Investing has been preached in many parts of the world and on the internet as the best way to make money or build wealth for the long-term. There have been stories of people that built investment portfolios worth millions of dollars in a few years and the story of Warren Buffett: one of America’s greatest investors.
Surely, these success stories must have been what drove you to consider investing. However, you should know that investing is very risky and if you’re not investing for the long-term, you could end up losing your capital and go home with no gains.
Our ultimate guide to investing is aimed at beginners who are scared of the market, have zero knowledge about investing and interested in investing.
What is Investing?
Investing is putting your cash into a venture with the expectation of achieving a profit. Investments are aimed at providing long-term profit and creating long-term wealth.
Investments could be in shares, bonds, funds, art, books, wine or paintings. Any venture that you put your money in while expecting profit is an investment.
However, this guide only covers investing in the stock market. Investing in the stock market is all about buying shares of a publicly-traded company with the aim of making a profit.
As easy as it sounds, there are crucial steps, techniques, and strategies that have to be applied when buying shares. These techniques could include you going through the financial statements of a company and considering its growth in the stock market and the growth in the economy before making a decision.
This might seem pretty difficult for those individuals who are not financially inclined. Still, there are ways to invest in the stock market and make a profit without using these techniques.
How Does the Stock Market Work?
A stock market is a place where shares are traded. Through this platform buyers and sellers can meet to buy and sell shares that are listed on the market.
A stock market usually refers to one of the major stock market indexes such as the S&P 500 or the Dow Jones Industrial Average.
The stock market works through a network of exchanges, for instance, the New York Stock Exchange. Companies list shares of their stock on an exchange through an initial public offering (IPO).
Each share has a value attached to it. Investors purchase the shares by paying for their value in cash. Through the IPO, the company raises money to grow its business and gradually increase in value.
As the company grows, so does the value of its share. Investors can choose to sell off the shares they own to other investors or allow it to continue growing.
How Can You Gain From the Stock Market?
There is no definite answer as to how much you can gain from investing in a certain stock or how fast you should expect profits to come rolling in.
Investing in the stock market is risky. You could end losing your money if the company loses value or folds up. When a company is unable to operate as it should or fails to grow, the price of its shares will lose value which means you will be counting losses if you choose to sell the shares of the company at that time.
For instance, when Facebook did its IPO in 2012, it offered its shares at $38 per share. Today, a Facebook share is worth over $180. There are many other great examples, however, there are also examples of companies that crumbled or lost value some months or years after its IPO.
An example of such is Jumia. When Jumia launched its IPO, a share of the company’s stock was valued at $14.50. In a few weeks, the value rose to over $40. Unfortunately, this was short-lived as Jumia shares have crumbled in value. Today, a share is only worth $6.77 which is below its offer during its IPO.
These examples should help you understand the dynamics involved and what to expect if you decide to invest in the stock market.
What You Should Know About Investments And Risk
Overall, investments are risky. You could end up losing your money or becoming a billionaire like Warren Buffet. But there are different levels of risk attached to different types of investments. High-risk investments usually bring in more profit if things go well and heavy losses if things go awry.
To avoid heavy losses during investments, you will have to diversify your investment portfolio i.e invest in different companies and industries.
With investing, you should not expect results in less than five years. You should also review your investment portfolio, monitor market trends and track the companies you have invested in so that you stay up to date on the state of your investments.
How Much Should You Invest
Years ago, you would need to have a stockpile of cash to be able to invest in the stock market. This was mostly true as investors who invest more money into the stock market usually make more profit.
With the rise of technology and the introduction of investment apps, you won’t need to keep a fortune aside for investing. Some investment apps allow you to invest in fractional shares which make things far easier for the average investor.
Another thing, you should never invest more than you can afford to lose. This rule of thumb applies to all investors regardless of their investing power. In the event of a stock market crash, you will be able to easily recover from heavy losses.
Investing your entire savings into the stock market wouldn’t be a good idea if you hope to use the money in less than five years. According to many financial advisers, it is best that you invest for at least five years. The longer you invest in the stock market, the higher the chances of you earning huge returns.
How To Invest
Through A 401(k) Retirement Plan
If you’re employed in the U.S.A, then you’ve probably heard of a 401(k) retirement plan. A 401(k) retirement plan is a retirement savings plan sponsored by an employer. This plan lets workers save and invest part of their paycheck before it is taxed.
Through a 401(k) plan, you earn money by selling stocks and bonds after their worth has improved or you can earn from company dividends and bond payments.
Investing from your retirement savings plan is one of the safest ways to invest as a beginner. You can start by investing as little as 1% of each payment or invest more so that you make more gains.
Through A Robo-Advisor
Investing can be risky. Sounds familiar? We’ve said it a lot of times. Sometimes, it would be best to leave the investing to a professional that knows what they are doing. Thanks to Robo-advisors, you can simply choose your investments and relax while these services manage your investments for you.
While they make managing your investments really easy, Robo-advisors also charge low fees relative to human investment managers.
Employing the services of a Robo-advisor is a great way to start, especially if you have very little money to invest. Robo-advisors can help you build an investment portfolio and educate you on the basics of investing.
Investing In Mutual Funds
Mutual funds are compilations of stocks, bonds, and other investment assets. A mutual fund is operated by a professional fund manager who invests the fund’s capital in investment assets with the expectation of making a profit for the investors.
A mutual fund portfolio is diversified (it contains different investment assets with different levels of risk) making it a good place for a beginner to make his first investment.
Mutual funds are not really different from hedge funds. A hedge fund uses the same principles as that of a mutual fund, however, in a hedge fund, only a few accredited investors are allowed to invest their money to buy assets.
Beginners should concentrate on mutual funds as they are open to an unlimited number of investors and do not have as many restrictions or requirements as hedge funds.
Investing in mutual funds is no different from investing in the stock market. The profit and loss in the mutual fund depend on the performance of the investment assets and the financial market.
Luckily, mutual funds contain a wide variety of stocks, bonds, and commodities, so the chances that you will make huge returns from your investment are higher.
Index funds and exchange-traded funds (ETFs) are quite similar to mutual funds and follow the same principles, however, there are some differences between these investment assets which mostly relate to the cost of investing and how the funds are traded.
ETFs have been praised as one of the safest ways to invest, especially if the right strategies are applied, however, investing all your money in a certain asset just because your financial advisor directed you could come back to haunt you.
Investing Directly in Stocks
Rather than investing through a retirement plan or through a fund, you can invest by buying shares of individuals companies directly.
To do this right, you will have to apply very important strategies that will help you determine the value of a company, the possibility of the company growing in the future, and how much you should be paying for a share of the company.
Below are some of the things you will have to do before purchasing the shares of a company
- Calculate the value of the enterprise
- Calculate the gross profit margin and operating profit margin
- Compare the gross profit margin and operating profit margin of the company you wish to invest in that of other businesses in the same industry.
- Read the income statement and balance sheet (You will need to have significant business knowledge for you to interpret these documents).
- Check for the shareholders in the company, especially the ones who hold large stakes.
There are other things you would have to consider and check before you can finally make a decision. This is why most people prefer investing in mutual funds or exchange-traded funds. But if you believe you’re up for the challenge, you can go ahead and invest.
Do you really need A Financial Advisor To Manage Your Investment?
A financial advisor already has more experience than you do when it comes to investing and managing investments. Getting a financial advisor will help you avoid some common mistakes beginners make when they start investing, however, this doesn’t mean that you will be guaranteed a profit in the stock market.
To consider if you need a financial advisor or not, you will have to take a look at how much you plan to invest, how much you expect to gain, and how much you can afford to pay a financial advisor.
Also, there is the issue of getting the best financial advisor. Top financial advisors that are great in their craft don’t come cheap. If you want a professional that will point out profitable investment opportunities and help you manage them, then you must be ready to invest millions of dollars and brace up for high fee charges.
Investment apps are becoming very popular, which could be due to the rising interest of individuals in investing. Also, investment apps charge low fees and allow you to invest little money, sometimes less than a dollar.
If you’re looking for a low-risk investment opportunity or you can spare only a little cash for investment, then you should first try out investment apps.
Some of the best investment apps include Merrill Edge, Acorns, Betterment, TD Ameritrade, and Ally Invest.
Remember to always think of the long-term when investing. The best results only come to investors who aim for long-term profits.
Investment Books For Beginners
To be a successful investor, you will need to have knowledge about the stock market, how to value a company, how to identify the growth potential of a company, and how to discover unexplored investment opportunities.
The only way to know all there is to read materials and guides by other successful investors.
In this section, we have handpicked the best investment guides that will help beginners step up their game and make the right choices when it comes to investing.
1. The Little Book of Common Sense Investing
John C. Bogle is one of the most famous investors in America. He is known to be the pioneer of the index fund having created the first index fund. He is also known as the founder of one of the world’s largest investment companies, the Vanguard Group.
In this classic guide, Bogle reveals his secrets to getting more out of investing, low-cost index funds. He also shares investment strategies through which other investors can build wealth over the long term.
Author: John C. Bogle
Current edition: 2 Edition (October 2017)
2. How to Make Money in Stocks Getting Started: A Guide to Putting CAN SLIM Concepts into Action
In this book, beginners will learn the right steps to take before investing. The book contains lessons on money, factors that determine which stocks to buy and which to ignore, and how to identify market trends that could lead to profits.
This book mainly focuses on the CAN SLIM system created by William J. O’Neil. It explains how you can put the system into practice and become a successful investor.
Author: Matthew Galgani
Current edition: 1 Edition (June 2013)
3. The How to Make Money in Stocks Complete Investing System: Your Ultimate Guide to Winning in Good Times and Bad
Through this book, new investors will learn proven techniques for buying stocks before they make big price gains, tips on picking the best investment assets (stocks, mutual funds, and ETTs), how to identify profitable trends, and the common investor mistakes to avoid.
This book also introduces the CAN SLIM investment strategy which has helped O’Neil gain 2,763.3% in 12 years.
Author: William J. O’Neil
Current edition: 1 Edition (August 2010)
4. Stock Investing For Dummies
If you need a book that will prep you on the basics of the stock market, help you navigate through the stock market, and help you choose the right stocks to invest, then you should go ahead to get Stock Investing For Dummies by Paul Mladjenovic.
This book uses real-world examples to show you how to incorporate stocks into your portfolio, how to balance risk and rewards, and how to identify and explore new investment opportunities.
Stock Investing For Dummies is the right material for beginners who have zero knowledge about investing.
Author: Paul Mladjenovic
Current edition: 5 Edition (May 2016)
5. Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
Investing QuickStart Guide by Ted D. Snow is an excellent investment book for beginners looking to create passive income and retire early. Through this material, you will learn how to create real wealth in the stock market and avoid the most costly mistakes that beginners make.
The book also teaches you how to identify profitable stocks and how to day trade them effectively.
Author: Ted D. Snow, CFP®, MBA
Current edition: (September 2018)
6. Stock Investing for Beginners: How To Buy Your First Stock And Grow Your Money
Through the stock market, you can grow your money into considerable wealth, that’s if you can learn the basics and follow the rules of the stock market effectively.
In this book, you will learn why you should invest in stocks, the basics of stock market investing, how to buy and sell stocks, and key strategies to protect your stock investments from losses.
Author: John Roberts
Current edition: (April 2017)
7. Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies
Investing for the long-term has been the investment strategy of top investors for a long time and this strategy has helped them build their investment portfolio and create wealth.
To be successful, you will have to follow this same investment strategy. Stocks for the Long Run by Jeremy Siegel explains how you can make the right investment decisions and build wealth for the long term.
Through this book, you will learn the sources of long-term economic growth, how to navigate the market, and the techniques used by top investors to identify profitable investment assets.
Author: Jeremy Siegel
Current edition: 5 Edition (January 2014)
8. Penny Stocks For Dummies
Penny stocks refer to stocks valued at less than a dollar. Just like any other stock, investing in penny stocks is very risky, but could lead to huge returns if the right steps are taken.
If you’re a new investor and you are interested in investing in a penny stock, then Penny Stocks For Dummies by Pete Leeds will give you the needed knowledge to make smart investment choices.
Through this book, you will be able to grasp the basics of penny stocks. You will find the latest information, tools, strategies, and techniques you will need to master before considering investing in penny stocks.
This book will provide you with the knowledge needed to identify lucrative penny stocks, help you find undiscovered penny stock and help you identify growth trends and market sectors that could be profitable.
Author: Peter Leeds
Current edition: 2 Edition (April 2016)
9. Warren Buffett Accounting Book: Reading Financial Statements for Value Investing (Warren Buffett’s 3 Favorite Books Book 2)
Reading financial statements is one of the steps an investor will have to take when determining the right company to invest in. This crucial step helps the investor to make the right value investing decisions.
In this book, you will learn how to calculate the intrinsic value of a company and how to read an income statement, balance sheet, and cash flow statement. You will also learn how to properly value any business and how the determine its growth potential.
Author: Stig Brodersen and Preston George Pysh
Current edition: Buffett Book Edition (April 2014)