September 12, 2023

A Beginner’s Guide to the Stock Market

Why do we write a beginner’s guide to the stock market? Many complete beginners are unsure how to invest in stocks and wait to buy their first stock. The fear to lose money is not unfounded, but even a complete beginner can invest profitably easily.

TL;DR – Aaron’s Summary

  • The stock market offers many ways to invest for beginning investors,
  • ETFs are a great segway into investing
  • Investing a planned amount every month (called dollar cost averaging) is great to get started even on a small budget

Securing Enough Funds to Invest Money in the Stock Market

If you want a secure financial future, there is no way around thinking about how you save and (ideally) multiply your hard-earned money. The stock market is a great place to build a secure financial future.

While there are many ways to make money fast as a woman, stay-at-home parent, non-native English speaker, or person of any background, offline or online, it is essential not to forget the most simple rule: never spend more than you earn. And make sure you save for the future.

I am sure you have heard the phrase “pay yourself first”. It should mean “pay your future self first” before spending money on current needs. That includes paying for living expenses, bills (the “musts”) as well as things you desire like a new pair of flashy sneakers (the “wants”).

While there are different formulas you can apply to define exactly how to best split between the 3 should be, a rule of thumb is to spend ~50% on your needs, ~20-30% on your wants, and use 20-30% to save and invest.

Improved budgeting split
Improved budgeting split

Now because this third bucket tends to be thoughts of last (when no money is left end of the month), it is recommended first to put the money aside that should be put into savings (use a high-yield savings account!) and investments, before spending the rest on the needs and wants.

To ensure you invest profitability, follow these simple steps to stock investing.

A Step-By-Step Guide to Stock Market Investing

Step 1: Setting the goal: investment objectives

Before investing in your first stock, it is important you clarify why you are investing: the stock market is a great place to generate real wealth, generate passive income, and achieve your financial goals – but it is also easy to stumble into common pitfalls and costly mistakes. To ensure you are making the right decision and to avoid such pitfalls, it is key to set clear goals.

Step 2: Understand your risk tolerance

As you can imagine, everything comes with a price, and as any retired hedge fund manager will be able to tell you: higher yield (= return) stocks often come with a higher risk of you losing the money you invested. Understanding that trading stocks carry risk and that you should invest according to your personal risk appetite is important. My personal rule of thumb: only invest money you could lose completely, and still be ok. Maybe not happy, but ok. Never ever invest money that you borrowed, or need to cover important expenses (like surgeries, insurance, mortgage).

Following a de-risked strategy should shield you from a part of the risk, but still, it is best to keep in mind, in the worst case, all your money will be gone. Now that you understand why at least a basic grasp of the stock markets is important, let’s understand, what you can actually buy on the stock market.

Stock market vision
Stock market vision by a beginner (Picture generated by Midjourney)

Step 3: Pick stocks or assets to buy

There are several different assets you can trade on the stock market:

  • Stocks are pieces of ownership in the company they represent (like Amazon or Apple) – also called individual stocks. Especially beginners tend to overestimate their understanding of an industry, or they want to invest in a company they have heard of. These can be costly mistakes. If you have just started investing, it is better to go for a group of multiple stocks instead of individual ones.

  • Exchange Traded Funds (ETF) track a group of assets like a stock index – for example the S&P 500. In simple terms, instead of a single stock on a company, it combines hundreds and thousands of stocks and therefore is less likely to hugely swing negatively (but also positively). Many trading and investing strategies incorporate ETFs, so it is an important asset for a beginner to focus on.

  • Bonds are debt that offers you interest payments on your investment over time. Some of them are considered especially safe and stable, for example, government bonds, however, returns are often lower than stocks or ETFs.

  • Options are contracts that allow you to buy/sell stocks at a set price in the future and should be reserved for a more advanced investor.

Investing in ETF is usually the best way for beginners to get into the stock market, because it allows diversification, and lets you buy a group of securities at once. ETFs also tend to have lower fees than investing in individual stocks. This is why this beginner’s guide focuses on ETFs for investing.

Imagining the stock market as a beginner
Imagining the stock market as a beginner (Picture generated by Midjourney)

Step 4: Research ETFs

There are different kinds of ETFs: some track a certain market, like the S&P 500 or Nasdaq 100 index. Others concentrate on a specific sector or industry, for example, Oil & Gas ETFs that track oil prices.

You can research ETFs online using stock market analysis websites and read through the official description of each ETF before making your decision. If you have no idea where to start, consider a very broad ETF, like the MSCI world, that tracks hundreds of companies across multiple countries and industries.

Finally, make sure to review the fees embedded in the ETFs you are considering. Keep in mind that these fees can eat away at your returns significantly over time, so it is important to choose carefully.

Step 5: Opening a brokerage account

In order to start investing in the stock market, you need to open a brokerage account. This is like a bank account, but specialized in trading stocks. Your money will be held in the brokerage and you will use it to buy ETFs.

Most brokerages offer different account types with different fees and features. Online brokerages are often more affordable than traditional ones, so before choosing, it’s important to compare the services they offer, their fees, and the investments they make available. There are many ETFs available for reasonable prices, so make sure to check out the following online brokerages that smart traders and investors like:

  • For those based in the US: Fidelity

  • For global citizens (not all countries covered): Vanguard

Step 6: Placing an order

Once you are ready to start investing, you will need to enter a buy or sell order into your brokerage account. Again, as a beginner, stick to ETFs and buy orders.

Step 7: Hold your ETFs

While there are many different ETF trading strategies, buy & hold is the most advisable for inexperienced traders in order to build long-time wealth. Because you hold the ETFs over years and decades, your investment decisions will have less of an effect on the outcome, which in the case of novices is great to avoid costly mistakes. Our recommendation (and a true goldie of trading and investing strategies) is: buy & hold

Step 8: Rinse & repeat

Once you have successfully bought your first ETFs, you will feel much more confident in your investing skills. You might rely on the stock market even to build a passive income. One of the best investment advice for beginners

Discovering the stockmarket
Discovering the stockmarket (Picture generated by Midjourney)

What Trading Stocks Really Means – Typically Asked Questions

What are stocks?

Stocks are pieces of ownership in the company they represent (like Amazon or Apple). If you buy stocks from a certain company, you become part owner of that company. And as an owner, if the company does well, you make money.

A beginner’s favorite: exchange-traded funds (ETF)

There are many different kinds of ETFs: from those that track the stock market to specific sectors and industries. ETFs offer diversification at a low cost, making them an ideal asset for beginners. Be careful with the type of ETF you buy: there are those that return a dividend, while others automatically reinvest any proceeds into the fund. When researching ETFs, make sure to check out the fees and compare different brokerages. Once you have found the right one, opening an account with a brokerage is fairly easy and then it’s just a matter of placing your order – et voilà! You have started investing in the stock market! Always remember: buy & hold, it’s the best advice for beginners. Good luck!

What kind of returns can I expect?

The returns you can expect from the stock market depend on the ETFs you pick and how much risk you are willing to take. Generally, ETFs with higher risks have higher yields but also come with a greater chance of losing your money.

How do I monitor my investments?

Monitoring your investments is key to ensuring that they generate returns in line with your expectations. A great way to monitor your investments is to set up alerts so that you stay informed about changes and events related to ETFs you have invested in. Additionally, regularly looking at the performance of your ETF will give you a better understanding of how it behaves over time.

What are index funds?

Index funds track a stock index like the S&P 500, which is a group of stocks representing the biggest companies in the US. Investing in an ETF that tracks an index fund means that you are investing in lots of different stocks at once, rather than just one single stock. This makes it easier to diversify your investments and reduce risk. This can be especially beneficial for beginners who are new to the stock market, as it helps them gain exposure to a variety of assets with one single ETF purchase.

What are mutual funds?

A mutual fund is a group of stocks or ETFs that are managed by an advisor. Different mutual funds have different goals, such as growth or income, and they come with different fees depending on the type of fund chosen. Mutual funds can help beginners diversify their investments more easily than investing in individual stocks.

What are momentum stocks?

Momentum stocks are stocks that have a high return potential but can also come with a much higher risk. Momentum stocks move quickly, so they can be volatile and unpredictable.

What are value stocks?

Value stocks are stocks that are seen as undervalued by the market, and can offer higher returns if they are managed correctly. Value stocks tend to be more stable than momentum stocks, though they may not have the same potential for high returns.

What are insider tricks I should know as a beginner investor?

Insider tricks can be tricky and even illegal. As a beginner, the best thing to do is research stocks carefully before making any decisions and always look for reliable sources of information. Additionally, it is important to remember that stock market investments are inherently risky – while they can offer great returns, they also carry potential losses if you make the wrong decisions.

Always use the tools available, such as financial calculators, to help you make informed decisions. Lastly, don’t get caught up in the hype of buying and selling stocks – stay informed and disciplined when it comes to investing in the stock market. This will help ensure that your investment decisions are sound and increase your chance of success.

Final Thoughts on a Beginner’s Guide to the Stock Market

Investing in the stock market can be intimidating for beginners, but with the right knowledge and strategies, it doesn’t have to be. Start by researching ETFs, only investing money you could theoretically lose, and plan to keep your ETFs for the long run. As you build more confidence with your investing, you can step by step expand your ETFs and later also consider other time-tested trading approaches. As money will generate returns over a long time if put into good and secure stocks, start investing as soon as you have saved enough money so your emergency fund (6 months of living expenses) is covered. Good luck, and go out there and get started creating real wealth!

Getting started with the stock market
Getting started with the stock market (Photo by Burak The Weekender)

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Originally from Tokyo, I am a world-traveling Japanese adventurer who loves connecting with people.

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