Getting Started with Investing: Tips and Advice for Newcomers

• Buy stocks you understand, like companies whose products you use and like.
• Evaluate a stock's performance relative to the overall market, not in isolation.
• Invest money over time in a staggered approach, not all at once.
• Avoid penny stocks and OTC markets if you're a beginner.
• Remember to account for taxes on investment gains.

Investing in the stock market can seem intimidating, but it doesn’t have to be. With some basic knowledge and a few smart strategies, young investors can put their money to work and build wealth over time. Here are 10 tips to help beginners dip their toes into the world of investing.

Choose Companies You Know

When first starting out, stick to companies you actually understand and believe in. Are there brands you love to engage with as a customer? Think about the products and services you use in your daily life - which companies make them?

For example, you might be familiar with Apple and their iPhones. Or you could be a fan of Nike shoes and athletic wear. Begin investing in the companies behind the brands you already know and trust. It’s much easier to research and analyze businesses that are straightforward to you as a consumer.

Compare Performance to the Overall Market

As you pick individual stocks, look at how that stock is performing relative to the overall stock market. Absolute performance alone doesn’t tell the whole story.

For example, if a stock went up 10% over the past year, that seems good. But what if the overall market went up 25% during the same period? That stock actually underperformed compared to the broader index of companies.

On the flip side, if a stock dropped 5% over the past year while the overall market fell 15%, that stock actually did relatively well in a down market.

Always consider both absolute and relative returns to make smarter investing decisions. Know if your picks are actually outperforming or underperforming the general market.

Invest Over Time, Not All at Once

Rather than investing a lump sum all at one time, take a more measured approach known as “dollar cost averaging”. Slowly build your portfolio by investing small amounts consistently, like setting aside a portion of each paycheck or savings.

This helps avoid the risk of investing all your savings when prices happen to be high. It also means you’ll continually buy stocks at both high and low prices instead of trying to time the perfect entry point.

Say you have $5,000 saved up to invest. Don’t put it all on the market at once. Instead, you could invest $500 each month over the course of 10 months. Or set aside 10% of each paycheck to regularly invest.

Be patient and stay consistent.

Dollar-cost averaging takes the emotions out of investing and leads to solid returns over the long run.

Steer Clear of Penny Stocks

While it can be tempting to try finding ultra-cheap stock bargains, penny stocks are too risky for beginner investors. These stocks trading at very low prices under $5 per share typically belong to very small, unstable companies.

Penny stocks are often found on lightly regulated over-the-counter (OTC) exchanges like the Pink Sheets and Bulletin Board (OTCBB). Even experienced investors have trouble properly analyzing penny stocks.

As a teenager, don’t get drawn in by the allure of getting tons of shares for very little money. Focus your efforts on higher quality companies traded on major exchanges like the New York Stock Exchange and Nasdaq.

The Problem with Penny Stocks

Penny stocks may seem appealing because you can purchase lots of shares for very little money. But there are significant risks to these ultra-low priced stocks that make them poor choices for teenage investors just starting out.

What are penny stocks? They are shares of small companies that trade at price levels under $5 per share, sometimes even down to just pennies. You’ll find penny stocks on lightly regulated over-the-counter (OTC) exchanges like the Pink Sheets and Bulletin Board (OTCBB) rather than major exchanges like the NYSE or Nasdaq.

Lack of Financial Reporting

Unlike standard stocks, penny stock companies are not required to file the same extensive financial statements. There is little transparency into their business operations and financial health. This makes properly analyzing them nearly impossible.

Thin Trading Volume

Penny stocks have very low trading volume, meaning very few shares trade hands each day. This causes huge price swings and volatility at the slightest bit of buying or selling activity. Prices can spike on speculation, not fundamentals.

Vulnerable to Manipulation

The lack of regulation makes penny stocks easier to manipulate through promotional campaigns, paid stock spammers, false hype and other unethical tactics. There are lots of these people and groups who do not have your best interests at heart, no matter what they say. The only person who cares about how well you do is you. It's your money, your strategy and your decision. Do not put yourself in a position where you rely on one source of information about an investment. Uppity press releases often conceal poor fundamentals.

Overall, penny stocks are extremely speculative and risky even for experienced investors. Beginners should stick to more reputable companies traded on major exchanges where they can access financial data to make informed decisions. The small potential rewards of penny stocks simply aren't worth the enormous risks. These are heavily weighted towards failure.

Remember the Tax Implications

When you eventually sell a stock at a profit, you’ll need to pay capital gains taxes on the earnings. Just because the money is still within your brokerage account doesn’t mean you’re off the hook with taxes.

Short-term capital gains tax applies if you held the stock for one year or less before selling. The rate corresponds to your ordinary income tax bracket. Long-term capital gains tax is lower when you hold for over one year; the rate depends on your income level.

So when planning trades, be aware of the tax implications. Set aside cash to cover potential taxes so you’re not caught off guard later on. Also, consider holding quality stocks for over a year to qualify for preferable long-term capital gains tax rates when you do sell.

Keep Emotions in Check

Investing stirs up emotions like fear, greed, and excitement. But good investing decisions come from a calm, rational mindset. Don’t let emotions cloud your judgment. Emotional investors are more likely to lose their money as their decision-making is erratic, avoid cold-hard data and invest on hearsay.

It’s easy to get hyped and check your portfolio constantly when stocks are rising. But that euphoria can lead to impulsive decisions, like not selling when you should. Likewise, when stocks tumble, fight the urge to panic and sell at temporary dips.

decision-makingLimit how often you check your holdings each day. Have a plan for buying and selling, and stick to it. Removing emotions from the investing equation avoids making rash choices you’ll later regret.

Controlling Emotions as a New Investor

Investing stirs up strong emotions like fear, greed, excitement, and anxiety. However, allowing emotions to drive your investment decisions is a recipe for poor results. Here's why beginners need to adopt a calm, rational mindset when investing:

Fear of Losing Money /Fear of Missing Out (FOMO)

When stock prices decline, it's natural to feel afraid of losing money. But reacting by panic selling often locks in losses at market bottoms. Have confidence in your research and investment thesis. Avoid emotional knee-jerk reactions.

Get Rich Quick Euphoria

When stocks rapidly rise, the prospect of quick profits can hype you up. But staying grounded is key; don't chase hot stocks or deviate from your plan. Manage euphoria so you don't take on excessive risk.

Impatience

Waiting for investments to pan out can be frustrating. But long-term investing takes discipline. Avoid impatience by focusing on business fundamentals over short-term price movements.

Regret Over Mistakes

If an investment drops after you buy in,feeling regret is normal. But don't compound the mistake by realizing the loss; wait out dips for a potential rebound.

Obsessing Over Portfolio

Checking your portfolio all day long can stir up emotional stress. Limit yourself to viewing holdings just once or twice a day for a calmer perspective.

By recognizing these tendencies, teenagers can learn to separate emotions from investing. Tune out the noise, have a plan, and stick to the strategy. Rational decisions amplified over time lead to investment success.

Diversify with Different Types of Investments

Don’t put all your investing dollars into just one or two stocks. Diversification means spreading money across different investments to reduce risk.

Along with individual stocks, consider diversifying into broad index funds that track segments of the market. For example, you could buy an S&P 500 index fund to gain exposure to large U.S. companies across sectors. Exchange-traded funds (ETFs) offer low-cost, diversified index investments. We would recommend this approach for the majority of your investments.

Bonds play an important portfolio role too. Add some exposure to bonds for stable income and to manage volatility. The idea is that when stock prices fall, bond prices often rise to help cushion the blow.

Spreading money over stocks, bonds, mutual funds, and ETFs provides a balanced mix for healthy returns.

Have Cash Reserves for Emergencies

Before investing, be sure to save up an emergency cash fund equal to 3-6 months of living expenses. Savings accounts or money market funds work well for this purpose.

Why is this important? Emergency funds prevent you from needing to tap into long-term investments at inopportune times. Stock investments work best when allowed to grow over extended periods, but sometimes financial needs arise forcing early withdrawals.

By maintaining an emergency stash, you keep investing capital earmarked for the long run. Don’t let unexpected expenses derail your financial plan. Make investing goals and emergency savings goals co-exist in harmony.

Have a Plan to Take Profits

Don’t fall into the trap of holding onto stocks forever, even as prices escalate higher. Set profit targets at the outset so you know when to sell.

For instance, you could designate selling once a stock rises 20% from the initial purchase price. Or if shares double, consider selling at least enough to recoup your original investment, playing with “house money” from there.

Reevaluate holdings regularly and adjust stop points. Trimming positions along the way also help lock in some gains. Having an exit strategy means you won’t watch all those profits evaporate if the market shifts.

Stay Invested – Don’t Try to Time the Market

Waiting for the perfect opportunity to invest is a recipe for failure. Those who perennially try to time market bottoms often miss out completely.

No one can predict next month’s or next year’s market movements. Prices may keep rising, making today’s valuations seem expensive, but that’s no reason to stay on the sidelines.

Historically, stock markets trend upwards over long periods despite periodic pullbacks. Don’t overly fixate on volatility or macro forecasts.

Commit to steadily investing over decades through all kinds of market conditions. Allow compounding to work its magic. With time and consistency, investing puts you on the path to financial freedom.

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decision-makingEmbarking on your investing journey as a teenager is an exciting first step towards financial independence. As you build your knowledge and strategy, remember to tune out the hype, manage your emotions, and think long-term. Don’t get discouraged by mistakes or impatient for overnight success.

Stay focused on the fundamentals, diversify your holdings, and let the power of compounding go to work. Investing rewards commitment, discipline and rational decision making. By starting early and sticking to solid principles, your money can grow into something that takes care of your future needs and dreams. Investing puts you in control of your financial destiny.

I wish you the best of luck as you take these important steps towards building lifelong wealth and prosperity through the financial markets. The opportunities are endless when you combine passion, patience, and the right approach.