While I studied economics, I always thought that investing would be really difficult. I was under the impression that investing in stocks, in particular, would be too risky. It would take too much time and I would never be able to make a profit. I would not ask myself: how to invest in stocks? I would just assume it would be too difficult.
Do you see the pattern? I was just thinking, and I was not doing. When I started doing, I realized that everyone starts somewhere and if you take the time to dive into it, anyone can do it. If you are feeling overwhelmed already, please continue reading this investment guide for beginners. I will explain to you the basics of how to invest in stocks, so you can start doing yourself!
If you are interested in bonds and ETFs as well, please read on to part 2 and part 3 of the Investing for Beginners series:
- Investing for beginners: the how-to of investing in bonds
- Investing for beginners: the how-to guide for ETFs
Overcoming Your Biases
The first step in starting to invest is overcoming your biases. Ask yourself: what are my biases regarding investing in stocks? One example could be the ones I mentioned already: I am not qualified enough to invest, or I don’t have the time to start investing.
Where are your biases coming from? Are they coming from uncertainty or lack of knowledge? It is important to take action to overcome these biases and rise above them. I know you can do it! Want to read more about overcoming your biases? Check out my article about the mindset of the rich – Rich Dad Poor Dad book review.
What Are Stocks?
Stocks – or shares – are small ownership pieces of a specific company. When the company does well, our piece of the company appreciates in value.
If there are more investors seeking to buy a piece of the company, demand exceeds supply. If demand exceeds supply, the price of the stock increases.
We expect companies to grow in the long term. The natural movement of the stock market, in the long run, is up. Even when we see crashes in the market, the market will correct and move upwards again. The average historical stock market growth is 7%, which is much better than you can get on any savings account at this time.
[Related Read: Get Over Your Fear Of The Stock Market And Start Investing]
Why Should I Invest In Stocks?
I can understand that you would think: why should I invest in stocks?
First of all, the natural movement of the stock market is up. Since the average return on investment historically is 7% per year, we can see that this is true for the past 100+ years. So you would hope to increase your investment over time.
When companies are in the market for a long time, they have matured. When companies have matured, they will most probably not provide you with an average annual growth of >10%. What they can do is provide you with dividends. A dividend is a part of the profit that the company is not reinvesting. They instead are paying their profit to their shareholder, as their way of saying ‘thank you!’. Mostly quarterly, sometimes monthly, companies pay out dividends. When you are also reinvesting these dividends, it will increase your return even further!
Do Your Own Research
This part is very important! Do your research when investing in stocks. Don’t be that person that thinks: ahh Facebook had +15% return this year, let’s buy it. Or: I like my MacBook, I really think I should invest in Apple, they make products I like.
If you are biased regarding one specific company, be careful! If you like the company, or you have a certain perception about a company, does not mean that the company is generating profit. You want to look for companies that are making a consistent profit over a specified period of time!
Look for stock tips online and do your own research!
Related reads about the stock market:
Are you already investing in stocks? Let me know below!