Like most people, I’ve always wanted to travel and explore the world. But traveling costs money and in my early days after college, most of my money went straight to rent, bills, and student loans. I couldn’t get myself to spend months of my savings on just one trip. If only there was a way to earn some extra income without getting another job. But like you (and Jon Snow), I knew nothing.
Fortunately, with the help of a finance friend, I was able to start investing in stocks and earn some extra cash on the side. This helped pay off my debts and more importantly to me, start traveling.
So here in this very beginner-friendly guide, I will be your finance friend and guide you through the early and intimidating steps of Wall Street.
Topics in our journey to get started in investing are:
- Why Should I Be Investing?
- What Is Investing?
- But Wait, Isn’t Investing Risky?
- What Stocks Should I Invest In?
- How Do I Buy Stocks Online?
- How Many Shares Should I Buy?
- Do I Have To Pay Taxes on My Investments?
- How Can I Learn More?
Why Should I Be Investing?
Imagine earning a few extra hundred (or even thousand) dollars a year from clicking your mouse or tapping a few buttons on your smartphone. You do some reading about a company, make an informed decision to buy some stock, give it some time, and as expected, money comes rolling in! Your life is instantly a bit less financially stressful and now you can enjoy some of the things you normally wouldn’t be able to, like traveling!
But besides earning additional income, by investing your money, we hedge (or protect) it against inflation. In the past few years in the U.S., the inflation rate has been about 1-2%.
Why does this matter to you? It means that if your money sits in your bank account earning next to nothing (since most savings accounts only pay out less than 1% interest rates), $1,000 of your money will be able to buy $990 worth of stuff next year ($1,000 x 1% inflation rate = $10 loss). $980 the year after ($990 x 1% = $9.90 loss). Your money is losing value even though you’re “saving!” Calculate this over your lifetime of not investing (and with more of your money that you will be saving) and it’s scary how much you are potentially losing every year.
So besides being able to earn a bit extra on the side to be able to enjoy the things you want in life, by investing, you’re also protecting the money you currently have.
What Is Investing?
Investing in the stock market in the simplest of terms, is buying a share (a piece) of a company at current market price, holding that stock until it rises in value, and then selling that share for the increased price.
For example, if you bought Apple (stock ticker: AAPL) stock for $95 today and sold it a month later for $100, you would earn $5 (or 5.3% return on your money) per share.
But Wait, Isn’t Investing Risky?
Yes, investing in the stock market can be risky! In the same example above, the Apple stock you purchased for $95 could have easily dropped to $90 a month later for any number of reasons, such as lower iPhone sales, legal issues, or a bad economy.
And besides an individual company’s woes (like our example with Apple), there are also systematic risks, or risks with the entire market. For example, from the end of 2007 to the beginning of 2009, the U.S. suffered a large economic recession due to the housing market collapse. Almost every stock decreased in price significantly, so no method of investing was safe. It didn’t matter which stock you picked, almost all of them endured huge price drops!
Huge price drop from 2007-2009 for the S&P 500 (500 of the most widely held stocks—considered to be the benchmark of the US stock market)
Therefore, you should only be investing extra money that you don’t need for daily or monthly use. So no rent money or anything for utilities and other necessities. Most personal finance articles suggest saving 3-6 months of your salary in your bank account before you use any of your money to invest.
Understand the risks and do not leave me angry comments about losing money you couldn’t afford to lose! Investing in stocks is not a get-rich-quick scheme. I really wish it was! But this is about investing with good decision-making. No YOLO (“you only live once”) risky bets in the hopes that they’ll win money. That’s called gambling!
What Stocks Should I Invest In?
So you’re not scared off yet and you think investing could be for you, let’s think about what stocks to invest in. There are many factors to consider when you start investing in stocks, but I’ll break down some of the more basic points as this is a beginner’s guide.
Your Interests and Expertise
The easiest field to start investing in stocks is in your interests and areas of expertise. Because you’re already knowledgeable in a particular area, you’ll feel more at ease researching and potentially investing in it.
For example, if you work in retail and noticed that a new product was flying off the shelves. You’re constantly busy and sales couldn’t be better. Your company could potentially be worth investing in as you already see firsthand of its current success.
Another example is if you loving playing video games and as an avid fan, you keep track of the most anticipated games. One company is about to release their newest game and based on initial feedback and internet buzz, it’s going to be a surefire hit. This could be another company to invest in, as usually all it takes is one standout game to keep the company profitable for the foreseeable future.
Of course with these examples, you’ll need to do more reading and research on the company before investing, but you can see how initial familiarity can help jump-start your interest in the first few stocks to consider investing in.
Don’t Put All Your Eggs in One Basket
One of the biggest rules for investing is diversification, or simply not investing all of your money into one stock. In other words, don’t put all your eggs in one basket! If something unfortunate or unforeseen was to happen to the company you invested in, like a brand new competitor or some bad global news, then your investment could be in trouble!
By investing in a wide variety of companies however, you limit the risk of one company losing a large portion of your money. To do this easily and without buying a ton of shares in every company, ETF’s (exchange-trade funds) are a good solution.
ETF’s bundle many companies together, usually within a particular theme or sector. For example, if you want technology stocks like Apple and Google, XLK might be the ETF you’re looking for as its top 5 stock holdings include them.
You can search for ETF’s online and because they hold a bunch of different companies, their stock prices are generally more stable. This is because if one of the company’s stock price drops dramatically, its stock is only a small portion of the entire ETF. Therefore, its decrease (or increase) in price only affects a small portion of the overall price.
For example, Apple is only about 14% of the XLK’s holding. If the price of Apple drops 30% one day (which is very extreme), it would only cause XLK to only drop 4% (since 30% of 14% is only 4.2%), which of course, still isn’t good news, but nowhere near as devastating as losing 30% of your total investment (if you were to invest solely in Apple).
I could dedicate an entire article about diversification and ETF’s, but for now, this is a good start for a beginner investor. And because ETF’s aren’t as volatile as individual stocks, you could invest in them and not have to monitor them as closely. It can be more of a casual investment.
Supply and Demand
This concept is about the desire (demand) for something that can be purchased (supply). If, for example, Apple just announced a brand new iPhone that would blow the competition away, then demand for the stock would increase (as iPhone sales are a big part of Apple’s total revenue). If everyone wants to purchase this stock, then this would cause the stock price to increase. And it’ll keep increasing until it is deemed too expensive to be worth it, in which case, demand for the stock will gradually fade.
Cause and Effect
This is using logic to deduce what good or bad can come from certain news and events. For example, if the price of airline tickets begin to increase, then we can likely infer that the amount of traveling may decrease, which would affect travel companies, like Expedia or Priceline, negatively.
How Do I Buy Stocks Online?
Now that you have an idea on what stocks to consider, what are the next steps? Now it’s about choosing an online stock broker that’s the right fit for you. Online stock brokers allow you to buy and sell stocks from their website or app (usually for a fee). They’re not banks, but if you end up depositing money and never trading, you do earn a bit of interest. So your money can sit there until you’re ready to start trading. And not to worry, online stock brokers require you to verify your identity, so they’re safe and trustworthy.
Stock brokers come in all shapes and sizes, but here at I’m Too Cheap, I’ll be discussing the inexpensive ones.
Cost per trade: $4.95
My personal favorite since it’s cheap (only $4.95 to buy stocks and another $4.95 to sell). Most stock brokers cost $7-10 per trade and the tools offered at OptionsHouse are comparable. And for rookies like yourself, you generally won’t be trading that much in the beginning, so the fees won’t cost you a fortune. My only gripe is that the website and mobile app user interfaces aren’t the most intuitive when you first use them, but they do get easier with time and use.
Cost per trade: $4.95
TradeKing is also $4.95 per stock trade. They are slightly more expensive with options (another form of trading, which I’ll get into in the next section), but the difference is negligible. I don’t personally use TradeKing as I am already satisfied with OptionsHouse, but they do seem to have the better-looking and more intuitive website and mobile app.
Cost per trade: Free!
Saving the most beginner-friendly for last, RobinHood is the cheapest online stock broker on the market—free! This is perfect for beginners as it won’t cost you anything to buy or sell stock. Additionally, they have highly-rated mobile and Apple Watch apps that look beautiful and are easy to use. However, I do not personally use RobinHood as they currently do not offer options trading yet (discussed in the next section).
Additionally, if you’d like a more in-depth ranking of different online stock brokers, Reviews.com has a comprehensive article on The Best Online Stock Trading Sites, with TradeKing and OptionsHouse coming in on top for the low-cost options.
What Are Options and Which Broker Do I Choose?
Options trading, without getting into too much detail in a beginner’s guide, is another form of trading that can be more lucrative than stocks, albeit potentially more risky. I do recommend learning options in the future when you’re better versed in stock trading, but most assuredly not at this moment.
So if you want to take your time and just buy and sell stocks for free, then RobinHood is a good broker to start with. Then as you get the hang of trading and investing and want to do more with your money, you can transfer over to OptionsHouse or TradeKing to start trading options.
What’s Next After Selecting a Broker?
After selecting a stock broker, it’s time to deposit your money into your brokerage account. Again, stock trading can be risky, so only deposit a portion of your money that you can afford to lose. There are several ways to fund your account, including linking a bank account, wiring money, and sending a check. The easiest and most convenient way is linking one of your checking accounts as this allows you to deposit and withdraw any time you want.
How much should you deposit? That’s entirely up to you and your comfort level. However, do make sure it’s enough for your trades to be reasonably profitable after fees!
How Many Shares Should I Buy?
Beginners often see a cheap stock or worse, a penny stock (never trade these), and think that because of its low price, they can purchase more shares. But in terms of profit, the number of shares does not matter (not until you start options trading). Instead, base your trades on total cost.
You buy 100 shares of a $15 stock for a total cost of $1500. Stock jumps up 10% to $16.50! Your shares are now worth $1650 (100 shares x $16.50), making your profit $150 ($1650 – $1500).
You buy 5 shares of a $300 stock for a total cost of $1500. Stock jumps up 10% to $330! Your shares are now worth $1650 (5 shares x $330), making your profit $150 ($1650 – $1500).
Same outcome for both examples since their total costs are the same.
Additionally, if you’re trading on a platform that charges a fee for a trade like OptionsHouse or TradeKing, make sure that your trade is large enough that it will net you a profit after the costs of fees. So for example, a $500 trade is too low since if you buy a stock, that’ll leave you with $495 ($4.95 buying fee rounded up). If the stock’s price increases a sizable 10%, you would only earn about $49 ($495 x 10%). Subtract the fee to sell the stock and you’re left with a paltry $44 ($49 – $4.95 selling fee rounded up). All of that work for such a small profit! Definitely not worth it.
Personally, I’d recommend at least $1500 per trade as a moderate gain of 5% can still net you a modest $75 in profit. Of course, the more you invest, the greater the reward (and also risk)!
Do I Have To Pay Taxes on My Investments?
Yes, as unavoidable as death, taxes are required when dealing with stocks. If you earn a profit during a calendar year, you’ll have to report taxes on your realized capital gains (actual profit from your sold stock, not the potential profit you have from currently held shares). This is usually based on your tax bracket. However, if you held a stock for a year or more and then sold it, then the tax rate for that is only 15%.
But what if you lose money from trading stocks? Then the bright side is that you’ll be able to deduct your losses from your regular income (up to $3000), thus saving you some tax money.
And don’t worry about forgetting to report as usually early in the following year, your brokerage account will remind you to download the tax information before you do your taxes.
How Can I Learn More?
Perhaps the best way to learn more about how to start investing in stocks is to simply read more. Books about investing and personal finance, business news, finance blogs (like this one), and anything that can help you better understand investing and why stock prices move the way they do.
Additionally, here are some helpful articles I’ve come across for beginners that can ease the learning process:
10 Things You Need to Do Before You Start Investing from The Simple Dollar – Great starting advice for beginners like you to learn right before you’re ready to start, such as paying off credit card debts and eliminating bad spending habits in order to get on the right path of investing.
10 Tips To Help You Start Investing by Money Under 30 – Some quick tips on how to help you get started in investing, including avoiding investing in fads, diversifying (as I’ve mentioned about the eggs in a basket), and more!
Less is More: Keep Investing Simple by A Wealth of Common Sense – Simple guidelines to live by that are helpful for starters. Tips like diversifying (noticing a pattern here?) and reviewing your investments periodically are all key to investing successfully.
And lastly of course, I’m Too Cheap is dedicated in providing beginner-friendly articles on how to invest and spend your money more wisely than the average person. This information, from my experience, is not common knowledge and sometimes, can be hard to find and even intimidating to get into.
Worry not though, as your finance friend, I’m here to help and if you like what you’ve read so far, feel free to subscribe to our newsletter (at the bottom of the page) to keep up-to-date on new articles!
Happy investing and stay tuned for tips on specific investments and strategies!