How can you Start Investing in the Stock Market as a Beginner?
To invest successfully over a lifetime does not require a high IQ, top notch education in Finance or inside information.
What’s needed is a basic understanding of how the stock market works, a strategy to find good companies to invest in and the ability to keep emotions from ruining your strategy.
I will try to give you the best guide you will ever need in order to successfully invest in the stock market as a beginner.
The main points are:
1 – Share dealing vs CFD
CFD trading and share dealing are two different ways to invest in the stock market. With share dealing, you buy shares of the company, so you buy ownership of part of the company, meaning not only will you benefit from any upward price movements, you will also get paid dividends, which is a share of the profits a company makes, if the company pays any. This is the standard way of investing in the stock market.
An alternative option is what is known as CFD, that stands for Contract For Difference. CFDs are contracts that you can open, betting on the direction of the price of a stock. You are just betting against your broker or against other traders, you don’t own a piece of the company.
Some traders prefer CFDs because they allow you to use the so called “leverage”, which has the ability to amplify your profits in case you are right about the direction of the market, but it can also amplify your losses, in case you are wrong, and because CFDs also allow you to open a “short position”, which means that you can bet on the price of a stock falling.
These two characteristics of CFDs make them an appealing option for short term traders, but not a great one for investors who are looking to buy and hold stocks for a long period of time.
Holding a position overnight with CFDs has a cost, generally indicated as “financing”, or “overnight rollover”.
So if you intend to keep a stock in your portfolio for months or years, you don’t want to pay a commission to your broker every day for holding that stock in your portfolio. In addition to that, some brokers may have wider spreads for CFDs compared to share dealing.
So, if you want to invest in the long period, share dealing is your choice.
Some people may argue that with CFDs, you can buy expensive shares even with a small amount of money. Nowadays, you can do the same with share dealing. Many brokers provide the so called “fractional shares”, allowing you to buy only a fraction of a share. Particularly convenient if you don’t want to start investing with a large amount of money, but you still want to be able to diversify your portfolio and buy “expensive” stocks.
2- Find a good broker
If you want to start investing in the stock market, the first thing you have to do is to open an account with a broker.
First of all, you want to make sure your broker is regulated by a recognised national institute which has some form of jurisdiction over financial services. This normally assures that the broker is legitimate and that your money is in good hands because most of these regulatory bodies also provide a scheme to refund your money up to a specified limit, in case of bankruptcy or any illegal financial irregularities by your broker.
You can usually find information about this, scrolling at the bottom of your broker’s homepage.
This Wikipedia page provides a list of regulatory bodies country by country: List of financial regulatory authorities by country – Wikipedia
It’s ok if you choose a broker that is regulated in a country different than yours, just make sure that it is regulated by a strong financial institution like the FCA in the UK.
There are many other criteria to evaluate, such as domicile, trading platform, customer service and more. Among the most important ones, I would put spread and commissions.
You’ll want to minimise the transaction costs in order to maximise your potential earnings, so you are more likely to want to choose a broker with low commissions.
I personally use eToro. It is regulated by the Financial Conduct Authority (FCA), it is commission free, minimum investment of only $50 and it allows you to buy fractional shares.
3 – Buy stocks
Now we are getting into the fun part. What stocks should you buy?
A stock is not just a symbol that you read on your screen, it is an ownership interest in an actual business.
Think of a shop you attend frequently. Maybe a coffee shop where you like to take a rest for 20 minutes and enjoy a cup of coffee.
Imagine that the owner comes to your table and asks: “hey, we are trying to improve our business, so we are looking for investors that can lend us some money to finance our projects. Would you like to invest $100 in our business?”.
Let’s say that for whatever reason, you say yes.
Now you own a piece of that coffee shop, you own a “share”. If the company grows, your share will grow too.
Imagine that, after one year, your share has a price of $200. You can sell it and you have a total profit of $100.
The stock market is a place where thousands and thousands of companies are looking for investors to finance their projects, just like that small coffee shop.
We are talking about Amazon, Google, Netflix, Microsoft, Apple, Visa, Mastercard, Starbucks, Facebook (Meta), Airbnb, Coca Cola and other companies of which you have probably used their products at least once in your life.
Let’s say that you like Apple. You can buy its shares and own a piece of the company. If the company grows, your investment grows with the company.
So what stocks should you buy?
I know some people who buy stocks in every company they know.
You know Apple? Sure, let’s buy some stocks.
Amazon? Of course!
Netflix? Ok, let’s put some Netflix stocks in our portfolio as well!
Don’t buy everything you see. This is a question that could help you be more selective in the stocks you put in your portfolio: “if you could only make 10 investments in your entire life, what stocks would you buy?”.
If you could only buy 10 stocks, you would probably focus on some businesses that can thrive in the long period and you would put more effort into studying those companies, instead of buying whatever stock you read on your broker’s platform.
There are two simple questions we need to answer:
First of all, what is more important? A good company or a cheap price? They are both important, but which one comes first?
Benjamin Graham, a Columbia professor, known as “the father of value investing”, believed that finding a good price is more important. So he used to invest in all the kind of stocks that could represent a “bargain”.
Warren Buffett, despite being a student of Benjamin Graham and adopting many of his concepts, adopted a different style, more similar to the one developed by John Maynard Keynes.
He first studies the companies. He looks for good businesses to invest in, not good stocks. Once he finds a good one, he evaluates the price. If the price is not convenient according to his analysis, he waits. Sometimes it can take 2 or 3 years until we have a significant market down-movement that can discount the price of a stock. Warren Buffett is usually there, at the bottom of that down-movement, waiting for those opportunities to buy the businesses he is interested in.
If you are a beginner, I would highly recommend you use the same approach and invest only in solid companies that are likely to be alive and still make money in 20–30 years time.
3.1 Find good companies
Later on, we will see two different types of analysis that will allow you to Start Investing in the Stock Market, but I believe that you can start writing down a list of potential stocks to buy by adopting two simple approaches.
I like to call the first one the “I don’t know and I don’t care” approach.
Typically, the first step for new investors is to try to identify the new Amazon or the new Microsoft. It’s understandable. You have missed the opportunity to buy the first Amazon or the first Microsoft, so you are looking for a new one that you can buy for a few dollars per share and earn several dozen times the amount invested.
So, which companies are going to be the next Amazon or the next Microsoft?
Your answer should be: “I don’t know and I don’t care”.
Don’t try to buy the next Amazon or the next Microsoft. Even experts fail in this attempt most of the time, let alone a beginner.
You should put these companies in your portfolio only when they are big enough to own.
Many beginners make the mistake of focusing on cheap stocks because they seem to have more potential to grow.
Would you buy a stock that has a price of $1 per share or one that has a price of $3,000 per share? What if the first company is reporting losses every quarter, while the second one is increasing their earnings at a sustainable rate?
In the stock market, $1 is not necessarily cheaper than $3,000.
It might be much easier for the $3,000 stock to double its price than for the $1 stock.
“So, have you heard of this company? It’s going to be the new Tesla!”
“I don’t know and I don’t care.”
The second approach you should have is to start noticing brands when you walk into a shop. Ask yourself: “what brand do I absolutely expect to find here in this shop?”.
For example, you walk into a 7–Eleven or another convenience store for food. What brand do you expect to see? If you ask me, I would definitely expect to see Coca-Cola. I can’t imagine a convenience store who doesn’t sell Coca-Cola.
If you go to a pharmacy, what brand do you expect to see for sure? Fortunately, I don’t go to pharmacies very often, but I would say that Listerine is something I expect every pharmacy to have.
Are Listerine and Coca-cola likely to be around for the next 20–30 years? Is it likely that they will continue to carry their brand power and generate earnings? If your answer is yes, you already have two companies you should put on your list. I’m sure you can find many potential stocks to buy like this.
3.2 Find a good price
Buying a stock at a good price is important.
You can still make money if you buy stocks of a good company, even if you overpaid for them. But you can make much more money if you buy stocks of a good company at a good price.
Here we have Asana (ASAN).
If you had bought at the first point, you would have got a price of $40.
If you had bought at the second point, you would have got a price of $60.
You may think it’s a small difference, but it’s not.
Consider the current price just above $120.
From $40 to $120 is a profit of 200%, you tripled your investment.
From $60 to $120 is a profit of 100%, you only doubled your investment.
So, getting a good price for the stock can really boost your profitability, but it’s important to note that, in both cases, you could have had a profitable investment by picking a good company to invest in.
4 – Technical and Fundamental Analysis
Technical and Fundamental Analysis are two ways to find a good price to buy at. Technical analysis is the study of historical prices on the charts and it is used to identify price trends and patterns.
Fundamental analysis is based on the assumption that a stock price doesn’t necessarily reflect the true intrinsic value of the underlying business and it provides a set of tools that allow you to understand if a company is under-valued or not.
I have published a course about Stock Trading and Stock Investing, it’s a 14+ hours video course (you can find it here), and Technical and Fundamental Analysis take more than 4 hours in the course. So, you can understand that it would be impossible to summarise these two topics in a small paragraph.
Despite that, I want to give you two examples of simple, but effective strategies. One based on technical analysis, one based on fundamental analysis.
Your broker will provide you with a charting platform that you can use, but there is also a web-based one that you can use for free: TradingView – Track All Markets
Here you can search all the stocks you want and visualise their price movements on a chart. I’m going to use a candlestick chart, daily time frame.
Do you have the list of stocks you wrote down following the suggestions I gave you above? Great!
Let’s analyse 3 names that are probably on that list: Apple, Coca-Cola and Johnson & Johnson (the company that owns the brand “Listerine”).
What I’m going to do is to put a Simple Moving Average (SMA) on the chart, 200 periods. We buy every time the price falls below it.
Apple (AAPL)
In the past 3 years, you had 6 opportunities to buy Apple stocks.
All of them would have been profitable investments, considering the current price.
Coca-cola (KO)
In the past 3 years, you had 9 opportunities to buy Coca-Cola stocks.
All of them would have been profitable investments, considering the current price.
Here, you would have suffered a bit more, but if you simply held shares in this good business, without panicking, you would have had a nice profit in the past 3 years. In addition, you would have collected almost 10% as dividends.
Johnson & Johnson (JNJ)
In the past 3 years, you had 16 opportunities to buy Johnson & Johnson stocks.
All of them, except the last one, would have been profitable investments, considering the current price. In addition, you would have collected around 8% as dividends.
This is a pretty easy method to try to get a good price for your stocks.
I don’t want to claim that this is the best method out there, but it’s very easy to use and you can apply it as a total beginner.
So, do you need sophisticated tools and indicators to Start Investing in the Stock Market? Not at all!
Fundamental analysis can be divided into quantitative analysis and qualitative analysis.
The latter is the study of advantages and disadvantages that cannot be measured, but that everyone can tell have an effect on the company.
An example of that is the management or the industry trend.
Quantitative analysis focuses on the financial statements of the company.
We have 3 kinds of financial statements: balance sheet, income statement and cash flow statement.
In the balance sheet we can read assets and liabilities of the company, as well as shareholder’s equity.
An asset is anything a company owns which has a quantifiable value, which means that it can be sold for money.
A liability is anything a company owes, that has to repaid.
Shareholders’ equity is how much the company is really worth. It is calculated as total assets minus total liabilities, so it expresses how much is left to the shareholders in case all the assets are sold and all the liabilities are paid.
The second financial statement is the income statement, in which you can read revenues and expenses, so how the company earns and spends money.
Simply subtracting the costs for the company from the sales or revenues, you get the net income or earnings, so you can verify if the company is making any profit.
The last financial statement is the cash flow statement.
This shows how the company uses its cash to operate the business. It also shows how much is borrowed from banks or by issuing bonds.
This is another important statement, as a company with a good amount of cash is less likely to go bankrupt during bad periods.
Where can you find these 3 statements for a company? There are many websites that you can use for free, my favourite one is Yahoo finance.
Learning how to read these statements is not easy, it’s not something for beginners. Analysts have created some metrics that summarise important figures that you find in these statements.
An example of that is the Price to Earnings (P/E) ratio, which relates the price of a stock to the earnings of the company.
A high figure may indicate that the price is over-valued compared to the company’s earnings. A low figure may indicate the opposite, so the price is under-valued compared to the earnings of the company.
You would like to buy a good company at a price that is under-valued, so you would like to see a low PE ratio.
First of all, where can you check the PE ratio of a company? You can use Yahoo Finance once again. My favourite website to check the metrics is Wallmine.
Let’s check the PE ratio for Apple:
It is 28.56. Is it high or low? Good or bad?
Generally, a PE ratio below 30 is considered good, while a PE above 30 is considered bad.
It’s worth mentioning that different industries have different average PE ratios, so it’s a good habit to compare the company’s figure with the industry one.
You can use a website like Finvizfor this.
The technology sector has an average P/E of 38.25, so the 28.56 that Apple shows at the moment I’m writing, is a good metric, below the average.
Despite Apple being at an all time high, the price is still under-valued compared to the earnings of the company, so it would still be a good idea to buy at the current price.
You can use technical analysis, fundamental analysis or a combination of both to Start Investing in the Stock Market.
5 – Money Management
How much should you invest? How many different stocks should you buy? How can you maximise your profit while keeping a low risk?
Money management is a discipline that answers all these questions.
I specialise in money management systems and, from my point of view, it is the most important part in trading and investing.
In the course Smarter Stock Investing and Stock Trading Foundation Course, we provide an Excel spreadsheet that allows you to simulate future returns based on your past performance.
This is a simulation based on one of my strategies.
I’m not going into the detail of it, but it’s easy to see how I would end up losing all my money if I risked 5% or, even worse, 10% per investment.
Keeping a balanced risk management of 1% per investment or 0.20%, I would have a profitable portfolio.
In Finance, this is called “risk of ruin”.
Let me ask you something: “how much do you need to make to recover your losses? How much do you need to make in order to recuperate a loss of 20%?”
This seems like a silly question and you may think: “well, I lost 20%, of course I have to make a 20% profit to recover”.
Unfortunately, it doesn’t work that way and the correct answer is 25%.
Let’s work on numbers. You have $1000 and you lose 20%, which is $200. Now you have $800. If you make a profit of 20%, on $800, it is $160, which will take your account to $960, not back to $1000.
You need a profit of 25%.
25% of $800 is $200, that would take your account back up to $1000.
The more money you lose, the higher the profit percentage you need to recuperate your money.
If you lose 25%, you need a 33% gain to get back to break even.
If you lose 50%, you need a performance of +100% to recuperate your losses.
If you lose 80%, you need +400% to get back what you lost, so very hard to recover once you sustain such a big loss.
So the first thing you should do is avoid high risks.
In order to keep your portfolio relatively safe, I have two recommendations for you:
Regarding the first point, let’s say that you want to Start Investing in the Stock Market with an amount of $10,000.
Should you invest all of it right away? No, you should invest between $2,000 and $8,000 and keep the rest in cash.
Why is that? Because the market crashes every now and then.
The S&P 500 is a market index that includes 500 of the largest
companies quoted in the US market. If we use it as a benchmark, we can say that, on average, the market falls by 10% or more once every 21 months.
It falls by 20% or more once every 9 years.
Down-movements between 5 and 10% happen almost every year.
While most people panic during these periods, you could use a smart approach. You could have some cash ready to put in the stock market when most of the stocks are heavily discounted because of a market crash.
I know that 20% to 80% is a very broad range. If you think that the prices are very high, then you want to keep more cash and have an allocation closer to 20%. It also depends on your risk attitude. If you don’t like risking much, you may want to have a low percentage in stocks.
Regarding the second point, this is called dollar cost averaging.
Every month, you can save some money to buy new stocks or buy more of the stocks you already own.
If you invest $10,000 today, making additional deposits of $250 each month into your broker’s account, with an annual return of 14%, you would be a millionaire in 25 years.
Is $10,000 too much for you? Or maybe you cannot add $250 every month? Or 14% per year sounds like a very high return?
Well, let’s try this.
If you invest $5,000 today, making additional deposits of $30 each month into your broker’s account, with an annual return of 10%, you would have $100,000 in 25 years.
You can play with these figures, using the calculator on this website: Compound Interest Calculator
6 – Psychology
If they asked me 2 secrets to be a profitable investor, I would say: patience and self-discipline.
Have a look at the charts I posted above: Apple, Coca-Cola and Johnson & Johnson.
How many times could you have panicked and sold the shares at the first sign of a down-movement? How many times you would have been wrong? 30 times out of 31!
Investing requires emotional stability. If you remove your funds every time the market is going down, or every time you think the market is too high, chances are that you won’t be a profitable investor.
So when is it the right time to sell?
Remember that you have bought a share in a business.
Imagine you had started your own restaurant and things were going great. You are making huge profits every month and it seems that there is no reason to doubt that it won’t be like this in the future. Would you sell your restaurant because you made enough money? I’m pretty sure you wouldn’t. So why would you sell your stock when things are going great and there is no reason to doubt that it won’t continue like that into the future?
Treat your stocks like your own business. Stay up to date with what happens in the company and in the industry. Sell if you need the money or if you don’t want that business anymore.
Don’t make the psychological mistake of selling every time the stock has a bad day or every time the stock reaches a new high.
If you are struggling with overcoming bad periods in trading and investing, I have written an article on this subject: How To Overcome Bad Periods In Trading.
There is much more to talk about in regard to this topic.
I will only say: don’t underestimate the impact that your emotions might have on your investments.
7 – Alternative Investments
Selecting individual stocks requires time and a certain level of understanding of the market.
You want to Start Investing in the Stock Market, but you don’t have time for it. In this case, you may want to have a look at some alternative ways to invest in the stock market.
ETFs and Mutual Funds are the most popular ways.
Vanguard is the leader in this sector.
In recent years, there has been an explosion in popularity of the Robo-Advisors. Robo-advisors are digital platforms that provide automated financial planning services using algorithms, with little or no human supervision.
These algorithms are designed by financial advisors, investment managers and data scientists, and coded in software by programmers.
A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest for their clients.
Since they require little or no human supervision, management costs are very low, usually less than 0.5% a year.
8 – Expectations
2020 and 2021 have been great years for the markets.
Pretty much all the stocks that survived the crash in March 2020, have followed a strong and sustained uptrend. The same happened with Bitcoin and cryptocurrencies in general.
This situation has lead many first time investors to put their money in the game, call themselves “experts”, start giving advice to other people through YouTube channels, Telegram groups and more, claiming to make astronomical returns that simply cannot be sustained in the long term.
To see why temporarily high returns don’t prove anything, imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I can drive that distance in 2 hours. But if I drive at 130 mph, I can get there in 1 hour.
If I try this and survive, am I “right”? Should you be tempted to try it, too, because you hear me bragging that it “worked”?
These “experts” who claim to make huge returns are much the same. In short streaks, so long as your luck holds out, it works. Over time, it will get you killed.
So when you see someone claiming to double their investment every quarter, good for them, but stay away from it and keep realistic expectations for your investments.
If you use the compound interest calculator mentioned above, you can see how you can achieve great results even with 10 to 15% a year, if you use a smart and patient approach.
9 – Keep learning
You would be impressed by the results you can achieve, if you dedicated only 2 hours a week to study the stock market.
You could check the charts and read the latest news about the companies you have in your portfolio and spend the rest of the time getting proper financial education.
What should you study? Of course, I may be biased, but I believe that this is a great starting point: Smarter Stock Investing and Stock Trading Foundation Course
I worked on this course together with another instructor. We spent 7 months to concentrate 14 years of experience into 14 hours of video content. I also share personal results that can be verified, together with my real time portfolio of stocks, with regular updates to let you know about any change in my portfolio.
I believe that this mix of theory and practice is the best approach to get started on the stock market.
If you are not a fan of video courses, 3 books I would recommend are:
So, you want to Start Investing in the Stock Market? Do it the right way!
I hope you will have a great investing career 🙂
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