A Beginners Guide to Investing

For new investors wanting to learn stock market basics

This beginners guide to investing in the stock market has three parts (READY, SET and GO)...
  • The first looks at the beginning investor's situation and how READY the new investor is to consider value investing.
  • The second considers what the beginning investor needs to know to get SET to invest.
  • The third deals with how to purchase and sell stocks; that is how to GO about value investing.
Depending on your previous investing experience, decide which discussions you need to link to in each of the three parts of this beginners guide to investing.

Then use the back arrow key to return to this stock market tutorial.

Beginners Guide to Investing - Are You READY?

So you are thinking about being a stock investor? What do you need to consider before you get close to beginner investing in the stock market?

Here are some guides to help decide whether to proceed further...

  • Do you have enough money to invest? Investing in the stock market requires a minimum amount of capital. How much will depend on what stock you wish to buy and the minimum buying requirements of the stockbroker you use to purchase the stock.

    There are also additional costs that you may need to incur depending on whether you pay for advice on which stock(s) to buy. Investment costs are considered in more detail here.

  • The basic beginners guide to investing is to only invest what you can afford to lose without that loss affecting your daily quality of life and your plans for the future.

  • What are your investment goals? Your investment goals will relate to your requirements for funds to meet your needs, whether they be short term, or long term for retirement planning.

    The type of investments you undertake to meet your needs will depend on when your needs have to be funded. For example, if you are thinking of buying a house in the next couple of years, you do not want your money tied up in the stock market if there is a downturn in the meantime.

    Check the link above to see more detail on how you might set investment goals to meet the various types of financial commitments you might have in the future.

  • What is an investment risk profile? This beginners guide to investing suggests that investors' risk profiles may vary from defensive to aggressive.

    The risk profile should determine whether the investor opts for a stable income stream with no downside risk to capital, or whether they accept large volatility in investments, with the promise of substantial capital gains in the future.

    Check out the five risk profiles outlined here. Where do you fit?

  • In Summary ...

    Being financially prepared is an important first step to becoming a stock investor. Equally important is having clear financial goals and being aware of your risk tolerance.

    This will ensure that you will sleep well at night and be ready to invest in the stock market with confidence!

    Beginners Guide to Investing - Getting SET in the Stock Market

    Having decided that value investing is for you, what do you need to know before you start buying stocks? Here are some points to help you find out ...

  • What are stocks? A company’s stock is the shares in the company that are issued (sold) to investors in an initial public offering (IPO). The shareholder then becomes a part owner of the company.

    The terms ‘stock’ and ‘share’ are often used interchangeably as are ‘shareholder’ and ‘stockholder’.

    Stocks (or shares) are bought and sold through stock exchanges. These may be national exchanges such as the stock exchange of India and the Australian Stock Exchange (ASX), or they may be stock exchanges in major cities like the New York Stock Exchange and the Tokyo Stock Exchange.

    There are different types of stocks. More detail is provided here on the types of stock available for you to consider.

    Knowing the characteristics of different stocks will allow you to buy those stocks that fit best with your risk profile.

    The general term for the stocks/shares that are normally of interest to beginning investors are referred to as common stocks or ordinary shares (both mean the same thing).

    Investors normally buy and sell shares (or stocks) through stockbrokers who charge a fee called brokerage for the service. Brokers generally come in two main varieties, full-service brokers and online brokers who may also be discount brokers.

  • Why stocks? Stock market investing is one form of investing. You need to be clear in your mind that stock investing offers the best alternative for your particular circumstances.

    Here is a comparison between investment in the stock market, investing in property and investing in a small business to see the advantages of stock investing.

  • How do you invest in stocks? There are a variety of ways to invest in the stock market and this stock market tutorial suggests that the value investing strategy will provide the best returns over the long term.

    However, it is useful to be aware that there are a variety of strategies that are used for one reason or another, some of which are more common than others.

  • What sort of stock investor will you be?. You need to be aware that there is a difference between stock investing and stock trading. Stock trading is short-term gambling on stock price movements with little regard for the prospects of the company.

    Traders are looking for capital gain from small movements in the stock price over short time intervals (hours or days) and use charting tools and other signals to help them to decide when to buy and sell.

    Value investing is for the longer term (normally at least five years) in companies that you believe will perform well over time.

    Investors are interested in both the dividends that companies pay them regularly and also in capital gain in the share price over the longer term.

    This beginners guide to investing assumes that you want to be a stock investor rather than being a stock trading speculator.

  • What about all the stock market jargon? Specific terms are used to describe different aspects of stock investing. I have outlined the most often used stock market terms associated with value investing in the stock market.

    This beginners guide to investing suggests that you may have to refer to these terms from time to time when you need to know the meaning of a particular term.

  • Where can you read about value investing? Well written books on value investing allow investors to keep up to date on the market as well as providing a thoughtful analysis of the past and valuable insights about the future.

    I have reviewed a selection of the best investment books. They are well worth a read in order to expand your knowledge on value investing.

    In Summary ...

    This beginners guide to investing suggests that understanding the difference between speculating and investing, as well as the characteristics of different types of stock, will enable you to choose the stock investing strategy that best suits your risk profile.

    Becoming familiar with the jargon will also help in developing your understanding of the stock market.

    Beginners Guide to Investing - GO For It

    Now that you know more about yourself and aspects of the stock market, the question becomes what will you buy? - and then, when will you sell?

    And more importantly, how much money should you expect to make? I consider these important aspects here ...

  • A useful first step to buying and selling stocks is to gain practice without the fear of losing money.

    Fantasy investing or virtual investing will allow the beginner investor to engage in free stock investing to develop confidence in buying and selling stock.

    It is worth keeping in mind that while fantasy investing is risk free, the real world of stock investing is not. Making large 'profits' from virtual investing is no guarantee that the same result will ensue when turning to 'real' investing.

  • When should you buy shares? This beginners guide to investing suggests that buying shares is about minimizing investment risk. The most important way is to try to incorporate a margin of safety when you buy.

    Check out safe investing to play safe! Safe investing (or value investing) involves buying when the share price is below what the stock or stocks are worth. That is, when they are at bargain prices.

    Does this sound familiar? In effect it is the same as when you shop for household goods. Bargains occur in the stock market when it falls from time to time for various reasons. So the rule is – buy when there is a 'share sale' on.

    Unfortunately, nobody puts out 'For Sale' signs. You have to recognize the signs. The best sign is when everyone else (the herd) has panicked. This is when you look for quality companies.

    Another consideration is to avoid inherently risky companies. Some companies are definitely more risky than others. You need to know how to tell the difference. Check out the above link to find out how.

  • When should you sell shares? There may be a number of reasons why an investor may want to, or need to sell stocks. An investor may encounter five 'selling scenarios'. It is useful to be aware of them.

    Did you know that many investors find selling stocks more difficult than buying stocks? Check the above link to find out why.

  • What financial return should you expect? You need to be realistic about the level of income you expect to make by investing in the share market.

    Because investing in shares is riskier than leaving your money in the bank or putting it in a term deposit, you must expect to get a greater return to compensate for the additional risk. But how much more?

    The best known stock investors are flat out making 20 to 25 per cent from their stock investments in the longer term, so don’t expect to make that much. Start with a goal to make about half that amount, 10 to 15 percent over time. This will still be about twice the amount that you could earn from a fixed term investment with a bank.

    Where will this return come from? It will come from dividends that companies pay to their shareholders on a regular basis, usually twice a year, as well as capital gain from the increase in the share price over time.

    While the dividends will come on a regular basis, the capital gain will only arise when you sell the stock.

    Dividend investing is used to describe the strategy of investors who wish to maximize their returns from dividends whereas investors who are more interested in capital gain prefer growth investing.

    You should be aware that investing for value or value investing involves both dividend and growth investing. This is my preferred strategy.

  • Some tips to always keep in mind I have summarized some of the important lessons that successful investors have learned from their investment experience over the years.

    These concise statements are what one may call 'basic truths' or 'truisms' about investing in the stock market. Some are also called 'rules of thumb' because they incorporate deeper knowledge expressed in a simple way.

    I (re)turn to these concise statements from time to time to reinforce in my mind the wisdom that they encapsulate. I recommend them to you.

  • In Summary ...

    Knowing when to buy and sell shares and being realistic about the return you expect to make are important considerations about investing in the stock market.

    Being aware of some basic 'truths' about stock investing will also serve you well as a source of distilled wisdom from the experience of some of the world's best investors.

    To Conclude This Beginners Guide to Investing

    Investing in the stock market requires an understanding of yourself and your financial goals, as well as an understanding of the stock market and the way it works.

    This beginners guide to investing has posed some questions and has considered what decisions need to be made before becoming involved in the nuts and bolts of how to purchase stocks and how to sell them.

    It has also considered the mechanics of the stock market and how to go about buying and selling.

    By following this considered approach to learning stock market basics, you will be on the way to becoming a competent and successful value investor who is better prepared to achieve the goals that have been set, whether they be short term, or long term for retirement planning.

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