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Investing in the stock market has never been that easy. All you need is a brokerage account and small capital to start investing. But obviously, there is more to it than just that. What is your strategy? Are you a short-term investor or long term? To determine all of that, you need to understand the nature of the stock market.
Too much to unpack? Let’s start from the beginning with the first step of saving money for your investment.
1- Save money for your investments
This step might sound simple, but money invested in the stock market is money you do not need for at least the next five years. Anyone can invest in the stock market; it does not matter how much money you make as long as you can lower your expenses and save a certain amount of your income toward your investments.
It is not about how much you make, It is how much you keep
To save money, start writing down all your expenses and see where you can make necessary cuts to redirect that money into the share market. On average, saving 10% of your income is a good start which, over time, can build up to strong equity that is ready for investment.
Living below your means is the first step to financing your investments; if you cut back on expenses that are not necessary, you can save enough to start investing. Although you can begin investing at as low as $100, you should know that brokerage fees when you invest can be high. Therefore, you should save some good capital, at least $1000, before thinking about investing.
However, most of the time, investing in the stock market is not about just putting your money toward any company you like; there are a few checkpoints that you need to go through before investing. So there is no need to rush. Take your time to build as much capital as possible; it will make sense in step 3.
2- Have an emergency account
Make an emergency account that can keep you going for at least three months if you lose your job or are in a crisis – Like a Pandemic! – that can keep you going without the need to exit your investment positions. This account should only be for emergencies, not unnecessary expenses.
This step ensures that you are protected from any unforeseen bills or fines you might get where you do not have to ask anyone for money or, worse, exit your position in the stock market and end up with a loss. In addition, having an emergency account will ensure that you are not stressing about money every time something happens, and you can pay any unexpected bill.
Find out how much you spend in a month on rent, gas, food and other expenses, then multiply that number by three.
Put all that money in a separate account from your daily expenses and give it a neam such as an emergency account. You can start with a balance of $2000 and then find out how much you need to save a month to reach your target within six months. Then keep growing this account slowly by allocating a small percentage of your income to this account; an amount as low as $50 a month can help grow this account over time.
Now you are probably wondering how long it will take to start investing in the stock market; it depends on your annual salary and expenses. Therefore, reducing unnecessary expenses is essential to start investing in the stock market. More importantly, having an emergency stash of cash can make you less worried when you go to bed every night.
If you do not know much about the stock market, the next section will be an eye-opener.
3- Understand the stock market
The stock market is not that complicated, but it is also not a gamble. There is a company behind every stock you buy. If the company does well and increases its profit year after year, the stock price will become attractive to many investors to buy the stock, increasing the demand for the stock price and forcing it to go up.
Subsequently, if the company is not doing well and its earnings are declining year after year, it will become less attractive to investors, which might trigger some selling which reduces the demand for the stock forcing the price down.
The general idea of making money in the stock market is to buy low and sell high. The opposing argument to this saying is when is high and when is low? Well, the simple answer is no one knows.
Even Warren Buffett (The world’s best stock market investor) does not know and can not predict when a certain stock will go up or down.
So what is the catch?
The catch is that the stock market can be rational for a short period but irrational most of the time, making it generally risky.
Example of a rational and irrational stock market
A rational stock market is usually when a stock follows the company’s success and earnings that are not triggered by short-term market issues.
Subsequently, the irrational market is the one that is affected by short-term market issues, such as supply shortages or short-term market issues with the business that force the price down. On the other hand, the stock price could be extremely high and overvalued because of short-term market excitements.
How to invest rationally in the stock market?
In general, when buying into any asset, you need to keep the following in mind:
- Does the company make sense to you?
- Will the company be in business for the next 5-10 years?
- How is the company going to increase its earnings in the future?
- Does it have good management?
The questions above are what every successful investor should ask, which will help you understand the company’s financial position.
How can you teach yourself the stock market?
Every publicly traded company must publish its financials periodically, which are available to investors to review to decide if they want to invest in that company or stay invested in it.
Successful investors will look for a company’s competitive advantage or moat and good management that can run the company and make firm decisions.
The best way to teach yourself stock market investing is to read investing books. See our Guide for the TOP 10 books to read to teach yourself stock market investing and which is best for your situation.
Some famous market investing books:
Peter Lynch, a successful stock market investor and the author of One up on wall street and the former manager of the Magellan Fund, says that investing in the stock market should not be complicated if you stick to what you know, which is also known as your circle of competence. This is one of his videos that shows how irrational people can be when investing:
4- Find a low brokerage fee account
You need to realise that with investing, you have to factor in the brokerage fee, conversion fees (if you want to invest in international markets), and capital gain tax, which eat up your profit. Therefore, finding a low brokerage free is the first thing you need to do before investing. This is what you need to find in a good brokerage account besides low fees:
- Have good exposure to the international market
- Allow you to buy a variety of assets: stocks, bonds, ETFs, commodities
- Have options such as stop, limit and market orders.
5- Have a strategy
Now that you have set up your finances, learned about the stock market, and signed up for a brokerage account, you are ready to invest in the stock market. In general, there are two ways to invest in the stock market: active and passive. Below is an explanation of each strategy and when and why you should follow every strategy, with a link to a detailed guide on applying each strategy.
Active investing
As the name suggests, this is a very active way to invest in the stock market. You have to know the company you are buying, track its earnings every quarter, and stay updated with its recent achievements and issues.
Generally speaking, this investing type is unsuitable for people with families or a busy lifestyle. This type of investing can be risky if the investor does not understand what they are buying and cannot determine the company’s fair stock price.
You need to dive into the company fundamentals to determine if this is something you want to hold for a certain period of time. There are a few ways to pick stocks individually. The most famous one is value investing.
Value investing is when you analyse the company’s competitive advantage and management by reading its annual report and then determining the stock’s fair value.
To learn value investing in detail, read: Guide to value investing and picking individual stocks.
Passive investing
This is a less risky option with a very low attention style of investing and is suitable for those investors who do not have time to pick individual stocks.
Passive investing is basically buying a collection of stocks that you can buy through Exchange-traded funds or ETFs that track specific markets by following the top-performing companies. The S&P 500 is the most well-known ETF, which tracks the top 500 companies in the U.S.
This type of investing is passive because stocks tend to perform well in the long run. Therefore, if you invest in ETFs, you need to understand that the longer you hold your investments, the higher your return will be.
If this sounds like an attractive option for investing, you can read our Guide To Invest In ETFs to better understand market tracking ETFs and how to put your money on autopilot.
