Investing Tips for Beginners

Investing 101 for beginners is a collection of tips to help you take the first steps towards developing your own financial strategy. The article explains what knowledge a beginner can’t make money in the stock market without.

Use your personal brand knowledge

The first thing to remember is W. Buffett’s advice to never invest in the stocks of a company whose business is not well understood. Introducing yourself to the stock market with the brands that surround the would-be investor in his or her everyday life is a frequent recommendation for beginners.

Studying the financial performance of companies whose activities are of interest can be a fascinating pastime. And a personal involvement will help to address crucial issues such as key competitive advantages and the future prospects of the business. Without an understanding of these factors, investing becomes like a casino game.

Know the fundamentals

Buying a stock is actually buying a small stake in a company. A tip for beginner investors is to choose securities based not on the hype news in the media, but by examining the financial performance of:

revenues;
net income;
earnings per share, etc.

Before you start buying individual stocks, it is essential to have an understanding of basic business valuation criteria and to learn how to interpret financial statements. Publicly traded companies must provide quarterly information on key indicators.

People who follow a value investment strategy use fundamental analysis. This approach allows you to compare companies by multiples and other criteria to find undervalued companies among them.

Educational tools offered by brokers can also be useful. They explain the investing basics for beginners in an easy-to-understand manner and provide analysis of the current market situation.

There are free online courses, e.g. Investing for Beginners 101 from Stock-Trak. They are designed for beginners who are interested in understanding the basics.

Use technical indicators to spot trends

In addition to fundamental analysis, there is also technical analysis. It is often considered as a tool for traders targeting short-term trades. But this does not mean that a beginner with a long investment horizon should discard it.

The skill of determining trends can be useful for a long-term investor as well. Key concepts of technical analysis:

chart types (bars, Japanese candlesticks, etc.);
different patterns on a chart (cup and handle, double top, etc.);
indicators (RSI, moving averages, etc.).

Do the math

Any investment strategy comes down to numbers. An investor needs to know exactly

the right balance of profitability and risk for it;
the time horizon and financial target;
the planned frequency of account funding;
the amount regularly allocated to the investing.

Your goals and time horizon

The first task for the beginning investor is to decide what goal he or she wants to achieve. This determines the time horizon required to realize what they want to achieve.

The time horizon, in turn, influences the investment strategy and the list of suitable assets. It determines the degree of risk that an investor can take without compromising his or her final goal.

For example, a young person who wants to build up retirement capital will be advised by a financial advisor to invest in growth stocks. And for someone whose investment goal is to save for next year’s holiday, it’s a high-yield savings account.

Define Your Tolerance for Risk

When choosing assets for investing, one should consider not only the ability to accept risk from a financial point of view, but also the psychological willingness to lose money.

The lower a person’s risk tolerance, the less volatile assets an investor can afford. Market drawdowns are inevitable. This means one must be prepared both for a “paper” loss and for fixing it if necessary.

Among the best investing tips for beginners is to use low-volatility assets for your first investments. One of the main reasons why beginners fail and give up trading in the stock market altogether later on is overestimating their risk tolerance.

Determine Your Investing Style

There are several different approaches to investing in the stock market:

Self-directed. The investor chooses their own assets. The investor may pursue either an active strategy or a “buy and hold” style.
With the help of a financial advisor. The investor transfers his capital in full to a trustee and pays a high commission (1% of the assets value per year or more).
With the use of a robo-advisor. These are computer programmes that help create and maintain an asset allocation. They select it using basic information about the investor’s risk tolerance and time horizon.

Unlike a real person, robo-advisors cannot take into account all individual aspects, but such programmes are free of charge and less often have a low price.

Whether it is reasonable to use an advisor depends on the investor’s capital and the need for additional services (e.g. real estate management, tax optimization assistance, etc.).

Choose Your Investment Account

There are several types of investment accounts. Each one is designed for a different purpose.

The most popular are 3 types of brokerage accounts:

401 (k) and its analogues. This is a corporate retirement plan. It is considered the most advantageous way to accumulate capital due to employer contributions.
IRA. It is an individual retirement account. Suitable for someone who doesn’t participate in a corporate plan or has the ability to save more than it’s possible to contribute to a 401(k).
Taxable brokerage account. This is the most suitable option for someone who wants to manage their capital on their own or use a robo-advisor.

Any type of retirement investment account gives an investor the right to a tax break. That is why it is recommended to join a retirement plan first in nearly all tips on investing for beginners. But keep in mind that there are limits on the maximum amount to be deposited per year and penalties for early withdrawal.

Apart from retirement plans, there are other targeted investment accounts that offer tax benefits. For example, the 529 plan, HSA, etc.

Learn to Diversify and Reduce Risk

Diversification reduces the risk that a single bad investment will cause serious damage to an investor’s capital.

Low or negative correlated assets are added to the portfolio to minimize the volatility of the total portfolio value.

The easiest stock investing tips for beginners is to buy ETFs or mutual funds that replicate a broad market index. Thus an investor gets a stake in a balanced set of assets.

Most funds copy an index or work within an active strategy with one asset class. But there are 2 types of mutual funds that offer maximum diversification:

Balanced mutual funds. These companies constantly invest in different asset classes ( stocks, bonds, precious metals).
Target-date funds. Initially, the manager focuses on investing in stocks to maximize returns. Then, as the date of return approaches, they increase the proportion of fixed-income assets.

When building a portfolio on your own, make sure that it comprises more than just different asset classes. The simplest option is to combine stocks and bonds. A more complex one involves adding gold, real estate, cash and cash equivalents, etc.

Stocks in the portfolio should be diversified by sector. That is because at different periods of the market cycle, particular types of business take precedence.

Ease into investing with a 401(k) or an IRA

Many employers offer a 401(k) retirement plan or its equivalent to their employees. And the plan is available in one of two types.

The first, a traditional 401(k), gives an opportunity for a tax-free account. However, you will have to pay tax on the investment income, but only when the money is withdrawn. No annual tax is due, as is the case with a standard account.

The second type, a Roth 401(k) is fully tax-free for all profits made through the investing. However, it does not reduce the tax base. Tax must be paid on the money credited to it at its normal rate.

This type of account is more suitable for people who have a small income and therefore pay low tax. It is also better suited to people who think they can make a bigger profit, which would be more profitable to be tax-free than making annual contributions.

A corporate retirement plan is considered to be the easiest way to begin investing for the following reasons:

The employer transfers part of the employee’s salary to the investment account himself. This is convenient for people with poor financial discipline.
Most companies offer retirement plans with a limited range of assets available. You are usually encouraged to invest in mutual funds, which are managed by a professional investor.
Many companies put a percentage of an employee’s salary into their retirement account ( most commonly 4-6%, but never more than the amount the person contributed). This helps increase the final return. The money is not available from the employer without participation in a retirement plan.

An important disadvantage of the 401(k) programme is that the maximum top-up amount in 2023 is $22,500 for young investors and $30,000 for people over 50. These figures are indexed annually.

Restrictions on investment options can turn from an advantage to a disadvantage. This happens if a company suggests its employees only invest in low-performing funds with high management fees.

Therefore, it is considered a 401(k) account to contribute exactly the amount that will maximize the employer match. Meanwhile, the remaining available money should be transferred to an IRA or a taxable brokerage account.

But there are also companies with a retirement plan including an option known in financial jargon as a brokerage window. Within such an account, a person can buy any stock and ETF of his/her choice.

An individual retirement account can also be of 2 types – a traditional IRA and a Roth IRA. In 2023 this plan allows you to save up to $6,500 ($7,500 for people over 50).

Such an account would have to be funded by an investor without an employer’s help. Yet many financial companies, especially mutual funds, allow one to set up auto-funding and investing as part of a pre-defined strategy.

Understand the different ways to invest

Capital can be created by using different types of investment instruments. Beginners should first learn the features of these asset classes:

Bonds. These are debt obligations issued by companies or the government. They yield fixed returns and there is relatively little market volatility in bonds.
Stocks. They are also called equities. They entitle their owner to vote at shareholders’ meetings and receive part of the company’s profits in the form of dividends. However, not all issuers pay dividends. The volatility of the stock price depends on the size and business direction. Still, it is higher than that of bonds.
ETFs and mutual funds. These are a type of collective investment. A management company pools the capital of thousands of investors and invests it in a particular type of asset. Funds are needed to facilitate portfolio diversification and to provide access to assets that are too expensive for a single private investor.
REIT funds. This is another type of collective investment. Such companies make money from real estate and pay out regular dividends.
Gold. Gold is widely regarded as an important component of a classic long-term portfolio and is necessary for protecting against inflation. Investing in this asset is best achieved through gold ETFs.

There is also money to be made on the stock exchange with the help of derivatives – futures, options, etc. But such contracts are intended for experienced traders.

Avoid individual stocks if you’re a beginner

All investing advice for beginners suggests that the market is always expanding. But they are referring to the SP500 or another index covering dozens of companies. Over the horizon of many years, the values of most stock indices do go up.

However, this rule does not apply to individual companies. Many of these companies fall because of industry problems, the issuer’s own business, or reduced investor interest.

It takes a lot of market research, financial statements and the prospects of individual issuers to find a stock that makes a good long-term investment. A beginner in the stock market is unlikely to have the necessary experience to do so.

Therefore, the most common investment advice available from financial advisors or educational resources for beginning investors is to invest in ETFs and mutual funds.

H2 Be prepared for a downturn

There are periods in the economy leading to a decline in the value of most assets. For example, this happened in the spring of 2020. In such a situation, even a well-diversified portfolio will lose some value.

An investor with a long-term strategy should be prepared for such events:

be capable of accepting it psychologically;
have an emergency fund that will allow him or her, in case of illness and other problems, not to sell assets during a downturn;
have a strategy to act during a bear market (the most common advice is to stick to the same frequency of building up positions the way one did before the crisis).

The key point to remember is that losses during drawdown periods are “paper losses”. An investor has not lost money until he or she has sold the assets. Provided quality securities have been selected for the portfolio, their quotes will recover when the crisis is over.

Try a stock market simulator before investing real money

A common mistake beginners make is to be convinced of their ability to “outplay” the market. Stock market simulators provide an opportunity to test whether a person is actually prepared to make good investment decisions.

With the help of such programmes one can make virtual transactions with no risk of real money. This allows them to test different strategies and track one’s reaction to failures.

Stay committed to your long-term portfolio

What is an important skill for the long-term investor is to be able to abstract away the information noise. Constant monitoring the stock market news and minimal fluctuations in quotations only leads to emotional exhaustion and wrong decisions.

That is why rebalancing rules are a must-have investment strategy. Since asset values change in different ways, their ratios deviate over time from what was originally chosen.

An investor should check the health of his portfolio regularly and bring it back into proportion (sell higher-priced assets and buy back lower-priced ones).

There are popular approaches to determining the rebalancing frequency:

at regular intervals ( best no more than once a quarter);
when the deviation limit is reached (e.g. 10%, i.e. with the original 60/40 ratio, the investor rebalances when the 70/30 ratio is reached);
a combination of the previous approaches (e.g., the investor checks the portfolio’s condition every quarter, but takes no action if the deviation does not reach 10%).

It is assumed that for the rest of the time, the investor buys assets according to a set plan. For example, monthly allocating the money credited from wages to the positions available.

Start now

Before one begins investing, preparatory work must be done. But one should not put off taking the first step for too long, especially in order to wait for the best entry point.

All financial advisors believe that the best time to start investing for the long term is now.

The earlier a person starts investing in securities, the greater his or her final return. (Provided that the portfolio is well diversified and income is reinvested).

The so-called compound interest provides this result. As a result, not only the money invested, but also the reinvested dividends and coupons begin to yield income for the investor.

Thus, despite experiencing drawdowns in certain years as a result of stock market crises, investor’s capital increases over a horizon of several decades in a graph that resembles an exponential pattern.

The figure below illustrates the portfolio value dynamics with no regular additions and an average annual return of 8%.

Avoid short-term trading

When choosing a passive income instrument, it is important to consider your investment horizon. Many financial advisors do not recommend investing money in equities that is planned to be spent within the next 3 or even 5 years.

For this reason, with a short investment horizon, there is a risk of facing drawdown closer to the end of the investing period. As a result, one will be forced to sell the stocks at a loss or postpone the realization of one’s financial goal.

When the investment horizon is short, less volatile assets are recommended:

high-yield savings accounts;
deposit certificates;
bonds with a maturity date close to the planned investment return date.

A common mistake beginning investors make is to think of the “buy and hold” strategy as too slow and strive for quick profits. Statistics show, however, that most people choosing active trading end up losing their deposits. Whereas investors who have followed the idea of long-term savings for decades have a positive financial result.

Keep investing over time

While compound interest yields notable results, it is not enough to buy a few ETFs or mutual funds once in order to build real wealth.

To build capital, what you need to do is to set aside a percentage of your income on a regular basis. Fundamental recommendations a beginner might find useful:

Budget all expenses so that you know the exact amount of money left over each month.
Set up automatic investment account replenishment from each payroll receipt.
Allocate any unplanned income (e.g. bonuses, cash gifts, etc.) to the investment account.

Investing for retirement capital is a long-term process. It should become a habitual routine, i.e. one does not wonder every time whether to save or buy a security, but acts according to a plan.

Many people find it difficult to start saving substantial amounts on a regular basis. It is therefore important to realize that the first step does not have to be a significant one. Even 1% of income, even $100 a week over decades can improve one’s financial situation.

Bottom line

Investing is seen as the only way to preserve and multiply capital. Interest rates, even on high-yield savings accounts, do not protect money against inflation.

As a beginning investor, it is important to assess your skills and capabilities. It is much better to invest regularly and securely than to make a single large investment or chase a quick profit.

Investing in the broad stock market, such as the SP500 index, is considered the easiest way to build up retirement capital. Buying individual stocks requires considerably more knowledge and time to select securities. However, some companies offer returns well above the market average.

FAQ

How should a beginner invest?

The key objectives for a beginner are to develop financial discipline and to follow a plan. That is, it is important to learn how to invest a certain amount of income regularly and not to sell assets at the first market correction.

When it comes to investment instruments, beginners are recommended to look at SP500 index mutual and exchange traded funds, government bonds and savings certificates.

Is $1,000 a good start for investing?

Yes, a portfolio of stocks and bonds funds is possible for this amount.

How much should I invest for the first time?

In fact, the size of the initial deposit is less important than the frequency of subsequent deposits. Many online brokers do not impose a minimum deposit limit. Therefore, it is possible to buy the first stocks by spending only a few tens of dollars. Even so, the investor should have an emergency fund to cover 3 to 6 months of expenses.

Is $5,000 a lot to invest?

For $5,000 a diversified portfolio of both individual stocks and ETFs can be assembled.

How to invest starting with $100?

The best investing advice for beginners with little money is to focus on index funds. High-yield savings accounts can also be a good solution when it comes to a short investment horizon.

How can I invest smartly?

A smart approach to investing includes 3 rules:

avoid delaying;
keep in mind diversification;
take into account the commissions, fees and taxes.

Proper goal setting, the ability to accept risk, and tolerance for account drawdowns are also important to build a smart strategy. Lacking any of these factors, an investor will find it difficult to get the desired results.