1) Be Mentally Prepared to Lose Money
This first tip seems contradictory to what is the purpose of investing. But turns out, being aware of this, is really important.
On the stock market, it is very rare for a stock to go up right after you bought a stock. Most of the time, the stock may go down right after you bought it.
Stocks does not go up on a straight line, there are a lot of bumps on the way. On the long run, great businesses turns to higher stock prices.
At some point, your portfolio may be down 10 percent. But that doesn’t mean it is a failure. After investing in 10 or more stocks, a couple of those may go down. That’s just how investing works.
Some stocks may be down 50 percent before taking off. Facebook was down 50 percent after 6 months it became public. After five years, investment in Facebook has been up more than 300%, even taking into account the loss.
Some stocks will not be successful. The key is to have more successes than failures. Even Warren Buffet makes a lot of failed stock picks in his investing career.
One of them is Berkshire Hathaway. Buffet estimated that it cost him $200 billion. He made a lot of mistakes on his investing career. (Source: Buffet Investing Mistakes)
At the end of the day, Buffet goes on to be worth more than $80 billion.
The stock market is very volatile, that means it can go up a lot or go down a lot. Just remember that you do not have to sell when stocks go down. Most of the time, it is a great buying opportunity when stocks go down.
As long as the business does not change fundamentally, it may be a better time to buy shares. Buying stocks at a discount can certainly work out for you.
A 10 percent drop occurs once or twice every year in the stock market. That is called market correction.Market corrections are normal in any given year.
On the other hand, bear market happens only once every ten years on average. Over the long run, the markets have returned 10 percent per year on average (including recession years).
We all make mistakes (even Buffet). Be resilient and move on.
2) Start with Little Money
Being a beginner in the stock market feels overwhelming. It is like learning a new language. I remember the first time that I was basically clueless on how the market works.
The reality is that experience is a vital thing to have to be successful in investing. Actually investing in stocks is vital to gain experience. The thing is, beginners are more likely to lose money in stocks.
I think the solution to this is to start with little money. That way, even you lost 50 percent (which is very unlikely), the lose is minimized. Investing huge money as a beginner is really hard.
Even if you lose money on the first year, you gained experience that is very necessary. Personally, I learned a lot in my first year investing. Dedicating 30 minutes a week learning goes a long way.
How much is little money?
For the most part, $1,000 of investment is more than enough. Try to start with less than $5,000. Too low invesment just isn’t motivating. For example, if you gained 10% on a $100 investment, that $10 income is just not enough to motivate. The return of 10 percent is actually pretty good.
On the other hand, too much of investing as a beginner can be harmful. For example, 30 percent loss on $20,000 is $6,000. That loss could be demoralizing to have motivation to continue investing.
After a year or two, I try to increase my capital gradually as I became more comfortable investing.
Trying Different Strategies
Also, having little money could allow you to test some investing strategies. Let’s be honest, it is hard to identify a strategy as a beginner. It is hard to identify if being a long term or short term trading works for you.
Having little money allows a person to try out different strategies. For example, you could try $1,000 on long term buy and hold strategy. And another $1,000 on swing trading and $1,000 trying another strategy.
After less than a year, you can have idea on what investing strategy works for you.
Best of all, investing little money allows a person to not be emotionally involved into a stock. It is hard to see your hard earned cash go up and down all the time.
Investing little money as a beginner allows you to decide without the emotional element.
3) Do not be Greedy
This one is really important. After all, if you are certain that a stock will be successful, why not go all in. The reality in stocks is that nothing is 100% certain. There is a chance for a stock to go up or down.
Investing in stocks is not a get rich quick scheme. Trying to time the market seems tempting. After all, if you could buy on the bottom and sell on top, you could make a lot of money that way.
But that is unrealistic since no one can time the market. Most people try to get rich from stocks in a couple of months by trading often. Trying to get rich quick most often lead to losing a lot of money.
Less than 5 percent of people did not lose money on day trading. Day trading is for the minority of people. If you ever try day trading, try starting with small capital and be extremely careful.
For most people, long term investing is the way to go. And setting realistic expectation is the key. The realistic expectation is to target around 10 percent per year and try to beat the market. On some years, you could gain 20 percent while on some years, it is possible to lose 10 percent or more.
Investing in stocks is the way to build wealth gradually. After 5 to 10 years, investing can pay off a lot.
We’re kind of tempted sometimes when it comes to how much money to invest in a particular stock. Being disciplined in investing goes a long way.
Another way of being greedy is buy investing in margin. Sometimes you could invest some in margin, as long as it is in your strategy. But for the most part, investing in margin usually did not end well.
“It’s insane to risk what you have for something you don’t need.”
– Warren Buffet (Source: CNBC)
4) Focus on the Long Term
Many people thought that investing in stocks is a quick way to make cash. If after a week you made a lot money, that means success. On the other hand, you’re a failure if you can’t make money after a couple of week.
It just doesn’t work that way in the stock market. The most effective way to make passive income in the stock market is by focusing in the long term. When Facebook became public a decade ago, they were originally worth $38 per share. After six months going public, Facebook lost 50 percent.
Many people would think that it is a bad investment at that time. Today, Facebook is now worth more than $200 per share. That is a great investment at the end of the day. People who sold at $20 must have regretted their decision today.
A lot of things can happen in the short term. But in the long term, great companies is very likely to be a great investment. Short term is unpredictable.
Today, people are guessing whether Facebook will go up or go down after a month or year. Is it going to $150 or $250?
But if you invested when it was around $30, it should not matter over the long term. Long term investors did not worry much on short term price swings.
Warren Buffet has invested during the WW2, cold war, 2000 tech bubble, and 2008 recession. After all that, the market hits new all time highs. The key is to invest for the long term.
Also, stocks did not go up every year. It is unpredictable when will the stock market go up. In fact, the market is down one-third of the years in the last 90 years. Pick any year in the last 90 years, there is 33% chance that a year is down and 67% chance that a year is up.
In the last 90 years, the market has been up 10 percent per year on average (including recession years).
5) Be Patient
Patient is arguably the most important trait an investor have. It is hard to not sell when a stock is down a lot. Also, it is tempting to sell just because a stock is up.
Great companies usually has gone up a lot over a long time. And investing in stocks is not rocket science. On 2012, Apple is trading at around $80 per share. On that year, everyone knows Apple. And it is argued that their company is too big to grow at that time.
Today, Apple is now worth more than $300 a share. If you invested when it was just $80 per share, you would have more than tripled the money. Also, you won’t worry that much. Even if Apple were to go down a lot, you would be still up a lot.
Just understand that investing in stocks is a long term game. In the short term, no one accurately knows where will the market be. Keeping a realistic expectation helps a lot. Investing in stocks is not a get rich quick scheme.
Another way to try for beginners is great dividend stocks. Dividend stocks are stocks that pays cash every month or every 3 months. Even when stocks go down, great dividend stocks will stay pay the same dividends. Dividends can be a great way to collect consistent income from stocks.
Here are 9 Dividend Stocks to Consider for Beginners
6) Ignore Most Articles Regarding a Stock
News is very helpful to stay updated. But for stocks, reading the news can do the opposite if you’re focusing on the long term. If you’re a short term trader, definitely read the news.
Everyday there are a lot of articles regarding a stock. For the most part, their recommendations changes a lot. When a stock go up a lot, they usually recommend to buy. When stocks go down, they recommend to sell.
The way to make money in stocks is buying low and selling high. People that is reading these articles should only view it as their opinion.
When Tesla was going down to $200 per share, most articles predicts that it will go down to $10 per share. While some articles on the internet says it will be bankrupt. Fast forward less than a year, the stock has more the tripled at the time.
When the stock go up, most articles predicts it will go up to $1,000. Also, others predicts it will go to $10,000. All of a sudden, everyone thinks that Tesla will go up and up.
And it happens on a lot of stocks, not only Tesla. Instead of worrying, try taking it as an advantage. When stock became very cheap in your opinion, it may be an opportunity to buy. When stocks go overvalued, it may be an opportunity to sell.
“Be fearful when others are greedy. By greedy when others are fearful.”
Warren Buffet
The truth is no one can actually predict what the market will be in the short. Stock market are thought to be risky, especially on the short term. The risk is minimized over the long term. In fact, the longer you invest, the less riskier it can be.
At the end of the day, every stock has a positive and negative case. Try to hear both cases and their reasons and decide whether you will invest or not.
7) Own Stocks You Understand
At the end of the day, stocks are a piece of a business. If you own all stocks of a company, you’re the owner of the company. Owning in stocks is owning a portion of a business. If you own 1 stock and there are 1 million stocks available, you own 0.00001% of the company.
When the company doubles in value, your stock doubles. Another way to gain is when the stock pays cash dividends.
With the said, it is important to own stocks you actually understand. And it is not that hard to find stocks. Most big companies have stocks to invest in. Whether it is a clothing company, fast food, or gadgets, there is a chance that they have a stock.
Start searching on your favorite brand or company. For example, it is hard to look at oil stocks if you do not have any idea on oil industry.
If you frequent on eating at fast foods, you may have idea on how fast food business works. Start searching on that. Also, if you shop online or physical retail store, you may have idea on what businesses attracts customers.
At the end of the day, stocks are simply a way to invest in a business. It is an opportunity to benefit from great companies. Investing in stocks are much simpler than most people thought.
3 Easy Steps to Buy Stocks
Today, you can get started buying stocks within 3 days. You can open an investing account for less than 10 minutes. After 3 days, you can start actually buying stocks.
1. Invest Money You Don’t Need
It takes time for investments to grow. During that time, it goes up and down all the time. If you need the money at the wrong time, you may be forced to sell stocks at a low price. Try to make sure that the money invested will not be needed for everyday expenses.
Also, clear up credit card debt first. Credit card charges 20 percent interest rates which are too high. The realistic return in investments is around 10 percent on a year on average.
2. Open an Investing Account
Investing account allows you to buy and sell stocks on your phone or computer. In United States, it is now commission fee. In Canada, fees are as low as $4.95 per trade on Questrade.
To fund an account, simply connect your bank account to investing account. This step is really simple as they instruct you on what to do. You can deposit and withdraw funds all the time.
Funds in the investing account do not have to be invested. You have the option to invest all cash or just invest half of the cash and wait when stocks go down before investing the other half. Investing account gives you the flexibility.
Opening an investing account today is very easy. Also, you do not need a lot of money to get started. For the most part, an investment of $1,000 is more than enough to get started. It is your choice whether to add or not.
3. Try to Consider at least 5 Stocks
For beginners, try to identify businesses that you actually know. Then start researching the basics. Most phones have an app where you can start adding on it.
If you’re having a hard time finding a stock, you can check out 7 Quick Ways to Find Stocks to Invest in.
You do not have to purchase the perfect stock the first time. The first stock is a big step towards learning how to invest. Starting with little money allows you to limit risk and gain experience at the same time.
After a year of investing, you’ll be much more comfortable investing in the stock market. It is just different just learning about stocks compared to actually investing.
