How To Invest In Stocks: A Newbie’s Guide To Getting Started

How To Invest In Stocks Infographics

One of the greatest joys in investing is to be able to have money working hard for you while you are busy with life. It is a means to a better future. To invest in stocks would mean buying fractions of the business of a public company and to hope that the company grows over time. When that happens, the price of the stock that you bought would have risen in price and you would enjoy capital gains. 

Have you been thinking of starting investing but not sure how to get started? In this article, we have put together the following steps to help you get started in your investment journey.

1. Determine your initial investment outlay

First and foremost, you should only be investing using money that you can afford to set aside for a good period of time. The first thing is to look at which phase in life you are currently at. Some of you may still be studying, or you are a fresh graduate just starting out at work, or already in your mid-career, or nearing the retirement stage. Depending on the current phase in life that you are at, your finances and life commitment may differ substantially. 

For those who are servicing high interest debts, it may also be more prudent to pay them off first before attempting to invest. 

Generally, we encourage new investors to start small first. The most important thing for a new investor is not to earn a lot of money but to learn how to manage their emotions and make the right calls. As you become more experienced and continue to accumulate your savings, you can always make additional top ups to your investment.

Regardless, a good general rule of thumb would be to ensure that you have sufficient savings to last for at least 6 months of expenses. This is to ensure that you will be able to stay invested even if you encounter sudden changes in life, such as a career switch.

2. Decide on your investing goal

There are 2 main objectives when it comes to investing  growth investing and income investing

In growth investing, investors invest with the goal of earning capital appreciation of the stock while in income investing, investors invest with the aim of generating a regular stream of income in the form of dividends. 

Broadly speaking, investors who have a longer investment time horizon should usually be more focused on growth investing, while investors nearing retirement phase and seeking recurring dividends can be more weighted on passive income investing. The difference that sets them apart is the number of years they have to invest and the life commitments they need to save up and pay for. 

However, investors do not have to constrain themselves in only one of the two categories. One can choose to do both growth and income investing at the same time but decide on the allocation of the funds to be more concentrated on either categories. 

3. Choosing how to invest

There are a few ways to approach investing.

For the self-directed investors, they would be pleased to know that in this day and age, opening and funding a brokerage account can be easily done online. 

In choosing a broker, more importantly, it is to understand the type of needs that you may require as an investor. As you progress from being a new investor to a professional one, your needs will evolve and you will eventually find that there are just a few brokers which have features catered for the professional investors. Some of these considerations include providing a good charting platform, a user-friendly interface to browse your positions easily and to have the capability to support the investing strategies that you will be using. Fees are less of a consideration nowadays as most online brokers are shifting to low commissions.

You may also try out the paper trading feature for a period of time to be familiar with the platform and executions before investing with real money.

On the other hand, for the less initiated who would prefer a more hands-off approach, they have other alternatives such as engaging advisory service from financial institutions or seeking low-cost robo advisors which helps in some automation based on their risk profile to construct their portfolio. Similarly, one of the passive solutions that The Joyful Investors offer is RoboJoy which enables investors to put their money into an advised portfolio that follows our investing methodology. Our RoboJoy portfolio has consistently outperformed its benchmark for the last 6 years to date.

4. Choosing what to invest in

Stock selection does not have to be very complex but you need to have some strict criterias to determine if they can be under your consideration set. While we may not be able to run through the nitty-gritty in just a few paragraphs, here are some pointers for investors to be mindful of in choosing the companies to invest in:

Invest only in businesses that you can understand

When you buy the shares of a company, you own part of the business. You would logically want to understand how the business makes money so that you will be able to evaluate its competitive edge over the long term. Some investors have the misconception that investing is about finding hidden gems that no one else knows of. When that happens, chances are that you may not understand the business that well yourself too. As a result, when the inevitable drawdowns happen, there will be no strong reasons for you to hold onto such stocks and you will sell at a loss.

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Learn what makes a stock financially sound

Do not just know the “story” behind a brand or a company. Do not just be enticed by the investors’ presentation. It is called a presentation for a reason. 

Look at the hard facts. Be critical of the assumptions made. Just because you may love or use a certain brand does not make it any more fundamentally sound than what it is on the financial statements. 

Are the earnings stable or growing? How efficient is the management able to generate a return on the money they have been entrusted with? 

The fundamentals of a sound stock is the last line of defence during market crashes that will allow it to recover eventually. It is not about picking stocks that do not crash (bear markets are part and parcel of the stock market), but finding those that may crash but will have a high chance of recovery.

Determine if the business has a durable economic moat

In order to evaluate if a business has a sustainable competitive advantage, you want to be looking for something that their competitors cannot easily replicate and to keep them at bay. Successful investors focus not just only on profitable companies, but also those that are able to continue to make outsized profits for the many years to come. Essentially, profits are a result of the competitive advantages such as brand monopoly and efficient scale. When the company can defend its profit, they can continue to strengthen themselves by using the profits to invest for growth.

For someone new to investing, it is encouraged that they construct a well-diversified portfolio. Diversification in less correlated stocks of different size, industry or geography sizes helps to reduce portfolio volatility. Generally it helps investors to manage company or industry specific risks because stocks of different sectors perform differently over different tenures.

A word of caution would be to refrain from buying flashy high growth stocks. They may seem like a good way to quickly grow your portfolio, until you realize that such stock performances are rarely sustainable.

5. Knowing when to sell

After you have constructed your portfolio, your next question would inevitably be: how long should I hold or when do I eventually sell them? There is no one-size-fits-all kind of answer but there are usually 3 main reasons why you may want to liquidate your current positions.

Raising cash

Depending on your investment strategy, some investors may like to take profits off the table and free up excess cash from time to time. Cash is king especially during market dips and drawdowns. It allows you to average down on some of your top conviction ideas and reduce the downside volatility of your portfolio.

Better opportunity cost

Our funds are always limited. From time to time, attractive opportunities that offer greater potential upside may come along. Under such scenarios, you may want to review your existing positions to see if there are any positions that may have either reached your target price or been underperforming for quite some time and you believe that this new opportunity would put the money to work better. As investors we want to deploy our capital to where it is likely to work the hardest for us going forth.

Change in company fundamentals 

Change in fundamentals can include poorer earnings for the business or that the products are losing the competitive edge. If you are investing in companies with worsening fundamentals, it might be time to relook into these positions and the investment merits. That said, this reason should not happen that often for an investor, as if otherwise, it could mean that fundamentally sound companies were not chosen to begin with.

6. Staying the course

Investing is a journey, especially so if you are seeking longer term goals like financial independence. Getting started is just part of the story. Learning how to stay disciplined by putting additional savings to work regularly, an ever-learning attitude to better your investing skillset and having the right temperament especially during market drawdowns will be critical in ensuring your success.

The financial markets have proven to be one of the best ways to grow long-term wealth if you invest in fundamentally sound stocks. While some of the years are down, most of the years are up. The long term average returns that we can expect from an index ETF such as the SPY, averages about 10% annually. 

One of the best things to do after you start investing, is to not look at the portfolio that often and be affected by the daily gyrations. This is with the exception of unless you are attempting to deliver market-beating returns, which often comes with hard work and experience to deliver such skill sets.

For most investors, checking portfolio returns and being too obsessed with the daily or weekly gains will serve them no good. It has often been joked that some of the best performing retail investors are those who forgot they had invested and only look back at their portfolio several years later. 

If you have learned something useful in this article, feel free to share with anyone who may find it useful as well. With the above pointers in mind, we hope that this article provides you with more clarity in figuring out how to get started and may you find joy in this rewarding process as we have done ourselves.

 

Onward and Upward,

Hazelle

The Joyful Investors

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