Last week, my friend asked me “do you know anything about stocks? Is that in your wheelhouse?” and I immediately screamed YES! THAT IS IN MY WHEELHOUSE! (Or at least that’s what I typed, days after she originally asked. It was an office IM from Friday afternoon after all.) She’d been sitting on an IRA worth $500 and wanted to play with it. That’s where I came in.
Investing in the stock market is my newest *adult* hobby, despite earning a degree in the subject almost 8 years ago.
And just like in college, I get better and better by tutoring others on the same subject. So indulge me, please.
Stock market investing for amateurs
In case you haven’t realized, getting started is the first step. For everything! We’re all inexperienced in the beginning, and as obvious as that sounds it deserves to be said.
I love helping people get their feet wet in the world of finance. Investing can get insanely complex, but we’re not there yet. We might not ever be there. But if you want your money to make you money, then you gotta get on board with the basics. And that’s where we’ll start.
Until recently my stock-savvy brain was buried in student debt and dwelling on the idea of indisposable income that comes with parenthood and homeownership. But I finally made it to that light at the end of the tunnel and dove headfirst into the market.
Since I know there are so many of us out there who just want the get the list and GTFO. So let me give you the things you need and explain after.
5 things you need
Before buying your first stock, you will need:
- A broker
- An investment account
- A strategy
- A strong stomach
- Some cash
5 steps to buying your first share of stock
Trading money for shares of stock is super simple, and it’s easier now than ever. I’ve purchased my entire stock portfolio on my phone using the Yahoo! Finance app. Here’s what to do:
- Pick a company
- Set your price
- Submit your order
- Stick to your strategy
- Place a stop loss order (optional but awesome)
5 things you need to know
Because you gotta have a least a little bit of an idea of how this game is played before you start playing. These are the basic rules of the stock market.
- Buy what you know
- Past performance does not guarantee the future (random walk)
- Start small
- Don’t keep all your eggs in one basket (diversify)
- The name of the game (buy low and sell high)
Onto the breakdown. I promise to exclude and explain any financial jargon.
What you need before your first stock purchase
The bare bones of “what you need” are listed below. I’ve also covered the topic of what you should do BEFORE investing here. A good foundation for investing starts with a little freedom, flexibility, and insurance for your well-being — and it ends with the proper tools for getting the job done. And those tools are what I have listed below.
A broker doesn’t have to be a sleezy salesman. You do not need to make calls to some dude in order to buy stocks. That’s an option, but not necessary. It’s an institution, like Fidelity or Robinhood.
All you have to do is open an account.
An investment account
An investment account isn’t your run of the mill bank account. You can’t buy stocks with your regular checking or savings account. For stock trading, you’ll need a brokerage account or an IRA for tax purposes. It’s a thing.
A brokerage account is a fun place to start because you can immediately reap the benefits of a successful trade. If you buy a stock for $10 today, and it jumps to $100 next month, you can sell it and walk away with $90. You’ll still need to pay taxes, but you can never truly escape those….
You can do this with an IRA too, but there is a penalty. A 10% penalty in addition to taxes. There are exceptions to this, but those deserve their own post (to be continued…).
When you open an account with Robinhood, you only have the choice of a taxable brokerage or an IRA. They don’t have the option of banking with them in a traditional sense (for now).
Strategies vary, and there are many books that give advice of different ones. I’ve been advised to invest everything in a Vanguard Target Date Fund (a mutual fund that regularly reallocates funds to maximize returns and minimize risk over time). I’ve been advised to invest everything in the Total Stock Market Index (VTSAX) and I know successful investors who follow popular strategies like 80/20 (80% stocks, 20% bonds) and about 60% of those stocks are index funds.
But your strategy is entirely dependent on your goals and the timeline of those goals. For time’s sake, I’m going to assume you want to make money for retirement (whether that is in 10 years or 50) with the least amount of risk. That is the standard goal that a financial advisor or planner will work with unless told otherwise.
The most money is made over time, and I will always suggest sticking out the ups and downs as long as possible. The best strategy for beginners is to make it a habit.
Something as simple as an automatic monthly or weekly deposit cash into your investment account is perfect. Eventually your strategy will evolve to balancing out your risk or buying stock in a company you think will go far.
The point is this: you shouldn’t just buy stock because someone told you to. You should buy it because it’s in line with your goals. If you want to receive dividends? Invest in stocks with low P/E ratios. If you want long term growth? Invest in strong. If you want stability, invest in value.
There are a ton of things to learn and when you regularly invest you will grow your working knowledge of the task AND your investments. But at the end of the day you need to know what you want in the long term.
A strong stomach
The stock market historically makes an average of about 10% a year. That’s a damn good return considering the best savings accounts will only make you about 2%.
However, that 10% is only an average. There are huge swings in there. For better or worse.
In 2008, the S&P 500 lost over 38% in value. And we all know how dark those days were. But in 2013 it soared to over 29%, so those are some examples of outliers. There are big wins to be made, which is why they say the bigger the risk, the bigger the reward.
If you can suck up the emotions that come with waving values, you can handle the market for the long (and profitable) haul. But without the mental strength to stick it out, you’ll break rule #5 (buy low and sell high) and waste your earning potential.
You gotta have something, but it doesn’t have to be a lot. The only requirement of THIS cash is that you won’t be sad if you lose it.
For instance, you need an emergency fund in place before you should start investing. You don’t want to rely on your investments for a new set of tires on your car. This money needs to be able to ride the waves of the market with minimal stress on you.
But you can start with as little as $5 at Robinhood and they let you microinvest in small portions of shares instead of buying a whole share.
Share prices vary from minute to minute, and they range from ~$15 to $1800 (I’m looking at you, Amazon…)
How to buy your first share of stock…!
Pick a company (or ETF)
Pick one. Any one. Or at least any one with a share price you can swallow.
from the Robinhood Home Screen, you can search for virtually every publicly traded stock. They’ve even broken them down into popular segments.
Company’s come with a ticker symbol or 3-4 letters. Pinterest is PINS, Amazon is AMZN, Disney is DIS, etc. You can get all the details of a company’s stock from several places, but Robinhood has some great features (which I’ll cover in a minute!)
Here’s a screenshot of Southwest’s stock
I do almost all of my trading through an app on my phone. It’s a beautiful one handed process once I decide what I want to buy.
Set your price
Once you know the company you want to buy (doesn’t that just sound cool?), you can decide what it’s worth to you. There is no wrong price.
As they say… Beauty is in the eye of the beholder. If you are willing to pay it, then that’s what it’s worth [to you]. But it’s always nice to make an educated guess on the value!
Could you imagine paying $10,000 for a white t-shirt? Hell no. Because you know you can get a NICE one for like $8 at Target (TGT). And that’s because you’re aware of the t-shirt market. Stocks aren’t much different.
Any company selling their stock to the public are called Publicly Traded Companies (get it?) and there are a ton of rules that come with that designation. The most valuable one is the full disclosure of their financials (what they’re doing with the money they’re making). And all those details translate into the value of their stock.
This is the Yahoo! Finance app’s interface. I love them too for the format they use. You can adjust the graph to show the stock price changes over the day, the past 5 days, the past month, all the way to the MAX or the life of the stock.
It goes deeper, but it’s good to get a general idea of where it’s been before you decide where you’d like to come in.
In the case of Shake Shack, who I’ve wanted to buy for a while, I notice the price tanked today by A LOT. And yesterday I was mad at myself for not buying that $83 stock when I saw it at $60 in April.
So now I’m thinking should I buy it at $60 and hope it goes back up?
$60 is my price. It’s the price I’d be happy with because it seems like a good deal to me considering where the value has been and gone over it’s history. I’m comfortable with it because I love Shake Shack <3 and really anything well branded and delicious.
Submit your order
To place a trade, you start by hitting that simple Trade button and then choosing the account you’ll use to pay. You can add your brokerage account right there if it isn’t already linked.
Then you will adjust the settings to your liking. There are different types of orders you can make, but for the sake of this example, let’s go with a “market” order. That’s where I started.
Stick to your strategy
Strategy for a baby stock picker is best left as simple as possible. The most advanced strategies are left for the “day traders” who Buy and sell shares almost daily and make it their job. Seriously.
The most valuable strategy is this: buy and hold. Meaning once you pick it, plan to hang on to it.
Since the market is always changing, it can be hard to watch your portfolio go up and down. Warren Buffet even said “most people aren’t cut out for investing in stocks” because it can leave the underinformed masses riddled with anxiety.
if it goes too high, you may be tempted to sell too soon and miss out on some major gains down the road.
If it goes too low, you may want to sell and cash out even if you’re losing money. This isn’t always the worst idea, but if you can find a way to offset those losses then use it.
Hedge your bets (optional)
Hedging your investment is what hedge funds do, make sense? They’re very sophisticated but the concept of hedging your bets can be done by an amateur too so don’t get it twisted.
And when I say “hedge” I mean protecting your money with an beneficial exit strategy. Instead of just selling at a loss and running away with your tail between your legs, you can buy options which will benefit you if the stock falls (or rises).
I won’t get into those now, but the easiest stock investment protection is a stop-loss order. Just like when you bought your stock, and can make an “order” to sell at a certain price.
What price? Well I know a financial advisor who doesn’t let his client’s investment drop more than 10%. He places a stop-loss order at the purchase price minus 10%.
you can also do this in reverse. For instance, I have a stock a really want to sell, but I don’t want to sell it at a huge loss. So I set sell-limit order at a high price and just *hope and pray to the stock market gods*
it’s worth a shot!
Your broker could be a robot or just an online platform that you control. A broker is the entity which uses your money to buy your stocks.
Brokers are necessary. Period. You can’t just throw cash at a screen and buy stock. There are laws in place, and this is a good thing!
I use Ally, Robinhood, and Vanguard for my investments. They are all awesome, and there are plenty of other awesome brokers out there too. They major differences between them is the fee structure (cost) and capabilities (integration and offerings).
More and more brokers are offering $0 commissions on trades. Meaning, you make an order, you pay cash. Period. No excess cash is paid to the man. Yay.
I highly recommend you only choose a broker with a $0 commission. Paying commission fees these days is like paying for shipping… completely avoidable.
Robinhood is the original $0 commission broker and they changed the game for amateurs like you and me. They made stock portfolios WORTH IT for the micro-investor and have a crazy simple app with all the bells and whistles of even Yahoo!. If you sign up with my link you can get up to $500 worth of FREE stock, but free stock no matter what..!
What you need to know about playing the stock market
These are my rules to intro investing and they are insanely easy to understand. Typical financial gurus will talk and assume you already know some things, and here they are.
A little foundational crash course, if you will.
Buy what you know
Don’t bother trying to be “smart” and impress anybody with your stock picks. Buy stock in companies you love, trust, and value.
This was my favorite lesson from Beating the Street by Peter Lynch. He says, “if you can’t describe what they do with a crayon, don’t buy it” and I LIVE FOR THAT SHIT.
Some of my worst purchases were made because of hearsay and PR moves made by dodgy companies. It’s a damn shame.
But do you want to know who my best performers are?
Target (TGT) and Southwest Airlines (LUV). These are companies I not only love, but I funnel money to them right and left. And everyone I know does too. I love, trust, and value them. It’s the trifecta!
Past performance does not guarantee the future
One finance phrase you’ll eventually hear is the “random walk”. This is the basis of investment value and it literally means no one has any idea how the market will perform in the future. When you invest in the market, you are embracing the random walk and are along for the ride.
This is important for you to know because if a financial professional ever promises future value, they are breaking the law.
Just because a stock or fund performed favorably in the past does NOT promise the outcome of future performance. This is where it gets tricky with your strategy, and where your personal financial education will need to come into play.
Professionals can advise you of anything, but unless you get a decent understanding of what’s going on and what you want then you’re giving them free reign over your money.
And nobody respects your things like you will.
I feel the need to say you do not need thousands of dollars to start buying stock. Phew ok glad I got that off my chest.
Yes, the more “sophisticated investors” are buying hundreds or thousands of shares in one order, but we’re new! And that’s totally cool. We’re just getting our feet wet and building a solid understanding of the market and our risk tolerance. Don’t be ashamed of your small orders. Just have some fun and reap the rewards.
Don’t keep all your eggs in one basket (diversify)
Maybe you do have $1,000 sitting around and you want to put it in the market. That’s great, but do you remember hearing people say “don’t spend it all in one place”? There are a few ways to interpret that sentiment, but all I hear is “spread your money around”.
and THAT is a timeless investing principle to live by.
The risk of the market is offset as your portfolio reaches 20+ stocks. In other words, the more things you’re invested in, the less likely they will all fall at once.
Taking it one step further, one strategy behind diversification is to cover competing companies
The name of the game (buy low and sell high)
Maybe you’ve heard this phrase before, and that’s because it’s the winning strategy. Dave Ramsay will tell you you only lose money in the stock market when you take your money out of it. Particularly when you get freaked out and decide to sell just because the price is dropping before your eyes.
This is the amateur of all amateur moves, and there are few instances when a stock price drop is an indicator of sudden doom for a company.
The snowflake nightmares of Enron and Lehman Brothers who shut down overnight dropping stock to almost $zero are incredibly unlikely and unfortunate (and a prime reminder to diversify).
If you absolutely have to or are itching to sell your stock, only sell for more than you paid.
Stock Market Investing 101 – graduation (yay)
That’s my little crash course. I hope you can say you learned something new and are at least *slightly* less intimidated by the concept.
We covered the 5 things you:
- need to know
- need to have
- need to do
In the most normal terms possible for normal people who aren’t trying to talk circles around you.
Do you have any questions I didn’t answer?
Please ask in the comments below!! And be sure to subscribe to my newsletter to stay up to date when more investment topics make it on here.