Summary
I have to say, this is a very exciting topic for me. I love talking about investing and how it all works. There’s not one way that is an absolute must when it comes to learning how to invest. There definitely are wrong ways though. This will be my interpretation of the most effective way I’ve found to go about it. You can invest in quite a few things out there but I’m going to focus on the stock market. To me, this is the core knowledge you should have when it comes to all types of investing because the strategies and processes you go through easily translate to all other investments. What you won’t find here is some secret or special tactic you can deploy to always invest in winners. It’s hard work if you want to do it right and it will pay off for you in the end... literally.
Investing is when you spend money with the expectation that whatever you spent it on will produce a profit for you. By that definition, you can invest in anything if you get more money back than you spent. Today we’re talking about investing in the context of the stock market. This generally refers to all types of financial instruments despite the key word “stock” being in there, but stocks are indeed what we’ll be focusing on.
What is stock? Stock is what a company uses to raise money to fund its business operations. This usually happens when a privately owned company has become very successful. To build and expand significantly beyond where they’ve got so far, they need a larger influx of cash. Up to this point, they’ve likely received funding from wealthy individuals and other businesses. Although the wealth of these sources is vast, they can’t compete with the combined funding power of the world’s population. What I mean by that is when a company issues stock to raise money, that money comes from people like you, myself, and others around the world. By issuing stock the company moves from private owned to publicly owned, allowing anyone to invest in it. By investing in a company, i.e. purchasing its stock, you are buying partial ownership of that company. It’s what’s known as becoming a shareholder. Being an owner in this manner does not mean you get to make decisions on the day-to-day operations. It does mean your investment will experience its gains and losses. You are, however, allowed to vote on who gets to be on their board of directors. They have oversight of the company’s management and protect your interests as shareholders.
The single most important thing to know about investing is that it involves risk! There is risk you could lose all the money you invest. When you go to the roulette table at the casino and put your money on black or red, what happens? You either double it or lose it all. Conversely, if you go to the bank and put your money into a savings account, what are the risks you have there? Your money is insured, no risk of loss, and the bank gives you interest. I do want to vehemently say that investing is not the same as gambling. Gambling is statistically designed for you to lose more than 50% of the time. My point is risk versus reward. The more risk you take, the more reward you get, and vice versa. Investing in stock can provide high rewards but it can also provide losses. We’re going to do our homework to make educated decisions on companies we want to invest in versus picking randomly and hoping for the best. Although, the best investors sometimes lose despite how solid their research is. Sometimes the unexpected or rare, unforeseeable events happen and there’s nothing you can do about it. Bottom line, do not invest if you’re uncomfortable with risk or can’t afford to take a loss.
Where do you get started? First, you need to open an investment account and to do that you’ll need to pick a financial institution you want to use. You can easily do this all online, by the way. You’ll want to pick one that doesn’t have any annual account fees or trading fees. The account will have other fees but none that you should be paying for basic setup and use. You just don’t want to have a fee for simply having the account open or for trading stocks. This is very common, so you won’t have any trouble finding a company to do this with. Chances are your bank offers these accounts so I would recommend starting there. You can easily connect your bank account as well for transfers in and out as necessary. If your bank does not offer investment accounts, the major investment firms you see in commercials watching the news or golf will work fine. The type of account you should open will depend on what your needs are. If you don’t have any retirement savings yet, you may consider opening an IRA [add link to how ira’s work]. If you have a retirement plan through your employer and don’t want another retirement account, you can look into opening what’s called a Brokerage Account. This is a standard type of account that doesn’t have any extra benefits associated with it like a retirement account, but it also doesn’t have any restrictions. You’ll need to provide information from your government issued ID plus your banking info (if you’re not opening the account at your bank) because you’ll need to fund the account somehow. You can never deposit cash into an investment account. The only way to get money into an investment account is through some sort of transfer from another financial institution. A personal check with your name and address pre-printed on it is acceptable, however cashier’s checks, money orders, and bill pay checks are generally not accepted. Alternatively, for account setup, you can always call their service line and an account can be opened over the phone. Other questions to answer are what your current income is, where do you work, what’s your net worth, etc. Some of the questions are there to ensure you’re financially capable of investing, i.e. you have a job and make money versus someone that has zero dollars to their name. Also to prevent money laundering and that sort of thing. Once the application is completed, it’s usually approved immediately or within a business day. All you need to do then is fund the account. Once the funds have cleared, you’ll see you have an available balance in your account and you’re ready to trade!
So, what company do you invest in and how do you go about picking one? The best place to start is by figuring out what your interests are. You want to invest in a company you’re familiar with and can stand behind. If there isn’t one that comes to the top of mind, start more broadly with something in your life that interests you. It could be exercising, arts and crafts, automobiles, computers, etc. You don’t want to invest in something you don’t care for. Maybe it’s a restaurant chain you frequent or a clothing line you purchase regularly. When it comes to investing, having as much information about the company as possible will benefit you the most which is why I’m suggesting it be something you already have interest in. Choosing large corporations that have been around for a long time will benefit you as well. It will be easier to find information on them and they are less likely to go out of business. Once you’ve selected the company, it’s time to do research! You may be thinking you need copies of their financial reports to analyze and calculate key financial ratios to determine if they’re going to be profitable or not. Sure, that’s important but it’s not for everyone nor do you need to be doing that as a beginner. What you’re looking for is more generic information that will help tell you which direction the company is heading in. For example, if you’re investing into a retail store and you find news that they’re expanding storefronts to multiple cities around the country and have a new product line that is selling out everywhere. That’s positive news and you would expect an investment in them to go up. Conversely, if you find stores closing and sales have dropped recently, they’re probably not a good place for you to invest right now. Say the holidays are coming up and you know that this store is always packed with shoppers and remember that you see news about how well they do every year during that time. It is likely a great opportunity to invest in them prior to the holiday season arriving. Ideally, you’re looking for as much information on them as you can that will help indicate to you the financial health of their business and which direction it’s trending. If this is a company you already know much about, you probably have a good idea of how they will be doing depending on the type of news you find out about them. Knowledge is power, as they say. Most companies will have a section on their website dedicated to news about themselves. That’s a good place to start your research. You’ll of course find a lot of good publicity pieces there. Not to say they won’t show news that’s less favorable to them but it is their own website after all so it’ll likely be articles more towards their favor. This won’t tell the full story by any means so do a general search about them online such as, “news about XYZ company.” Read articles by the major journalism/broadcasting companies. Credibility is extremely important for them so you can feel safe that you’re reading accurate information. Be sure to check the date the article was posted as well so you’re not reading old news. A third option are forums. These are a great source of information because you can combine your researching power with others and get answers to questions that may be difficult finding on your own. A very strong word of caution though as there can be very opinionated and potentially inaccurate information there that may harm your decision making. Just tread carefully there is all I’m saying and do your best to filter out information you think is false. Take notes! This is exactly like doing a research report in school. Keep records of your information and where you got it from. Make a list of pros and cons. Note any trends you see following any type of news release from the company. Get into the weeds as much as you can with regards to research. Download a finance app that allows you to follow the company’s stock price. The place you have your account open will certainly do that for you and will most assuredly have an app available for you. But if not or you haven’t opened an account yet, feel free to grab one from the app store. Personally, I use Yahoo Finance because I’ve found it’s the easiest to use, the layout is nice, it provides links to related news articles, and I don’t have to log into my account every time I launch the app. You can also create portfolios, enter purchase dates and values of stocks so you can track how your investment is doing based on the exact dollar amount versus points or percentages. Here’s a big benefit to you if you’re still not ready to jump in headfirst. You can use the app to imitate a purchase and follow along in real time to see how you would be doing if you had purchased the stock. You can input a date further into the past to back test your theories too but I recommended doing this type of practice in real time so you don’t have the benefit of hindsight. Part of investing is not knowing what the future holds and keeping up with the news so if you do your homework correctly, you’ll see how you benefit from it. Create a plan. Investing is about making money but for what purpose? This is important because part of that plan should include an exit strategy. Knowing when to get in is just as important as knowing when to get out. Set goals for yourself. How much profit do you want to before selling, when will you need to spend this money, how far down will you let it go before selling if it ends up being a bad investment?
Downfalls to watch out for. Money is emotional! I can’t stress this enough. It’s a learning process to keep them under control when investing. We all know about selling high and buying low, but our emotions can get the best of us and do the opposite. When the stock goes down, you want to sell to stop the bleeding. When it’s going up, you want to keep it to make more money. Having a plan on when to buy and sell will help reduce the emotion if you stick to your plan. How much of it going down can you tolerate? How much upside will you take before selling and if the stock continues to soar up afterwards will you be ok missing out on more? Celebrate your wins but don’t get overconfident. Continue doing the work to make educated decisions and don’t let your guard down because you feel like it’s getting easier. Don’t try to time the market, meaning don’t wait for the exact second when the stock price will be at its highest or lowest to place your trade. Often, it’s better to place your trade when it’s close enough. When investing, you want to be right twice, when you buy and sell. Trying to capture every little gain by waiting an extra minute, hour, or day is one of the easiest ways mistakes and regrets are made. Be wary of “water cooler” advice. Your friend tells you a hot stock tip that they just purchased and made a lot of money from it already so you should do it too. An investment that was good for one person doesn’t mean it’s good for you too. Chances are, by the time you’ve heard about it, you’ve missed the ride up. Always do your own research! Don’t let the daydream of becoming rich overnight get the best your judgement. Time carries risk too. Let’s say you have money you need to spend on rent next week. You hear this great stock tip from your friend and decide to invest for a quick profit before your payment is due. The stock drops, now you sell for a loss and are short on your payment. Having a longer time horizon gives you the ability to ride out dips in the stock price. Lastly, if you’re not comfortable with it, don’t do it! Maybe it’s a gut feeling or you’re just not completely sure. It will be tougher to stomach if it doesn’t work out because you had a feeling you shouldn’t be doing it at all.