This Beginners Guide to Investing in Stocks is a three-part series designed for anyone who has considered getting started with investing in stocks. Three articles will focus on why we risk investing money at all, what the stock market can do for the average investor, and exactly how to buy stock. We’ll answer the “why” first, since you should know why or if you should even investing in stocks before you figure out how you do it. *
Part 1: Why we risk investing in stocks
Let’s talk stocks and how to start investing. Not now? These are scary times – and you don’t want to lose money investing in stocks?!
Yes, March 2020 will hit the history books as a time that changed our world socially and economically. Last December we weren’t thinking a virus would become a global pandemic in a few weeks and send the Dow plunging from a high of nearly 30,000 to just under 20,000 in a handful of trading days in March (it’s a bear market?). Or rising before March ended, recording the best “up” days in 80 years. (so…it’s not a bear market?!).
Confused whether this is the time to be investing in stocks and the stock market? You are not alone.
Whether you’re 18 or 80, you can’t help but notice how some of this financial stuff keeps happening. Even if you didn’t know (or care) that the stock market has been seesawing up and down, you’re still reading news that might make you freak out about the future and worry about your finances. Or, maybe you just cringe when watching your 401K or IRA balance gyrate.
Some gutsy folks aren’t panicked, however. They’re actually investing in stocks and buying shares (or seriously considering it). Are they foolish, or do they know something others don’t know? Aren’t they worried about losing money by investing in stocks?
Investor FOMO in investing in stocks, “follow-the-herd” mentality
Yes, this is a nail-biting time, whether you’re a bystander, beginner or experienced investor. But is this the best time to invest? Do it now or hold off for a better time? That is the million-dollar question, isn’t it?
So you just shrugged and decide (as many do) that you’ll simply avoid any correction or a bear market. You will stay out until things calm down and then jump in? Uh-huh, along with everyone else. That’s the herd mentality in action. You’re thinking what’s the harm in waiting until you’re certain better days are here to stay? Ah, remember that no one knows exactly when the market will go up.
So adopting this wait-and-see attitude can mean you miss some of the best days in the market’s rebound. Experts will acknowledge that investors often make their money by staying in or buying during a bear market. But you don’t know that until it’s long over. Hindsight is 20/20 vision, right?
If this is the first extensive market volatility you’ve actually noticed, you might feel less anxiety knowing the market recovered well from former rockiness. We’ve had more than 30 bear markets and 100+ corrections in the last 120 years or so, which is down time about every two or three years.
Surprised? Well we haven’t seen much in the way of big downsides for you to notice lately, have we? We’ve been in an historically long bull market period. March 2020 could have been the start of a drop that signaled our first bear market since the recession of 2008-9.
Investing in stocks is path to gain wealth
If you can’t predict when you should be invest in the stock market, then why even do it at all? The main reason you invest is to build a financial nest egg, or make money. Because, you just can’t save enough for retirement if you only put money in savings and money market accounts today, like your grandparents (and maybe your parents) did.
Check this interesting factoid: Over the last 200+ years, the stock market has been the best place to invest your money to build wealth. Doesn’t mean every year is great, or that every investment you choose is a winner. However, the market has marched higher over its history. It just doesn’t go up in a straight line. When you invest, you have to realize that every day is not an “up” day, and you won’t make money everyday either.
Of course, no one wants to lose money investing in stocks. You invest in the market thinking you’ll magnify your nest egg not shrink it! So yes, it’s psychologically difficult to invest hard-earned money into a choppy market or stay in one that wallows in the doldrums for years. That’s why most won’t do it. (Particularly if you are a beginner.)
More often, people wait. When everything looks rosy and more predictable, they tell themselves they will then return or begin investing in stocks. But they may never see their “safe” time to buy in. “Some day” keeps getting later and later for them. Most miss out because they fear the drops rather than focusing on the potential upside of the market.
There is not one best day or one best investment pathway to take. You must take your own circumstances and personality into account. Despite no ideal course of action, some investors will wait to hear consensus from the “collective” of financial talking heads to tell them what to do. Others leave everything to their financial advisors and hope (or assume) those strategies pan out. Others invest a little, lose some and never try again. At any rate, investors benefit most from learning our Tip #1 early: With reward comes a risk. Understand your own risk personality to be comfortable with your investment choices and gain rewards.
Investment risk is a personal thing
Many, many people limit their ability to gain wealth because they sweat the risk they perceive comes with investing in stocks. But the risk of not growing your nest egg shows up in your finances a few ways too, for example:
- It’s a risk to keep money in an unregulated financial institution or under your mattress,
- It’s a risk to keep money not needed immediately in a savings account that earns very little,
- It’s a risk to avoid making any financial moves – procrastination,
- It’s a risk to not learn how to invest.
An investor should be comfortable with how much risk to take in order to make money with an investment. We all have our own idea of what being risky means, however, and your idea might be too much for me. Plus, understand that risk tolerance and risk capacity are two different things. For example, stock investments that appear risky to a 70-year-old investor could be the same growth stocks that excite a 30-year-old with a hefty income. These investors have different risk capacity. So they should measure the time they have to make money in the market differently. The younger you are, the more capacity you should have for risk because you have a longer time in the market to be rewarded.
On the other hand, risk tolerance is how you generally feel about losing money compared to reaping a reward. How well can you tolerate the idea of losing money or being stuck in a bear market? Some investors may feel crabby or a little anxious when the market plunges, but they aren’t so nervous they get a stomachache, stay awake at night, or freak out like others may do.
How risky you are in one part of your life can often reveal how you might feel when it comes to taking risks with your money. Most of us fall neither in the “very risky” camp nor the cautious group. Rather, we will fall somewhere in the grey middle. Only you can determine how much risk you feel you can handle, and your risk personality can give you clues to do it.
So everyday, some investors buy while others sell and still others stay out of the market entirely. A variety of risk personalities are at play here. Ironically, having willing buyers and willing sellers every day is why stock markets function as they do. Knowing how comfortable you are with the risks you take in the market is important to understand before you buy.
Ooops…you’re in the market but don’t know anything?
There’s a good chance you’re already exposed to the stock market. Ok, maybe you don’t have a brokerage account yourself yet. But if you’re enrolled in a 401K or another retirement plan at work or have an IRA (Individual Retirement Account) with an index fund, you’re in the market. However, you may not understand exactly what product(s) you’re invested in or how risky (or cautious) those investments really are.
You. Are. Not. Unusual.
Yet cashing out your investment because you don’t understand where a down market will go is not the best strategy, especially if you have plenty of years before tapping into your accounts. In addition, jumping in and out of the market – trying to use market timing – is not a good recipe for success either.
So if you’re going to have investments, it’s key to learn about the products you own, understand how they make money, and know what they’re costing you. That means we start by understanding the financial terms themselves —just like knowing sight words before we can learn to read. This is our next lesson that benefits investors, Lesson #2: Build a good financial vocabulary from the beginning.
Even in reading this article, you may skim over financial words you think you know but can’t quite define. Start your vocab lesson right there. We’ve boldfaced some of those financial terms – like index fund, IRA, 401K, bear market, market timing, risk tolerance, etc.
Building your vocabulary isn’t difficult to start, nor do you have to memorize an investor’s dictionary. Begin by reading financial articles from reputable sources, like Morningstar.com, Kiplinger.com, or MoneyGodmotherBlog.com. When you come across a word you don’t understand, find the definition, perhaps at investopedia.com. Do this regularly and your financial vocabulary will grow quickly. Along with this, your overall financial savvy will bloom too.
Similar to having a financial vocabulary, we should know the basics of how the stock market works for investors like you and me. Besides, you’ll fare better if you learn how to do it from the ground up, rather than just guess or rely on a few hot tips. Because, the underlying building blocks of the market are stocks of publicly traded companies.
Oh, you can’t do stocks? You’ve heard that’s risky?
A few will spend time upfront to learn how investing works, but more will decide to learn after they’ve lost money. Or, they just assume it’s too complex to do. When you understand how to buy and sell stocks, it’s much easier to evaluate, buy, or sell other investment products that also use stocks — like mutual funds, exchange traded funds, target-date funds, index funds.
I can tell you why (and when) I learned how to invest in stocks: As you may know, I’m an entrepreneur who writes about money and a financial educator. When I was young and newly married, brokers and financial advisors eager to sell something would call and ask to speak with my husband. They never wanted to talk to me (and assumed I had no say)….and that made me mad. It wasn’t that my husband couldn’t do it (he could), but I liked the money and investing chores better. After several brokers snubbed me, I decided I would learn everything I could about stocks, and they would want to talk to me. So I started reading and learning. My first stock buys were a few shares of Caseys, Inc. and Pioneer Hi-Bred International, Inc., two local companies I knew.
Then, I discovered an investment club – and the day (in fact, the very hour) I was joining this club, the stock market was having its worst day since the Great Depression! Great. I was queasy, afraid I was making a huge mistake.
But what amazed me that morning about this club of 22 women (most more than twice my age) was how the market was dropping, dropping, dropping and they were only buying, buying, buying. They didn’t even hesitate! Quaker Oats…Procter & Gamble…Johnson & Johnson…IBM… They went big.
Learning to invest is not rocket science
Now it took me forever to decide to jump in before I made my two teeny stock purchases. I kept second-guessing my decisions. But, whoa! I thought these women were gutsy! That club taught me so much, and it’s part of the reason I like to teach others about stocks. (Being part of a club is a great way to learn, but most investors don’t join a club.)
I learned a valuable, lifelong lesson the very day I joined these women investors, which is our Lesson #3: Invest in what you know (and you don’t know everything) so you are confident to take the plunge. These women were not listening to hot tips or guessing. They based their buys on what they understood and knew (and had researched) on these blue-chip companies.
They weren’t fearful or waiting to decide either. As the prices were getting hammered down with the market crash, these stocks were “on sale” that morning. And they knew it. They were confident they understood the companies’ past performance and future potential. To these women, their purchases were an educated risk. The result? In short order, the market rebounded, those stock prices rose, and the club made money.
It’s not as hard to invest in individual stocks as you might imagine. Perhaps you have an interest because your grandparents opened a brokerage account and gifted you a couple shares of stock. Maybe you’ve discovered a popular investment app like Stash, Acorns or Robinhood that’s been fun to test drive. Or maybe you made a contribution to your work retirement plan (401K, 403b, 457) and got interested.
But. You. Haven’t bought a stock. Yourself.
Now, investing is not rocket science, but learning how is key. Sure, you may have heard friends or relatives do the humble brag about following a tip or hunch and snaring a quick profit. That is not learning how. Likewise, you don’t need to be an expert, nor do you need to be wealthy to start on the investing path. But as many say…you can’t win if you don’t play. Which brings us to Lesson #4: Starting small is okay, maybe preferred. Just keep investing, learn as you go, and be patient.
Start early, even if you only invest small amounts
Over time, investing in the market can turn a tiny nest egg into a larger basket of wealth. But you have to take the plunge – or at least dip your toe in – to reap the rewards. Then, you can put the magic of compounding to work.
This scenario of two young grads shows why starting early is key: Emily and Elle went to the same school, graduated the same day, got similar jobs at the same employer, for the same salary. When they showed up at the orientation meeting, they got a benefits packet with a form to do an auto deduction from their paycheck, to save for retirement.
That time seemed so far away, and frankly, irrelevant.
Emily said, “I know I need to get some clothes for work, need new tires for my car, want some furniture for our apartment, and we have to go to those 3 weddings… But what the heck, it’s only $20 a week. I’ll go ahead and sign up now. When I want to get a new car or house, I’ll stop doing it.”
Elle sighed, “Yes, I need some clothes for work, new tires for my car, furniture for our apartment…and we’ll go to those 3 weddings… “I can’t possibly spare $20 a week! I need to wait, when I can save much more. I’ll sign up later.”
So Emily ends up stashing away $20 a week, which is roughly $1,000 per year. She saves this for the first 10 years and stops cold turkey. That means Emily put in $10,000 of her pay. Elle starts the same year Emily stops. But Elle puts in three times as much – $3000 a year – for twice as long – 20 years. Elle puts in $60,000 of her pay.
Over 30 years pass as Elle and Emily make identical investments. Who ends up with more???
Surprise – Emily wins! And even though Elle contributed six times as much pay as Emily, she will never catch up, given their investments return stay identical. In fact, the more years we go, the more Emily’s nest egg grows larger than Elle’s. And Emily didn’t put in one DIME after year 10 either. Does Emily’s $20/week choice look that painful? Nope.
Who would you rather be? I’d like to be Emily. This is why starting early makes such a big difference. So start investing early.
Be patient and let the magic of compounding work
Investors also need patience to stay in the stock market and let this magic of compounding scenario work.
Here’s a true conversation I want to share: After a dean at a major university and I became friends, she told me about the estate her father left to her and her siblings. It seems her family grew up in a major Midwest city and had very little money. Her dad worked in a shoe factory and her mom stayed home to care for the four kids. The parents considered it very important to give their kids a great education. Even though money was tight, the dean went to college and even got her PhD.
She didn’t believe, that besides their small home, her parents had much of a retirement nest egg, let alone an estate. But years later, she was dumbfounded when the adult kids received a tidy sum of six figures to divide. Wow….what a nice inheritance for each one. The Dean couldn’t believe her dad accomplished this on his factory worker wages. I bet you can guess the answer.
Yes, her father had learned how to invest and spent $25/month to buy one stock or another throughout his working life. What a great retirement and legacy he created! The problem is….this well educated, high ranking university administrator had no idea how to do what her dad did. So she wasn’t. Too bad the dean’s father didn’t show her how.
Yes, here’s a factory worker who simply learned how to invest in stocks early in his life and kept plugging away at it. There are many others who do the same. Most are not rich, and they don’t know it all before they become investors. In fact, most will buy only a few shares (or fractional shares) at a time, not hundreds or thousands of shares.
The point is…you are more like the shoe factory worker, and not like Warren Buffett, when you start investing. But even Warren was not brilliant or wealthy, nor an expert investor when he started. (Rumor has it he was 11 or 12.)
Hopefully we’ve set the stage in answering why you should learn about the stock market to build a nest egg. Perhaps one takeaway today is that investors are made, not born. You can become a good investor.
Next, we’ll focus on what to know before you invest, like: What is a stock anyway? What exactly is the market? Stay tuned as we build on the investing we should first understand:
Lesson #1: With reward comes a risk.
Lesson #2: Build a good financial vocabulary.
Lesson #3: Invest in what you know.
Lesson #4: Starting small is okay, keep investing, learn as you go, and be patient.
*This content is presented as strictly educational in nature, with the understanding that the publisher and author are not providing legal, investment or other professional services and are not liable for any loss, damage or injury. Investors should seek the assistance of competent professionals.
Did you enjoy this article? You might check out part #2 and part #3 of the series.
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