How To Invest In Stocks: A Simple, Thorough & Clear Guide

By
William Hughes
·
October 11, 2021

Believe it or not, you’re probably already investing. Most of us are, but just don’t realize it. If you have a savings account with a bank, then you're probably earning between 0.01-3% interest per year. This is because the bank invests your money and gives you a small percentage of the profits.

It sounds great — free money!

The problem is, you could be making far more money if you were doing the investing yourself. All of the same principles apply, but you get to reap more of the rewards.  

In this guide, we'll teach you exactly how to do that, so you can learn to invest like Warren Buffett and the rest of Wall Street.

Like many beginner investors, you probably feel overwhelmed, with no clue where to start investing. What makes this even more challenging is that there's so much information available on investing for beginners. It’s hard for you to separate fact from fiction and find concrete information that will help you in your investing journey.

That's where we come in.

So, how do investments work? What is the best investment for beginners? Is it possible to invest on your own or do you need a fancy financial advisor? Do you go with an online broker or a brokerage firm? Where's the best place to get investment advice to reach your financial goals? Can you start an investment portfolio with a small amount of money? Do you need an investment plan or complicated algorithms?

These are just some of the questions you might have and, in this post, we’ll aim to answer all of them.  

How does investing work

To understand how investing for beginners works, we need to look at what investing actually means. A formal definition, for example, is that it involves spending money with the expectation of achieving a profit or material result by putting it into financial plans, shares, or property, or by using it to develop a commercial venture.  

Now, that’s certainly a mouthful and sounds overly complicated. Let's simplify it a bit.

Let’s say you buy a property for $200,000 in July 2021. You then sell this property in July 2022 for $220,000. You’ve made a $20,000 profit.

That’s exactly how any investment works, whether it’s stocks, bonds, real estate, or mutual funds. In the simplest terms, when investing, you want to get more money out than you put in. We’ll now look at why investing can be a good idea and how you can get started.

Why should you invest?

“When you invest, you are buying a day that you don’t have to work.” — Aya Laraya

For most people, the idea of investing sounds out of reach, almost like an impossible dream reserved for people in fancy Wall Street suits with millions of dollars in the stock market.

This is no longer the case. More and more average people are beginning to invest and you don’t need much money to get started.

But why should you invest? There are 5 main reasons:

1. Most wealthy people already do it

Think of a rich person who you look up to. Chances are, they didn’t get to where they are now through wages alone. Instead, a large proportion of their wealth was made through investing what they already had.

2. To achieve your dreams

Whoever said 'money can't buy happiness' is right — it can't. But it does help.

It can improve your standard of living and let you realize your dreams. For example, the profits made from investing could be put towards buying your forever home, learning to waterski, looking after your family, treating yourself to the watch you've always wanted... Money makes more things possible, and the possibilities are endless.

3. Financial stability

Everyone wants to feel financially stable. You may be worried about securing your children's future or paying for your retirement, and often a 401k or mandatory retirement plan just isn't enough. You can cut out the uncertainty by investing in your future and your family legacy.

4. Money in the bank is always losing value

In 1970, $1 would buy ten loaves of bread. In 2020, $3 would buy one loaf of bread.

This is known as inflation or the purchasing power of money, and is essentially a representation of how much of a good or service you can get for your money.

You may have heard the term 'inflation rate,' which is measured as a percentage. If the percentage is high, it means that you can buy less for the same amount of money as time goes on.

When you keep your money in a bank account, you may think it is growing, because it is earning interest. But that’s not taking inflation into account.  

Let’s say your bank account pays you 1% interest each year, so at the end of that year, each $1 you saved will then have grown to $1.01. But if the inflation rate in that year is 5% (regarded as high inflation), each dollar is effectively worth 5c less at the end of the year. So your dollar is now worth just 95c, and your interest adds just 1c to that. Your savings just decreased in value.

In order to make money in real terms, you need to be making a return that is higher than the inflation rate. This is where investing comes in.

5. Time is your friend

With investing, the longer you own (“hold a position in”) a stock, the better chance you have of making a bigger return. Every minute you waste thinking about it, you are losing potential future profits. For this reason, it's best just to start now.

“The big money is not in the buying or selling, but in the waiting.” - Charlie Munger

Don't worry, we'll show you how to get started.

4 good investment categories for beginners

The investing process depends on the category of investment you choose. So let’s first break down the different types of investments suitable for those just starting out.

Bonds

What are bonds?

When companies or governments need capital (money), they have the option of issuing bonds. A bond is an IOU (I owe you) between a company or government and you, the investor. You are effectively loaning them money. The sum of money is called the principal.

The loan is for a set period of time, during which the company or government will pay interest payments called yields. When the bond reaches maturity (the end of the loan period), the original sum (the principal) is returned to the investor.

How can you profit from investing in bonds?

For the average investor, there are two ways to make money with bonds:

  1. A coupon-paying bond pays the investor a set amount of interest, usually a percentage of the bond value. As an investor, you make money through these interest payments, which are usually paid twice annually through the lifetime of a bond.
  2. A zero-coupon bond does not pay any annual interest. Instead you buy the bond at a discount, and when it reaches maturity, you sell the bond at its face value.

Negatives of investing in bonds

Read the fine print

Every bond will have a different set of characteristics (length of time, interest rate, insurance, tax status) and it’s important to know exactly what you’re getting yourself into.

Relatively low returns

While bonds offer low risk, the average return (profit) on bonds is often lower than for stocks, for example.

Your capital isn’t always guaranteed

There is always the risk that the company or bond issuer will default on the interest you’re owed or be unable to pay it. Make sure to pay attention to a company’s balance sheet (how much money they actually have) before entering into an agreement.

Benefits of investing in bonds

Low volatility

Bonds are relatively safe compared to other investments and do not hold as much volatility as the stock market. In other words, the value of returns is more stable, so there is reduced risk involved.

Steady income

Coupon-paying bonds are a great way of securing a steady, passive income (money that you do not have to work for). They are particularly popular with retirees, as an alternative to a 401k or a retirement plan.

Inheritance and tax benefits

Zero-coupon bonds can be used as a vehicle to pass down an inheritance without paying as much tax, and some types of bonds in certain locations can offer other tax benefits.

Varying lengths of maturity

Different bonds offer varying time lengths, from short-term (1 — 2 years) to more long-term holds (10 — 15+ years).

Mutual Funds

What are mutual funds?

A mutual fund is a collection of different investors' money, all pooled together to invest in a shared portfolio of stocks, bonds and other securities.

You, the investor, would own a fraction of the shares in proportion to the amount you invested. If you invested $1,000 in a $100,000 fund, your stake would be 1%. However, as the size of the fund increases, your percentage will decrease (unless you continue to invest more).

How can you profit from investing in mutual funds?

The mutual fund will be controlled by a money manager, which can either be an individual or a large company. Their goal is to make as much money as possible for their investors, through making informed investment decisions into securities they think will be successful.

The money that a mutual fund shares with its investors is called a distribution. There are two ways that money can be added to the distribution:

  1. When a person or a fund invests in a company’s stock, the company can pay out dividends. A dividend is an amount of money, usually drawn from profits, that the company has decided to share with its shareholders. Investors can choose to receive a check or to reinvest the money in the mutual fund.
  2. The fund can choose to sell shares it owns, when the price has significantly increased, resulting in a profit for the investors.

If the fund is doing well and increasing in value, you can also choose to sell your own stake in the fund on the open market for more than you initially paid.

Negatives of investing in mutual funds

High fees

Although cheaper than employing a personal financial advisor, mutual funds still have pretty high fees. Most mutual funds either charge an annual fee to cover administration costs, or are commission-based, meaning they take a percentage of your investment in the fund.

It's also key to note that you must pay the fees, regardless of how well or badly the fund is doing, and regardless of whether or not you are making money.

Lack of control and transparency in holdings

While you can choose which type of mutual fund you invest in (e.g., one that focuses on growth), you will often have no say in the specific securities that are bought. This means that you could unknowingly be investing in companies you wouldn’t want to endorse.

Sitting cash

Funds need to ensure that if you want to sell your holding, they always have cash available to pay you. This means that a large chunk of the fund’s capital (your money) needs to be held as cash. This is known as a cash drag and, as we know, cash that’s just sitting around won’t be making you any money.

Benefits of investing in mutual funds

Diversification

Even though you are investing in one fund, you aren’t putting all your eggs into one basket. Most mutual funds will invest in hundreds of different securities, making them an easy method of spreading risk through portfolio diversification. It is just as easy to invest in one mutual fund as it is to invest in a single stock, but your money is stretched much further. If one of the securities in the mutual fund begins to fail, its effect will be outweighed by the rest of the fund.

Access all areas

In pooling money, mutual funds make it far easier for individual investors (like yourself) to invest in more exclusive investments like foreign equities, or securities that require a large initial buy-in.

Professional management

Mutual funds are run by professional money managers who (should) know what they’re doing. You can rely on the fact that, at this point in your investing journey, they will have more experience than you.

Index Mutual Funds and ETFs

What is a market index?

A market index is a list of different stocks that all have something in common; e.g., all of the stocks could be from the same sector (technology), or country (United States). Market indices provide you with a ‘snapshot’ of the market as a whole.

Two of the most popular market indices are:

The Dow Jones Industrial Average (DJIA)

Arguably the most watched stock index in the world, the DJIA tracks 30 of the most actively traded companies. The list rarely changes and is capped at 30 companies. The DJIA is a good representation of the U.S. market and economy as a whole.

The DJIA uses a price-weighted method, meaning that companies with higher stock prices will hold a larger weighting in the index.

The Standard and Poor’s 500 (S&P 500)

The S&P 500 Index is simply a list of the 500 largest companies in the United States. It’s regarded as the most diversified index and the best gauge of U.S. “large-cap” companies, which are valued at $10 billion or more.

The S&P 500 uses a market-capitalization-weighted method. Market capitalization (cap) simply represents the value of a publicly-traded company. So in the S&P 500, higher-value companies will hold a larger weighting in the index, which is shown as a percentage.

Investing in market indices

Investing in the companies listed in the indices is a good idea if you’re looking for steady returns and relatively low volatility. But while you could invest in each company listed on the indices individually, it would be very time consuming and costly if you had to pay a fee per investment.

Instead, an increasingly popular alternative is to invest in an index mutual fund or an index exchange-traded fund (ETF). Similarly to mutual funds, you can invest in many different stocks, wrapped up in one investment.

So instead of purchasing 500 individual stocks, you can invest in one index fund or ETF.

Index Funds

An index fund is a type of mutual fund, and follows the same principles. It aims to match the performance of a specific index.

Unlike other mutual funds, index funds tend not to be actively managed. Instead, the stocks are selected by a computer-generated algorithm that tracks the best-performing stocks.

Index Exchange-Traded Funds (ETFs)

ETFs work similarly to index funds and allow you to take a passive approach to investing, tracking market indices. They tend to have lower costs compared to mutual funds.

The main difference between the two, however, is that ETFs are traded like shares on a stock exchange. Instead of a stock price, there is a minimum investment amount, and, like traditional stocks, this value can fluctuate during the day, moving either up or down.

Because ETFs are traded like stocks, trading commissions are often involved when you buy and sell them. Fortunately, most brokers offer commission-free ETFs, which means you don't have to pay any fees when investing. This can save you a significant amount over time.

Negatives of investing in index funds or ETFs

Conservative approach

Index funds and ETFs aim to match the markets, instead of beating them. Both of these investments are considered conservative, long-term strategies. They won’t make you a lot of money in a short period of time.

Little control

Like mutual funds, you don’t have control over the companies you invest in.

Limited to one type of stock

These funds will focus on one index, and that index will usually be made up of one type of stock, e.g., large-cap stocks or American stocks. So your portfolio will still need further diversification beyond the index.

Benefits of investing in index funds or ETFs

Simple diversification

Investing in a basket of stocks is a great and easy way to diversify your portfolio, reducing the overall risk of investing.

Almost entirely automated

While this could be perceived as a negative, the lack of human interaction is actually a good thing, as you don’t have to worry about emotional thinking skewing an investment decision.

Lower fees

The automated nature of these funds means that there are fewer associated costs, so the fees you pay are lower.

Passive investment

With all mutual funds, your involvement as an investor is very small. You simply decide how much you want to invest and for how long. You don’t have to make any of the tricky decisions, like what to invest in.

Stocks

Most of the investments above mention stocks, but what actually are they and what does it mean to invest in the stock market? Let’s start at the beginning…

What are stocks?

Stock is the collective name for multiple shares of one company. A share is a piece of the company, that you can purchase for a set price. The price of a company’s stock can go up or down, depending on how well the company is performing. If the company is doing well, the price of the stock goes up.

A company’s total value (market capitalization) is determined by the total number of outstanding shares multiplied by the current market price of one share.

In order for you to buy a company’s stock, the company must be public, meaning it is listed on the stock market.

What is the stock market?

The stock market is the collective name for the place where you can buy and sell stocks. All publicly traded companies will be listed on the stock market. You can also trade ETFs and corporate bonds on the stock market.

The stock market is highly regulated, and made up of many different stock exchanges.

What is a stock exchange?

A stock exchange is a market where stocks are traded between investors and corporations. It’s where brokers and traders go to buy or sell stock on your behalf. Exchanges can operate through a trading floor in a physical location or via an electronic trading platform.

There are currently 13 registered exchanges in the U.S. The largest exchanges in the world include The New York Stock Exchange (NYSE), the Nasdaq and the Shanghai Stock Exchange.

Some stock exchanges focus on specific types of stock; for example, the Toronto Stock Exchange - Venture Exchange (TSX-V) focuses primarily on small-cap stocks, such as venture capital or early-stage companies.

A company can choose to list its stock on multiple exchanges. However, you can only sell shares on the same exchange that you bought them.

Why do companies choose to release shares?

When a company first releases shares, it is called an Initial Public Offering or IPO.

Companies may choose to IPO for various reasons:

1. To raise capital

The main reason a company releases an IPO is to obtain capital (money) in exchange for equity (ownership of shares) in a company.

A huge amount of cash can be raised when a company first goes public, which is then used toward future growth of the company.

2. An exit for early investors

When a company first releases shares, it not only signifies the first time they can be bought, but also the first time they can be sold. This allows early investors such as friends and family, venture capitalists or employees to sell their shares and release their investment.

3. To gain exposure

IPOs are always exciting, as it's the first time the general public can be involved. A company will usually choose to IPO when their service or product is already popular and in demand, so there is plenty of interest in the shares.

How is a share valued?

Before a company can IPO, the company needs to be valued to assess the price per share. This valuation takes into account the company’s earnings, assets and future projections.

Once a company has gone public, the share price will continue to increase or decrease, in correlation with the company’s performance and the state of the market as a whole.

How many shares does a company make available?

There are few rules about how many shares a company can release, or have on the stock market at one time. The minimum is one and there is no formal maximum. Large companies like Apple can have billions of shares issued at once. The only issue is that when the number of shares increases, the amount that an individual share is worth decreases. This is called dilution and can be very dangerous if done irresponsibly.

What does it mean to own a stock?

When you own a stock, you don’t actually own anything you can touch. Instead, you own a intangible percentage of a company. When buying a stock, you become a shareholder in that company.

As a shareholder you cannot:

Make direct changes within the company

Being a shareholder doesn’t entitle you to make decisions directly. This is left to the management team, who are often also shareholders in the company.

Receive discounts

Unfortunately, being a shareholder doesn’t often result in staff discounts of the goods and services the company offers.

Claim ownership of assets

Just because you’re a shareholder in the company, it doesn’t make you a shareholder in the company’s stock of pens or chairs. However, if the company folds, you may be entitled to a share of the value of assets that are sold off, but only after creditors and bondholders have taken their payments.

You can (sometimes):

Vote on major issues

Though not mandatory, you may be given the option to vote in shareholder meetings where issues such as board members, policies and corporate actions are discussed.

Receive dividends

Some companies elect to distribute a portion of their profits among their shareholders as a bonus payment called a dividend.

How can you profit from investing in stocks?

There are two ways you can make money from investing in stocks:

  1. Earning dividends.
  2. Selling your shares at a higher price than you paid for them.

Common fears of investing in stocks

You may be worried about investing, because you’re afraid of losing your money. That’s understandable, and is the main thing that puts people off.

The news is flooded with stories of people who have lost their entire life savings on one risky bet. The thing the news fails to pick up on is the millions of regular people who make a consistent, steady return. Why? It doesn’t make a good story.

The reality of investing is that if you make clear, informed decisions, then the chances of you losing all of your money are quite slim.

But let’s dispel some of your other fears.

"Individual stocks lose value"

This is true, to an extent. Stocks can decrease in value, but it is also possible (and more likely) that a stock will increase in value.

You can find a lot of data about attributes of a company that impact the price of its stock, and these can help to inform sound investment decisions. These attributes include “fundamentals”, such as cash flow and return on assets, as well as technical merits of a stock. There are professional analysts who assess the strength of these indicators.

If you invest in companies with strong fundamentals, then the chances of them devaluing to such an extent that their share prices never go back up are very low.

The key is to hold on until the markets improve, and only sell when the price is more than you paid. Patience is key.

"Recessions"

A recession is defined as a global decrease in economic activity, usually caused by a lack of spending. The most recent recession was in 2020, caused by the Covid-19 outbreak. During this period, many companies sold less and performed worse, and as a result, the stock market took a downturn. This lasted two months.

The good thing about a recession is that it is always temporary. So, as long as you’re able to wait it out, then you shouldn’t worry too much.

"Too complex"

The stock market certainly is complicated, but it’s incredibly easy to overcomplicate.

The key is finding learning resources that you trust, and going at your own pace. There really is no rush.

"More volatile than bonds or mutual funds"

Bonds are considered a safe investment, as they have a fixed return and you can rest in the knowledge that your loan will be repaid. The down side of the return being fixed is that you can’t earn any more than that set amount.

So while stocks can go down and depreciate in value, they can also go up, resulting in higher returns and more money for you. With higher risk comes higher reward.

Benefits of investing in stocks

Tried and tested

Stock markets have been around for 400 years, making them relatively well-regarded and regulated entities that have been tried and tested thousands of times over.

Liquidity of the stock market

A market that is liquid is clear and free flowing. In simple terms, this means that there is almost always someone willing to buy or sell a share at a given point.

In a liquid market, you don’t have to worry about being stuck with something you want to sell, with no one wanting to buy it.

Dividends and capital gains

When you invest in a stock, you sometimes have the opportunity to receive dividend payments. While the percentages are usually small, these payments can quickly add up.

Pro tip: With most brokerages, you can set dividends to reinvest, meaning you buy more shares with the dividends instead of taking them in cash. If the company is thriving, reinvesting dividends will benefit you more than taking the cash out.

Many sectors to choose from

Stock market sectors are groups of stocks/companies that are in similar industries. There are 11 main sectors:

  • Real Estate (Building projects or investment trusts, REITs)
  • Industrials (Transport, aerospace, defence, construction)
  • Energy (Oil, natural gas, coal, ethanols)
  • Utilities (Electrical power, water, renewable energy)
  • Healthcare (Pharmaceuticals, healthcare equipment and services)
  • Materials (Chemicals, construction materials, mining stocks)
  • Consumer discretionary (Automobiles, luxury goods, retail, hotels and restaurants
  • Financials (Banks, insurance, brokerage houses, mortgages)
  • Consumer Staples (Food, beverages, tobacco, supermarkets)
  • Information Technology (Computer programmes, phones, TVs)
  • Communication Services (Telecommunications, media, entertainment)

Pro tip: Choosing a stock can sometimes require a lot of research and due diligence. To make this process more enjoyable, perhaps consider your first few investments in an industry or sector that you are already familiar with and interested in. For example, if you work with computers, pay attention to tech stocks, or if your background is in farming, focus on agriculture stocks. This is until you feel more comfortable with the process and can begin diversification.

"An investment in knowledge pays the best interest." — Benjamin Franklin

Quiz: Decide what you want to invest in

To help you decide what to begin investing in, take a look at these questions. There are no wrong answers!

How much control do you want to have?

A: I don’t have strong opinions over what I invest in, as long as I make money.

B: I want to be able to choose exactly what I invest in.

How much time do you have to dedicate toward your investments?

A: I don’t have enough time and would rather someone else did it all for me.

B: I have enough time to sufficiently research my own investments and form my own investment plan.

Which do you value more, rewards or security?

A: I would rather know that my money is safe.

B: I would rather have the potential to earn big returns, even though there is potentially more risk involved.

If you answered mostly A, then perhaps you would be better suited toward bonds, mutual funds or index funds and ETFs, which often hold far lower risk compared to stocks, and require less time and fewer decisions, but also deliver potentially lower returns.

If you answered mostly B, then it seems you’d be best suited toward investing in stocks. Stocks are popular investment vehicles available, as they can promise excellent growth, but they can also potentially carry a higher risk than other investments.

If you’ve decided that you want to invest in stocks, the question now is: Which stocks?

Before we decide on which stock to invest in, we must first understand the difference between investing in stocks and trading stocks.

Investing vs trading stocks

While both involve stocks, they are quite different.

What is stock trading?

Stock trading is considered the more risky of the two. Instead of holding stocks for a prolonged period of time (years), traders will buy and then sell stocks after months, days, hours, minutes or even seconds. The aim is to buy low, sell high.

Sound stressful? It is.

Stock trading isn’t for the lighthearted. While some traders will win big, 80% of day traders will lose money (eToro.)

What is stock investing?

Investing in stocks is considered the steadier alternative. It may seem less thrilling, but it can actually be more profitable in the long run.

While a trader may be forced to sell their stocks at a loss, a long-term investor could choose to simply ride out the volatility, avoiding short-term losses.

As you might imagine, investing in stocks is also far less stressful than trading. Most of the time, you can open your positions and not think about them until you decide to cash out.

Different types of stocks

Stocks can be sorted into three categories: value, growth and income.

What are value stocks?

A company’s share price can be affected by events that are out of its control — a scandal involving the CEO, a change in public perception, natural disasters or global outbreaks like Covid-19.

When this happens, even though the fundamentals of the company haven’t changed, the share price can drop. This means that it’s possible to buy a stock at an undervalued price.

Uranium is a good example. After the Fukushima disaster in 2011, public perception of the element changed and prices of uranium stocks plummeted. Some investors could have seen the value in those stocks and bought them at that lower, undervalued price. Today, the uranium market has made a strong resurgence, resulting in an outsized return for those investors.

Of course, this is not always the case and some stocks will never return to the original value.

With value stocks, it is important to ensure that you focus more on the fundamentals than the price.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett

What are income stocks?

Income stocks are known for paying dividends.

If you are going to hold a stock for a long period of time, dividends can be a good way of ensuring a steady income.

What are growth stocks?

When you invest in stocks, you hope that over time, the value of that stock will increase. This means that every stock should be a growth stock, otherwise, what’s the point in investing in it? The question is, how do you identify a growth stock?

This is the hardest part, and something that even professional investors stumble on.

While we can’t look into the future and see which stocks will go up in value, there are certain fundamentals that can help us identify a good investment.

Know what stocks to invest in: the hard way

Due Diligence

Due diligence is a time-consuming and sometimes complicated process for beginner investors. But you will want to truly understand a company before you invest in it, so it’s worth doing your homework.

You wouldn’t buy a house without checking its foundation.  Investing in stocks is the same.

“Behind every stock is a company. Find out what it’s doing.” — Peter Lynch

Stock Fundamentals

Consider fundamentals as a checklist. If the company you’re considering investing in matches these basic criteria, then it's worth investigating further.

Long-term stability

Will the company still be relevant in 50 years?

Think about the difference between investing in a company that produces phone books, or a tech company that produces computer chips. Which will we still need? Some companies are better than others at changing with the times, so look into the kind of projects or products a company has in development.

Potential for future growth

Even if the company will still be relevant, does it have the potential to grow and increase in share price?

If you don’t think it has the potential to grow, then it could be one to avoid.

Strong management

Does the company have a strong, trustworthy management team who have relevant experience to the industry? If you get the sense they have no idea what they’re doing… avoid.

Pro tip: If you notice members of the management team investing their own money in the company (not simply receiving shares), that’s a sign they believe in the future of the company and have a vested interest in its success. This is called insider buying and is actually a really positive thing.

Best in class

Is this company the absolute best in their sector? If not, why are you investing in it?

You can tell a company is the ‘best in class’ if it is considered to be an industry innovator, has one of the biggest market-capitalizations or has a key advantage that sets them apart from the competition.

Healthy financials

Looking at a company's financials is essential, and all of the information is made publicly available. You should look out for:

  • Debt: Low debt is a good sign. High debt can be okay, but only if they have a clear plan to repay it.
  • Cash flow: How much money is coming in and out of the business. Positive cash flow is when a company receives more money than it pays out, which is a good sign.
  • Steady earnings growth: The company’s earnings are increasing either quickly or steadily.
  • Executive pay: Is the CEO and senior management paid a reasonable amount, or are their salaries very high? High compensation is a sign of poor money management and should be a red flag for investors.

However, it’s important to note that the criteria above only let you analyze a stock at its most basic level. Stock analysis can become so in-depth and complicated that institutional investors and hedge funds will pay tens of thousands of dollars for reports researched by professional analysts.

Institutional vs retail investors

Institutional Investors

  • Manage other people’s money and invest on their behalf
  • Trade more frequently and at higher volumes
  • Are considered more sophisticated investors
  • Have access to expensive, exclusive research

Types of institutional investors include: banks, hedge funds, mutual funds, pension funds and insurance companies.

You could choose to invest your money with an institutional investor, but this often entails high fees and a lack of control. If you’re still reading this article, perhaps you’re more interested in doing it yourself and becoming a retail investor.

Retail Investors

  • Invest their own money
  • Trade less frequently and at smaller volumes
  • Only have access to publicly available information

While online brokerages have opened up investing to many more retail investors, there's still a large information gap.

This makes it hard for retail to perform as well as institutional investors.

Some companies, like Crux Investor, are making things even simpler and more accessible by finally giving retail investors access to the information used by institutional investors.

Know what stocks to invest in: the simple way

Crux Investor

Crux Investor is an investing app for busy people, with a keen focus on retail investors like you. Crux Investor has a team of analysts who will study a stock in the same way the hedge funds do, but they’ll distill it down into an easy-to-read, one-page memo (for a fraction of the cost).

Each month, there is a new stock recommendation, which will include all of the information you need to make an informed investment. You can then choose to go and do further research, or rest easy in the knowledge that the memo has been written by those best equipped to advise you.

Crux Investor is for anyone interested in saving time while investing with confidence. If you’re a complete beginner who needs guidance, or you’re tired of throwing money away with guesses and gambles, this is the ideal app for you. If you’re an experienced investor, you can now have a faster and more efficient way to arrive at the perfect stock, or significantly increase your knowledge of your holdings and prospects.

Regardless of how you decide to choose your stocks — DIY or following the experts — you are now at the stage of actually investing.

How to invest in stocks

If you’re reading this and not quite feeling ready, don’t worry! A great way to gently ease yourself into investing is through stock market simulators, which allow you to practice investing for free with virtual money.

If you’re ready to invest for real, let’s get started.

Opening a brokerage account: Step by step

A brokerage account is how you access the stock market and make investments.

Opening a brokerage account has never been easier. Today, most brokerages are online and can be installed as an app on your phone.

1. Choose your brokerage

There are loads of brokerages to choose from, which can feel overwhelming. A good rule of thumb is to search ‘most popular online brokerages’ followed by the country you live in. You must use a brokerage from your own country.

Popular US online brokerages include:

  • Fidelity
  • TD Ameritrade
  • Robinhood

Popular UK brokerages include:  

  • Trading 212
  • Freetrade
  • eToro

2. Sign up online and create your investment account

While this process varies between platforms, it's usually pretty simple. You will need to provide a photo of your Passport or other suitable ID, and depending on your country, a proof of residence. For UK investors, this could be your National Insurance number.

3. Fund your account

Most platforms will require you to deposit funds before you can place any orders. This can often be done by bank transfer.

4. Make an investment in a stock

This process will usually be explained by the platform. Alternatively, you could search for step-by-step instructions on YouTube.

Is my money safe in a brokerage account?

Yes. It’s highly unlikely that your brokerage will go bankrupt.

If a brokerage does fail, it is highly likely that another firm will buy that firm’s assets and accounts, and your shares will be transferred with very little interruption. Failing that, the court appoints a trustee for the brokerage, during which time you’ll be notified of the transfer of accounts. You can continue with the assigned broker or move to the brokerage of your choice. In that case, the only loss would be a few hours of your time.

The next line of protection is an insurance provided by the US government called SIPC (Securities Investor Protection Corporation). They will insure $500,000 of stock, or $250,000 of uninvested cash held in your brokerage account. This insurance will try to recover the value of the investments at the time of the brokerage firm's failure. In order to claim this, you must file a report.

To protect yourself from this worst-case scenario:

  1. Don’t hold more than $250,000 of uninvested cash in your brokerage account. Keep any extra in your bank account until you want to make an investment.
  2. Split your investments so you have no more than $500,000 of stock in any one brokerage.

The bottom line is that there aren’t many examples throughout history where a brokerage firm has failed. The SEC exists to protect you and your investments. Better still, it’s meant to side with the investor, not the brokerage.

Note: If the share price is lower than what you bought at and you decide to sell, making a loss, this is not protected by the SIPC. They exist to recover the value of investments in the case of a brokerage's failure.

Decide how much you want to invest

With most brokerage accounts, there is no minimum investment. You could invest $10 in a stock, or $1,000.

So, how much should you invest?

This will depend on how much disposable income you have available in your budget to invest and the amount you want to risk.

You should refrain from investing money in stocks that you're not willing to lose. This is simply because investing in stocks, like every other investment, carries some risk and you should not invest money that's earmarked for something else or that you borrowed.

Pro tip: Decide on your time horizon before you decide how much to invest. This is essentially how long you plan to hold an asset before selling it. A time horizon could be for retirement, schooling fees or that holiday you've always dreamed of.

Setting a clear end goal helps determine how much you should be investing and which type of stocks you should focus on. If your goal is many years in the future, you can sit back and let the markets do the work. If your deadline is sooner, maybe you should focus on higher risk, higher reward assets.

"My favorite time frame is forever." — Warren Buffett

When’s the best time to buy stocks?

While there is no ‘right time’ to buy stocks, the lower the price of a stock when you bought it, the higher return you can earn when you come to sell.

Some investors spend hours trying to determine the perfect time to invest in a stock, to get it at the right price. This is known as ‘timing the market’.

Ways investors try to time the market:

  • Studying charts and patterns of a stock, to try to estimate when it will next go up or down, based on when it last did.
  • Looking out for press releases that could cause a stock to fluctuate.
  • Understanding the cycle of a stock relative to the calendar year. Some industries perform better in the first quarter of the year and worse toward the end.

While all of these are valid methods, timing the market is a time-consuming process which doesn’t even ensure you’ll buy a stock at the ‘best’ price.

"Market timing is impossible to perfect." — Mark Rieppe

Instead, it is better to invest your allocation over a set period of time, avoiding market volatility. This is called dollar-cost averaging.

What is Dollar-Cost Averaging?

Let’s say you are investing $100. Instead of investing it all at once, you might invest $20 a week over five weeks. This way, you don’t need to worry about ‘timing the market’ as your investment creates an average buying price.

With most brokerages, you can set up an automated investment that will invest a predetermined amount each week or month.  

Plus, if you’re planning to invest for the long-term, you shouldn’t worry about the day-to-day fluctuations of a stock.

“Do you know what investing for the long run but listening to market news everyday is like? It's like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill.” — Alan Abelson

Monitoring your stocks

While you shouldn’t worry about the day-to-day fluctuations once you’ve invested in a company, it’s a good idea to keep an eye on the stock and ensure that the company is heading in a direction that you believe in.

Look out for significant press releases and interviews with management.

"Know what you own, and know why you own it." — Peter Lynch

How do I know when to sell my shares?

Selling a stock is the main way investors make money. Throughout this article, we have been talking about long-term investments that you shouldn’t touch for 10, 20, 30 years.

In this case, you won’t need to worry about selling the stock until you decide that you’re happy with the return you’ve made and want to sell.

You should only consider selling your shares in a company ahead of time if the fundamentals change and you no longer believe in the company’s future.

How to avoid losing money investing in stocks

Unless a firm folds, the only way to lose money is by selling at a loss. If you wait until the price goes back up, you won’t lose money.

"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim Helu

Investors lose money when they let emotion control their decision making and panic-sell when the stock price has taken a downturn. If you believe in the company’s fundamentals and its future, then the share price should go back up.

Remember, the potential for loss is capped at 100%. The worst you can lose is the money you invested. However, the potential for gain is infinite.

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1” — Warren Buffett

Imagine you buy a jumper, rip it, and have to give it away for free. That’s the worst-case scenario. But unlike all of the other things we buy (phones, food, holidays), there is the chance here that you can make more money.

Key takeaways

  • Invest in companies you believe in and understand
  • Hold your investments for a long time
  • Don’t let emotion take over
  • Only sell at a profit


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