply forgetting about it until you were ready to retire — and this is a very realistic example!
If you have the time (and fortitude) to hold that stock for 25 years, your dividend total will be around $118. So even at “only” 2%, the dividend alone adds up to be more than the price you paid for the stock. Many dividend stocks can thus pay for themselves if you hold them long enough.
How do I invest?
You can start by signing up at a reputable broker like those mentioned earlier: TD Ameritrade, E-trade, Vanguard, Ally, and many others.
If you’re looking for a broker with a great mobile app and you find this article useful, feel free to check out WeBull using my referral link. When you sign up, we’ll both get a couple free stocks to help us on our way. (This isn’t a paid promotion, I just like it when we get free money!)
Most brokerages are streamlined to make signing up as easy as possible, but if you run into any snags, a quick YouTube search will help you out a lot faster than I can in text.
You’ll need to have your social security or taxpayer identification number ready. I know this sort of thing is probably something you instinctively don’t want to throw at an internet entity you’ve never worked with before, but the brokerage must legally report your sweet gains to the IRS.
In order for the IRS to be able to contact you if you try to skip town with all your amazing portfolio gains, you’ll likely need your driver’s license or street address as well.
You’ll also need your bank account number and routing number to transfer money to and from the stock broker so you can deposit, buy, sell, and withdraw.
It might also be in your best interest to make a unique email address and password for trading stocks that you don’t use for anything else. If your brokerage of choice offers Google 2-factor authentication, I highly recommend enabling that as well. Again, if you’re unfamiliar with how Google 2FA works, a quick YouTube search will set you on the right path in no time.
I know this sounds like a ton! But if you have your license and SSN ready, it will only take you 3–5 minutes to sign up for most brokers.
Applications to open an account must be audited by the brokerage. Your account sign-up should generally be approved within a few days.
How much should I invest?
The answer to this question is going to be different for everyone, and even for you as an individual as your life situation changes. If you were single last year and now all of a sudden you’re married with a bun in the oven, you probably won’t be able to invest as much as if you’d stayed a single crazy cat lady.
The general rule of thumb is this: Invest as much as you could afford to light on fire and not miss. This advice is more commonly phrased as, “Never invest more than you can afford to lose,” but we want this money to sit and collect value. This should be a separate thing than something like an emergency fund or vacation money. This is our retirement money, and it’s not to be touched unless it’s life or death!
Invest ALL you can, but don’t invest MORE THAN you can. That’s the rule. If you can comfortably spare $100 a month, then don’t just invest $50. Invest $100. On the other hand, don’t strain your resources by trying to invest $150. You know your budget better than anyone. If you want to invest more, you’ll have to get creative in finding new ways of Saving Money and Building Wealth. (What a great plug to another of my articles, right?)
How often should I invest?
The age-old adage goes, “Time in the markets beats timing the markets.” It’s of absolute importance to simply not care what the prices are from week to week or month to month. The years will account for themselves.
For that reason, I generally recommend NOT buying a huge position all at once (A position in a stock is how many shares of it you own). Maybe you get lucky and the price just goes up from your purchase, but most likely price bounces around for a while and you feel regret within the week or month (or even over the next couple years!) as price declines from your purchase price. Remember, the average return of the stock market is around 6–8% per year, but that means it could go down 10% one year and up 20% the next.
By buying around the same time once or twice a month, you will negate the impact of market price swings on your purchase cost and end up with the average price of the stock over a longer period of time. If the price declines for a while, great! You’re getting a deal (and lower average cost) on everything you buy through the decline. If the price increases for a while, great! Each previous purchase was lower than the next, so you still have a lower average cost. Almost no one who actively trades stock outperforms someone who simply DCAs (dollar-cost-averages) into an index once or twice a month and holds long term.
My recommendation is just buying every paycheck. Take care of your rent, your student loans, your credit cards, bills, food, emergency fund, all that super fun stuff, and see what’s left over to invest. Investing consistently at regular intervals secures an asset’s average price and helps you sleep at night since you don’t have to worry about price fluctuations.
What should I buy?
You may be overwhelmed by the amount of things available for investing. Should you buy individual companies like Apple, Google, or Microsoft? What if you’re not tech savvy, but you really believe in the Starbucks business model? Or love your Honda? Or just think biopharma is neat?
Those are decisions for future you. When your portfolio hits five figures and you feel like you’ve got your financial foundation laid, you can start considering individual companies.
Until then, the safest, most beginner-friendly approach is to buy an overall market index. You may have heard of something like the S&P500. This is a great example of an everyone-friendly index. It simply takes the top 500 large, profitable companies and buys you “fractional shares” of each of them. So instead of you seeking out 500 different stocks, you can buy an index and get a fruit basket with a little nibble of everything.
As one company becomes less profitable, it will automatically fall out of the index and be replaced with a more profitable company. That’s part of the reason there is no 20 year period in the history of the stock market in which the market average has not been profitable.
Depending on your broker, different indexes will be available such as VTSAX or SPY. There will be a search bar in any brokerage app that lets you type in these “tickers” to pull up the index you want. At the time of writing, SPY is one of the most popular market indexes.
The great thing about these “fruit basket” indexes is that you don’t have to buy a full share of these. If you search for SPY and see that it’s over $360 (as I write this), that doesn’t mean you have to have $360 to invest to buy a complete share. You can buy fractional shares through most brokers. That just means instead of saying, “I want 1 share of SPY for $360,” you can say “I want however much SPY fifty bucks gets me.” The exchange will figure out how much of a share that amounts to and let you invest your $50 without needing to buy whole units.
1) Stocks have outperformed all other investment assets consistently for 200 years. You should invest because you want to make your money grow the most it can. Cash is not necessarily safer, and is guaranteed to lose value over time.
2) Owning a stock makes you a partial owner of a company, and many will pay you a portion of the company profits.
3) Find a reputable broker and go for it! Some examples were Vanguard, E-Trade, TD Ameritrade, and Ally. If you want to get us both a couple free stocks, you can use my referral link for WeBull.
4) Invest as much as you can comfortably live without on a monthly or bi-weekly basis, and don’t sell unless it’s do-or-die.
5) Average into a total market index like the S&P500 (use the search bar on your broker’s interface to look for something like “SPY,” or Google some other indexes you might be interested in!). Do this until you’re comfortable hand-picking stocks, until you have a portfolio of $10K+, or just…forever! Branch out only if/when your comfort level allows.
That’s it for now! I hope you found this article useful and can begin making your first investments with more confidence.
For more information about finance, TA, and life in Japan, find me on twitter @Nikadesh
BONUS FUN FACTS!
1) Thinking about passing on generational wealth to your loving, completely-deserving children?
Let’s look at a single dollar invested from the year 1800 to about 2000:
$1 in cash became worth seven cents (that pesky inflation!).
$1 in gold became worth about $1.20.
$1 in bonds would’ve yielded $1,070.
I’m glad you’re sitting, because:
$1 in a stock index would’ve become $462,500!
2) Since 1825, there has never been a 20 year period where the stock market lost money.
3) Despite price fluctuations, the overall market index has roughly a 70/30 split: 70% of years, the price of the overall market has increased.