When you’ve never dealt with the stock market before, it can be a little daunting. We hear you! But never fear because if you take it one step at a time, it’s easy enough once you get the basics down.
From there, you can just build up your knowledge bit by bit as you go along. Also, there’s the opportunity to learn about specific types of investments, sectors, or other specializations to deepen your knowledge and increasing your skill too.
Okay… Let’s now take the first steps to getting started with the stock market.
How Involved Do You Wish to Be?
Before you consider beginning to purchase stocks, think about how much time you wish to invest in the process. Is this something that you’ll be happy to devote several hours to every weekend, a once-a-month review, or ostensibly entirely hands-off with a round-up at the end of the year?
If you believe that investing should be something to handle yourself and you’re willing to invest time to learn about different companies to invest in, then individual stock investing may be for you. However, if you’d prefer to let other managers pick from their best ideas, then actively managed mutual funds or ETFs may be the better option.
Alternatively, if you’re looking for something entirely passive where you don’t need to worry about a manager underperforming the stock market, then index fund investing is in your future. Here you’ll purchase mutual funds or ETFs that track an index with a limited tracking error in their results. This way, if the broad stock market does well, so do you. The fees are also the lowest around.
Know Your Risk Tolerance to Prevent Big Mistakes
The next step is to understand how accepting you’ll be of a large decline in the value of your investments. This is because the stock market will sometimes lose 30-50% of its value over a 1–2-year period and may require 5-10 years to recover it back again. And that’s not including inflation! Therefore, a patient and long-term perspective is required with stocks.
While you may have some bravado and suggest that you will be 100% invested in stocks (equities), that will deliver the most see-saws in value. The likelihood is that you’ll sell if the market drops, licking your wounds and swearing off the stock market. “Never again,” you’ll declare defiantly.
Well, all that can be avoided when lowering the percentage of stocks that you own and mixing in some fixed income securities and a few cash equivalents. This steadies the boat and prevents it from capsizing.
What’s Your Time Horizon?
Think about when you’ll want to start spending some of the money that you’ll put into stocks and your portfolio.
Generally, a time horizon of at least 10 years is advisable. This is because stocks over this time can go down in value and not have recovered. However, for longer than a decade, the chances are high that you’ll come out ahead.
For investment periods of 5 years or less, a cautious position should be taken when wanting to invest. This would suggest a much higher allocation to bonds and cash to protect your downside.
Investment Style: Value, Growth, Income Investor, or Something Else?
There are different styles of investors. No one can tell you what you should be.
See which ones seem sensible to you and develop a strategy to pursue that through stock investing.
A value investor looks to buy stocks at 50 cents that are worth one dollar or more. This discount buying approach allows them to get a bargain, sit on it, and wait until the stock is revalued upwards.
There have been many famous value investors over the years including Warren Buffett and Charlie Munger of Berkshire Hathaway, Mohnish Pabrai, Seth Klarman, Joel Greenblatt, and others. While their approaches have differed over the years, they all largely stay true to buying at a discount to fair value.
A newer twist on the value approach is being willing to pay up for a better-quality company that manages their money well. Philip Fisher promoted this idea in his Common Stocks and Uncommon Profits book, which was later recommended by Charlie Munger who changed Warren Buffett’s investing approach thereafter.
A growth investor is someone who likes investing in fast-growth companies. These typically are in the earlier stages and pay little or no dividend income. Depending on the size of the company, it’s often a big bet on the CEO and the creativity of their ideas.
The growth style goes in and out of fashion over time. It doesn’t always perform well and the smaller the companies, the less likely they’re going to shine brightly.
Momentum investors look at charts to see which stocks are trading outside of their range, indicating that they’re on the rise. Just like with a rollercoaster about to begin a climb to its peak, they hop on for the ride to the top and hope to leap off safely before the inevitable sharp decline.
There are mutual funds and ETFs that focus on this style. For the more adventurous investors with less concern about risk, it’s on the high stakes end of the investment styles.
An income investor understands that dividend income is the largest component of the total return from stocks when accounting for inflation. This isn’t true for every market and every stock, but historically the dividend can be more reliable than stock price returns.
For investors looking for income, they’re seeking safety through regular income and accept a lower growth component than is usual in the stock market. This can support their needs when taking a sabbatical or ensure a steadier withdrawal from their portfolio in retirement compared to relying on selling depressed stocks in bad markets.
How to Buy Stocks to Get Started
Once you have a good idea about your time commitment, tolerance for risk, time horizon, and investment style, you’re ready to begin.
It’ll be necessary to open up a trading account. When thinking about how to start buying stocks Canada, follow the step-by-step guide from Wealthsimple. They offer free trades through their mobile app to help all investors keep their costs down and get started right away. Using a Robo investment firm is often less expensive when you want to own stocks directly.
Plan Your Purchases Carefully
It’s best to buy a good spread of different stocks, to begin with. Avoid buying shares of your employer’s company because that won’t offer diversification benefits from your main source of income.
Diversify between companies in different sectors to avoid being overloaded in technology, utilities, green companies, transportation, or another area. While the long-term performance will differ between listed companies in the same sector during market or sector declines, they all tend to fall in sympathy with one another. This is why being diversified between sectors offers some protection.
For example, if you are based in Germany, investing in a satellite internet network like Starlink might be an option – you can learn more about how to go about investing in Starlink Aktie (Starlink shares) by taking a look at some of the helpful resources on the Coincierge website.
Use Tax-Deferred Investing Vehicles
Talk to your employer about whether there are any tax-efficient investment vehicles that they offer. Also, do they match contributions up to a fixed percentage that makes it worth doing?
When investing separately, enquire about what tax-efficient options are provided for and make full use of them. This reduces what will be lost in expenses along the investing journey allowing you to hit your target number sooner.
Set a Goal and Don’t Stop Until You Attain It
Investing is often a lonely pursuit. It is also commonly a long one.
Set a goal based on generating a 4 percent return from a nest egg that’s sufficient to live off in retirement. Allow for taxes and investment fees on your investments to be included in the 4 percent figure.
Breakdown the Goal into Incremental Stages
Break the amount needed into equal amounts. Then work towards building your net worth up until it is enough to cover the next stage.
Alternatively, take your expected living expenses in retirement and calculate what you’ll need to fully fund each line item. Twenty-five times each year’s cost of living will give you the sum needed in investments to fully cover it. Then invest and grow your total portfolio value until it’s reached that amount. Then move onto satisfying the next item on the expense list that your investments need to cover.
Celebrate the Wins
It’s a long journey. So, be sure to celebrate the wins at each stage or as each expense category becomes fully funded through stock market investing.
It doesn’t matter whether you’re a beginning investor or one who has been learning and practicing their investing for years. It only matters what you save, invest, and grow. You can create freedom for yourself (and your family if you have one) when making it a point to defer gratification through easy spending and setting money aside to build your net worth.
Don’t worry that you’re new to all this. Everyone starts that way. Make sensible choices, know yourself, and proceed at a pace that feels right. Avoid random stock tips from well-meaning strangers. Stick to a sound policy and only invest in what you understand. This protects you from many of the risks and allows you to get ahead.
[Images via: Google Images]