Let’s have a short discussion on, how to start investing in stocks. Every investor would have asked themselves this question at some point in time. But before we begin, do you know what you are investing in? You are buying stocks, but do you know what a stock is?
What is a Stock?
A stock can be thought of as, a very small piece of a company. So when you buy a stock, you are actually buying a very small portion of the company. You are paying for the brand and the value that you think the company brings.
This is why it is recommended to own stocks of established and well-known companies and not shady companies or companies that are not doing very well.
Now that you know what a stock is, how do you profit from them?
How do you make money from stocks?
There are 2 simple ways to make money. Firstly, it is through the buying of stocks and waiting for their stock price to appreciate or go up.
There is a very famous phrase for this and I am sure most of you would have heard it before. “Buy Low, Sell High!” It just refers to buying a stock at a low price and selling it at a higher price. The difference in prices is how much you will earn.
Here’s an example.
On Tuesday you bought a share of Starbucks for $30. And on Wednesday you sold that share for $50. So in this scenario, you would have made $20! In 2 days you would have made 66% of the initial sum you put in to purchase this stock. What a fairytale-like deal!
(In actual fact, to see such great returns will probably take a lot more than just 2 days. You are going to need to be more patient.)
Buying of stocks and waiting for their share price to appreciate is the most common way investors make money.
The other method is through the dividends that the stock pays out.
Some companies give a dividend payout to their shareholders. A dividend is a distribution, normally a sum of cash, that the company pays their shareholders. The payout can be yearly, quarterly or monthly, it depends on the company. So when you own the shares of the company, you will receive the dividend.
Although the dividends you get from a company are normally not a large sum but this is a stable and consistent way of receiving income. And over the long term, the amounts you get from dividends can be quite significant.
So some investors prefer this method of choosing and buying stocks that pay a consistently high dividend rate every year.
The Brand & Value
Earlier I mentioned that when you own shares of companies, you are paying for the brand and the value that you think the company brings. And I recommended buying stocks of established and fundamentally strong companies. The reason is because the stock prices of these companies are always growing over time as these companies are financially sound.
These companies are also commonly known as blue chip stocks. A blue chip stock is a company that is well established and very resilient. They produce goods or services that are widely used by many people in the market. Blue chip companies have a record of posting strong and stable growth, even in the event of bad economic conditions or market recessions.
To give you an example, I would like to show you the chart of Microsoft (MSFT).
This chart shows the past 5 year period of MSFT. We can see that 5 years ago, Microsoft stock price was $32.57. The current price of Microsoft is $75.
So if you purchased the stock of Microsoft, you would have made 130% of the initial amount you put in. And on average, you would have gotten a compounded annual growth rate of 18.15% a year!
(And this is not a fairytale-like deal. You actually do get it)
Your Greatest Asset
The best asset you can have when you are investing, is TIME.
When you have time, you can weather economic downturns or recessions and let compound interest work for you!
Now we are looking at the chart of Microsoft from middle of 2006. You can see that even though Microsoft was affected by the 2008 financial crisis, but their stock price rebounded and continued to move higher and higher as the years passed.
The more time you have to invest and stay in the markets, the better your chances of getting good returns. And when you purchase strong stocks like blue chips stocks, they can withstand major financial crisis and continue to be profitable afterwards.
How do I Buy Stocks?
Some countries have schemes that allow you to use your retirement savings account to purchase shares, but for countries that don’t have this alternative, you will need a brokerage account.
A brokerage account is an account that lets you buy and sell shares online. When you are choosing your brokerage firm, be sure to note the commission fees and if there is a minimum sum required to open an account. Most firms charge a commission fee for every trade you make, regardless of buying or selling. You should also keep an eye out to see if there are any useful rebates or perks when you open an account with them.
Once you have transferred your money into your account, you can begin to buy, sell and invest in stocks.
Looking to get started?
I hope that after reading this article on how to start investing in stocks, you now have a better idea on what stocks are, how you can make money from them and how to buy them. And you can answer someone when they ask you, “How to start investing in stocks?”.
If you found this article useful, please don’t hesitate to share it. As always, thanks for reading!
If you are keen to learn more on how to invest in stocks, you can check out my course. It teaches you the basics of using Technical Analysis to view stocks. Be sure to look for the discount coupon on that page!