Investing in the stock market is one of the best ways to build wealth over the long term, whether it's for retirement, to increase your net worth, or working towards financial freedom. Investing in the stock market is the place to do it. But like anything worthwhile, it can be tricky, and you should build your knowledge first. So reading these investing tips for beginners will serve you well.
In today's world, investing has never been easier. In the past to invest, you had to work with stockbrokers who charged hefty fees and didn't always have your best interests at heart.
Now you can invest from the comfort of your own home from an app if you want to. With the rise of fraction stocks, you don't need to have lots of savings either, just the courage to get in the game!
15 Tips for Stock Market Investing
When starting out, investing can be a scary place. I know when I first started investing, I had no idea where to begin. In this guide, I will share with you the best investing tips for beginners. Stock Tips that have served me well over the years.
1. Get Your Finances in Order First
First things first, before starting out, you need to get your finances in order otherwise, stock market investments are kind of pointless you need to have a good idea of how much money you have to invest on a regular. Make sure you have these things in order:
Pay off any High-interest Debts
If you have high-interest debts, specifically over 8-9%, then you should seriously consider paying these off first. As initially, you are very unlikely to beat these with the stock market returns.
Think of it this way if you have debt that is 9% interest, paying this off is the equivalent to investing in the stock market and making this in returns.
The S&P 500, an index of large American stocks, has provided an average return of 9.8% over the past century or so. Depending on your risk tolerance, you should aim to pay down any debt charging an interest rate near or higher than that.
Have an Emergency Fund
If you are serious about investing for the long term, then to be able to do that, you have to leave that invested money alone, specifically for at least 3-5 years.
Now in order to be able to leave your stock market investments invested, you need to also have a emergency fund you can access instantly for any rainy day.
The worst thing to happen would be having to sell stocks at a market low because you needed some cash fast. That's not smart investing. You need enough money put away so you don't touch your investments.
So first, make sure you have some emergency funds stashed away. Many financial experts recommend you should have between 3-6 months of expenses kept in a cash equivalent account.
This means should the worst happen and you lose your job then you can still leave your investments save and have money to be able to carry on your day-to-day.
Get a Retirement Scheme
If you haven't already joined your company retirement scheme, then do also look into this. The reason being is that most companies will match your contributions, so if one of your reasons for investing is for retirement, then you should do this first. If you study any investment advice they will normally tell you to start here first. If your company does not have one, you can open an IRA or Roth IRA with a financial institution like Vanguard.
It will mean you have an even better investment return.
2. Use a Stock Advisor Service
This is, of course, a personal choice, but I have included it on this list because it has worked well for me. It has helped me, more than anything, save time researching every stock because all of this is already done for me. I personally use Motley Fools Stock advisor.
Taken from Fool at time of writing this article, for most up to date information use the link below.
If you are just starting out and are not sure which Stocks are worth investing in, then it's good to get tips from experts. You do pay for a service like this, but for me, it's been more than worth it as it has allowed investment in stocks that have delivered good profits. What you get is a monthly report of up to date stock picks.
Benefits of using a stock advisor service like Motley Fool are:
- Time-saving – The service comes with 15 starter stocks that Motley Fool invests in and knows to be long-term good investments.
- Up to date advice from experts – each month, you get 2 stock picks based on what is going on in the market so you can invest at the right time.
- They tell you when to sell too – If you go with their advice (which you should if pay for the service), they will also tell you when it's time to get out of a bad stock.
- The service at the time of writing delivered 566% in returns since 2002, so if you want some sort of guarantee of success, then this could help you.
3. Use a Zero-Commission Online Broker
When you're looking to invest beyond your retirement accounts, there are plenty of investment vehicles out there that can help if you don't already have a broker, then make sure you use one that doesn't charge you any investing fees. Take advantage of the world we live in now and sign with a broker that won't charge you commission fees to buy stocks.
This means that the money you earn goes straight back in your pocket where it belongs. You could invest $5 and start to have a play.
4. Build Your Knowledge
I would always recommend that anyone who goes into the stock market should go in with open eyes and a bit of knowledge. Yes, its a very rewarding place, but it can also be a place of sorrow if underestimated.
For this reason, I would say it's good to do some of your own research and build up knowledge initially. I personally choose to read books and continue to do so. The 2 I would recommend initially are Rich dad, poor dad, and Intelligent Investor.
It's also worth looking into stocks history to give you an idea of stability whilst this is no guarantee, it certainly gives you more information to work off.
5. Get in the Game and Invest Early
It took me until I was in my 30s to start investing. Time is your greatest friend when it comes to the stock market. That's how you earn compound interest, which Einstein called one of the wonders of the world.
So don't wait until you have lots saved to start investing; you can literally start buying even if you have a dollar spare. Just start setting goals and invest even if small amounts on a consistent basis.
6. Invest for the Long Term
If you want to invest, then do it for the long term to reap the rewards. You shouldn't be dipping in and out with your money. This is how you make big losses with individual stocks.
Instead, sound research first on the companies you are interested in investing in. A few questions to ask yourself at the companies you are looking at are:
- Who is leading the company at the moment? Is the leadership in your view good, and is the leader likely to change?
- Look at the financials that are listed with the share, taking into consideration the earnings per share, free cash flow, and looking carefully at how much liability the company has.
- Does the company pay dividends, and how high is it – be careful of companies that pay above 6% as this can sometimes mean the stock doesn't grow as much as it should as the companies are too busy paying out massive dividends.
- Growth history – you can see this through your broker app – if the company has had sustained growth, it's a very good sign.
- Do you have an interest in the field, meaning you understand what good looks like? I.e., avoid investing in sectors you have no understanding of as you are unlikely to know what to follow.
7. Have a Diverse Portfolio
One of the reasons I believe I have been successful with my investments so far is that I have a diverse portfolio. Investopedia recommends having around 15-20 stocks to create a diverse portfolio.
So why should you take this advice? Well, it's all about damage limitation and playing the market. Some Stocks will be down whilst others will be up by having a good mix that allows you to play your odds. Depending on who you decide to open your brokerage account with could help you get started as many offer free stocks.
Sometimes unforeseen circumstances will happen even on the most reliable stocks, so never put all of your money in one company. This is how people lose money on the stock market.
8. Index Funds and ETFs are a Good Place to Start
When you are just starting out, if you want a safe bet, then Index mutual funds or ETFs (exchange-traded fund) is a good place to start. The S&P 500 index fund, for example measures the overall success of all of the S&P 500 companies.
This means low risk for you and being able to invest in lots of companies with one stock. Of course, no stock is risk-free. Even the S&P 500 has had years of losses, but it's backed by good years of gains. It is just known as having the best track record. This is another reason to always play the long-term game. See further down for further details on the S&P 500.
9. Automate Your Investments
Once you know which stocks you will invest in, set up direct deposits each month with a set amount. It doesn't have to be lots, but over time, these investments will add up. This will create a dollar cost averaging investment approach where you benefit from market ups and downs.
Do it in line from when you get paid. This way you won't miss the money and will just treat it like another bill.
You are also then taking advantage of what is known as dollar-cost averaging. This is a common investment strategy that aims to reduce the volatility of the stock market because you are buying stock when it is high and low therefore paying overtime an average price per stock.
The point has a plan of how much you can afford to invest each month and do it consistently. Then over time you will reap the rewards.
10. Use the 50/30/20 Budgeting Rule
If you want to know how much to put aside each month for savings, a good model to use is the 50/30/20 budgeting rule. This goes on the basis that 50% of your income should be put aside for your essential bills i.e., bills you have no option to pay to live. 30% should go towards any wants like a gym membership or dining out. Then the final 20% should be used for savings.
Depending on where you are with your rainy day savings fund i.e., savings you can access quickly should any unforeseen bills happen, you may want to consider splitting your savings into 2 pots. For example, 10% could go towards your rainy day fund and 10% each month into your stock account.
Pro tip: Make sure anything that is in your essentials pot is an essential and not a want. For example, say you have a car on finance, and you could have gone for a cheaper car but choose a more expensive one. Part of this payment should come out of your 30% wants calculation because you didn't necessarily need the more expensive car.
11. Understand Compound interest
I mentioned compound interest earlier in this article, but I felt it deserved its own heading because it's just that special. By understanding compound interest, you can keep your head in the long term. Nerd Wallet defines compound interest as “Compound interest is simple: It's the interest you earn on both your original deposit and on the interest that your money earns. Compound interest allows your savings to grow faster over time.”
Check out the example below where I used a compound interest calculator to show the effect of how much additional compound interest gives you.
As you can see, the green line represents my money plus interest, but the red is if I leave all of my interest in and let that too earn interest. In stock market terms, this means leaving any dividends in and reinvesting so your money can continue to grow.
Want to try it yourself? Check out the calculator here. Just make sure to return back to read the rest of the tips.
12. Understand that the market has ups and downs
Understand that for some months or years that the market will be up and others it will be up massively. This is why it's important to invest for the long term so that you can weather the storms that are part of the package.
Let's take the S&P 500, which is a benchmark of American stock market performance (a safe ETF stock to invest in, by the way). This ETF has an average annual return rate of around 10%. Not bad at all, but if you see in the chart below, even at these great returns, it is an average over the years.
Invest for the long term and get the know the stocks you are investing in, so you don't sell at the wrong time.
13. Reinvest Dividends and Capital gains
On the majority of brokers, you can set this up automatically, and whilst you are building up your portfolio is absolutely the right way to go for a few reasons:
- Allows you to build up your investment portfolio quicker
- Keeps your compound interest building at a faster rate
14. Investing is Boring
Yes, an Investing tip for beginners is that investing should be boring. And that good, you absolutely want it that way! Because you have done sound research about than leaving it alone for the long term.
The exciting part is your profits. Here's what a few of the investing greats have to say about boring investing
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”
“People don't like the idea of thinking long term. Many are desperately seeking short-term answers because they have money problems to be solved today.”
15. Leave Emotions at the Door
My final tip is that you should always make your own mind up about your investments. It's so easy to bring emotions into investing, and emotions are when mistakes can happen.
For example, being over confident about stock and investing too much in that one stock. Sure, you might be right, but always ask yourself can you afford to lose the investment if you are wrong?
Emotions should be checked at the door end. Investing isn't a get-rich-quick scheme, don't let others tell you that. Sure, you can make a lot of money, but you can also lose too – so make sure you outweigh the risks by using logic and spreading your investments.
Investing Tips: Final Words
There is a lot to learn to become a successful investor, but it doesn't have to be complicated. Hopefully, the Investing tips for beginners in this guide will help you on your way to becoming a successful investor.
Are there any investing tips that have served you well? Let me know in the comments below.
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