Other pages in this 'Stock Market For Beginners' section of the site look at the kinds of things that a new investor should do to help themselves. However, these were written in essay format and so instead this offers a simple list format of stock market tips.
Here we go...
1. Investing is not a hobby. To big merchant banks, it is a very competitive business. Therefore, you should also treat it as a business. That means understanding your own profit and loss as well as the companies in which investments are made.
Once this thought pattern is established, it makes the whole process so much easier. Simply ask, "Will this investment / trade / software / subscription make or lose me money?" Once an answer has been established, a clear course of action will present itself.
At first, investing can feel like gambling and many beginners want to learn how to play the stock market, thinking that they can understand the moves of the Dow Jones or NASDAQ, but the real skill starts to come as an investor takes it more seriously.
Ben Graham said many decades ago that, "Investment is most intelligent when it is most businesslike". Quite so. The fund managers, analysts, prop traders and hedge fund mathletes of Wall Street are taking things very seriously and so should you.
2. Get some great investment management software. These days, a speedy internet connection and good money management and investment software costs virtually nothing. Why spend the time and effort trying to figure out the best ways to do things when solutions already exist?
Ideally, look to purchase two types of software. One will be for personal money management. This can be used for profit and loss and keeping track of the costs of subscriptions, stockbrokers and the like. The other will be used for tracking stock and fund prices, storing company news, technical and fundamental analysis and more.
Neither of these tools will turn you into a Wall Street titan or a hedge fund mogul, but they will help to keep you organised and understanding the current situation of your positions will become much simpler. It will also become easier to track the stock you want to buy next, hunting out a good opportunity and an attractive price.
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3. Get an education. Warren Buffett has suggested in the past that every investor should be able to understand basic accountancy principles, an annual report and stock market history. You probably do not need to become an accountant, but being able to understand the scoring system of the game can only help. There are thousands of books about investing and trading - you don't need to read them all, but you probably ought to read a few to enhance your theoretical knowledge.
This education really ought to include one of the daily papers that covers the movements on the stock exchange (information here) in detail, such as the Financial Times or Wall Street Journal. Remember, the investment bankers that you are competing against have Bloomberg terminals and Reuters subscriptions, while everyone else is watching CNN and MSNBC.
However, it might be best to not become too much of a market "expert". Some of the most famous and successful investors of all time, such as Peter Lynch, the famed manager of the huge Fidelity Magellan fund. He suggested that looking for clues in normal life is a great way to find opportunities. Lynch used to closely follow the shopping habits of his wife to see what brands people were buying. He believed that most people working professionally on the NYSE lived in a bubble.
While that may sound like outdated advice, in late 2012, an American marketing executive explained how he had turned $20,000 into $2 million during the recession. Chris Camillo explained that Wall Street is quite homogenous and tends to be behind the curve on trends involving females, young people and those on low incomes. Camillo invested in stocks that anyone could have, he just spotted trends before the investment bankers did and was able to make some very sizable profits.
4. Learn about money management. Every investor will have the occasional (at best) loser and it is vital that no individual holding can wipe out a portfolio. Understanding asset allocation is vital.
Years of talking to people about investments has taught me that there are fundamental differences between the way investors behave. New investors ask for 'a tip' and want to know, "What should I buy?".
In contrast, professional fund managers (information here) do not want tips. They have dozens of good ideas of their own. They won't be sharing those ideas with you and they will not be expecting you to share yours. Instead, they ask about how you allocate money. "Which sectors and markets do you like and why?" The difference between these approaches is like night and day.
It might be worth noting that Warren Buffett tends to call what he does as being an "asset allocator" (information here) and not an investor. Understanding asset allocation and risk management are core techniques that are mostly overlooked by amateurs and (regrettably) most financial planners.
5. Read widely. Getting a wide ranging education in personal finance, corporate finance, taxation, economics and investment theories will help. However, finding areas of the world or business in which you can become relatively expert can help in the process of finding investments.
The reality is that in the modern world - especially with the power of the internet - there is very little information that is not in the public domain somewhere. However, the world now has information overload. Whilst the information might be available, few people now have the time to find or understand it. The people who know these things and can 'join the dots' have regular opportunities for stock market investment.
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Once the basics have been covered and understood, it may be that just one or two hours of reading each week will be enough to keep knowledge up to date. But keeping up to date is vital.
It is also worth trying to keep up to date with the latest thinking related to the area of investment that you are trying to specialise in. Therefore, if you plan to invest in defensive or income stocks, for example, it would be wise to read regularly about value investing and dividends. If you plan to invest in growth stocks, it would be wise to read about technology and the latest trends. Perhaps you could subscribe to one or more trade publications that relate to the sector(s) that you are most interested in.
6. Find a good investment service to subscribe to. Many of the suggestions above can now be covered by joining just one stock market service. These services now aim to pick stocks, offer trading and portfolio management software and educational services too. If things go well, then by investing in the stock market picks, the service can be paid for with profits.
It is worth trying to understand - before signing up - whether a service is designed for investors, traders or day traders, as these distinctions will be very important when following their stock market tips.
Though these services are often not 'cheap' they are generally very valuable and can help to make an investor or trader profitable whilst learning the ropes. This is a great way to learn or experience the stock market for beginners.
If you are literally just getting started, the services offered by most major stockbrokers (information here) as a part of their trading account services will be a good place to start (and free). Firms such as Trade King, eTrade, Charles Schwab and Ameritrade provide a range of online tools. These will give you a feel for how portfolio management software works without having to pay extra to learn. However, these services typically offer no advice (known as execution only), which means that a separate service will be required for information analysis.
Most of these services offer some form of free portfolio tracking - this enables you to create a portfolio and track it properly to see how you do with no money on the line. This used to be known as paper trading in the 'good old days' before 2001. This kind of exercise can be a good way to learn and play around with things without being either serious or costly.
In contrast to finding an expert or two that seems to make valuable and careful decisions, do your best to avoid listening to 'tips' from friends or work colleagues. Typically these people will know less than you and have very little to base their suggestion on. No matter how well meaning it may be, advice from someone who knows next to nothing about the topic in question is not advice.
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7. Practice makes perfect. In the investment business, paper trading is how we all start. Pick a couple of companies, make a note of their price, the date, the reason why you want to buy them and then start following the stock.
As time passes, the hunch or
assessment which made the company such a great prospect will play out. Was
it a good or bad decision? Would buying 'for real' have made a
profit or a loss? This simulation will be a great way to track your thinking and ideas relative to the unfolding reality. Treat it as a game at first and have fun with it.
This is an excellent learning experience and one that is vital to the long-term profitability of anyone in the stock market. To get the real experience, purchase some graph paper and chart the stock price movements each day by hand. Learn to compare this with the overall movements of the equity market or index and a whole new world of investment and money will begin to open up to you!
Before you raise your hand to complain, yes, we know that a computer can track price changes much better than most humans. We get it. But the aim of the exercise is to get a 'feel' for the movements in price and that is unlikely to happen by using a computer program and pressing a button. We are talking here about stocks for beginners, and beginners need the learning experience, not the quick fix automation. Just trust us...
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Astute readers will realise that the above guidance is mainly taking different angles to help prepare for and guide decision making by the investor. The ability to confidently make decisions is vital for investment profits and long-term success. This pdf about the decision making models of Charlie Munger (business partner to Warren Buffett at Berkshire Hathaway - both are certified investment immortals) is almost certain to prove helpful.
Bonus Stock Market Tip: Everything above is related to how best to invest actively - in other words buying and selling into companies that have been selected by you. But what if you don't have the time, money or inclination? What if the paragraphs above put you off? Perhaps you were looking for a simpler guide? The stock market for dummies perhaps?
In that case, it is possible to invest passively in capital markets. This
means that a private investor puts aside either a lump sum or an amount
each month and the money is invested into a fund. That fund contains
the savings of lots of other private investors and is managed by a
professional equities investor. The fund will then be invested in an equity market (such as the NYSE) or a sector (such as energy).
There are a number of different types of these funds (mutual funds, unit trusts, pension funds, ETFs (exchange traded funds) and SICAVs are the best known examples) and thousands of individual funds within each group.
Since these funds pool the money of lots of investors, they can take a position in a much wider number of companies than most individuals could afford. This is known as diversification (information here) and has the effect of reducing the risk being taken by an individual.
It also has the added advantage of saving time. Learning how to play the stock market can take many years of study and effort, but being able to understand the basics so that it is possible to select a sector and fund to invest in should take just one or two days of background reading.
If this sounds like a preferable option to you, then it would be wise to find a local investment or financial adviser that has some investment experience to help you make a selection. It certainly ought to be an easier entry for someone that is a beginner to stock market investing.
Bonus Mindset Tip:
The Intelligent Investor by Ben Graham ought to be required reading for every private investor. While the innovations he brought to stock analysis have long been outdated and the red flags he used to watch out for in a company's accounts are now regulated against by the SEC, many of his insights about thinking about investment still stand. For example, his description of Mr Market is still an excellent way of understanding how a crowd moves with the daily news.
When thinking about the mindset of investors, The Great Crash 1929 by J.K.Galbraith (reviewed here) should also be required reading. Typically, any sustained fall in prices - known as a bear market - is very destructive to wealth. However, as Galbraith explains wonderfully, each bear market is unique and is a reflection of the bull market that came before it. The book explains a great deal about the feedback loops that can exist when prices rise and fall as more people are either sucked into or forced out of holdings. It is the reference work about a very important slice of Wall Street history.
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Whatever happens on a stock exchange and no matter how much influence computers, algorithms and high frequency trading may have, human nature will always have an important role to play. Typically, human nature becomes more important when momentum is changing and there is excitement or panic in the air. It would seem wise to try and understand this mass psychology or group thinking which is often referred to by investors as the madness of crowds.
There are many thousands of people around the world that base their day trading strategies around investor psychology. Don't overlook it. Learn to think about the expected resistance levels and inflection points and you will have advanced beyond making beginner stock market investing decisions.
Modeling:
In late 2014, legendary self-help and business guru Tony Robbins published a book called Money: Master The Game. In it he explains the strategies and ideas used by the very best investors in the world - hedge fund managers, asset allocators and billionaires - that he gleaned from them during four years of interviews and how their lessons should be applied by the rest of us.
As he explained in many of the promotional interviews he conducted at the time of the book launch, most of us make basic errors in our investments and just a few sensible steps can enable us to have the investment world work in our favour.
For an example, watch this short interview he conducted for some insights and tips:
His book is a big beast at more than 600 pages and will need to be committed to, but it offers some fantastic insights into how to invest safely and profitably for the long-term and how to make your money work harder. Having interviewed all these legendary traders and investors, the book contains some excellent insights into asset allocation and portfolio planning that almost everyone should gain some benefit from reading.
It also takes the reader through a path that should help anyone make better decisions based on their own personal circumstances so that they can plan their own path. This book redefines investment related advice and is highly recommended for investors at all levels.
Bonus Liquidity Tip:
Don't borrow money to use for stock market investment. On the stock exchange, borrowed money is known as either gearing or leverage. It is typically used either by companies (to help them finance growth), investment banks and hedge funds (to help juice their returns) or very aggressive traders. There are many spread betting (information here), options trading and day trading strategies that use borrowed money to enhance returns, but it also has a very profound impact on the risks being taken with each trade.
If there are any lessons to be learned from the American sub-prime mortgage crisis, the 2008 stock market crash (information here)
and Wall Street bailout that followed - and there are lots of lessons -
it is that borrowed money can be very dangerous in investments, even
when it is being handled professionally. The failure of LTCM, Bear
Stearns, Lehman Brothers, Northern Rock and many others shows just how
precarious a business model can be with too much gearing.
The most feared words on any stock exchange are margin call. A margin call is made when a position is losing money and more money is required by the broker to keep the trade open. If and when a stock ticker moves quickly, there can be people whose borrowing levels literally bankrupt them as things get worse ... fast. Volatility can be either a blessing or a curse, but if you have too much leverage, it can break a trader.
An age old investment maxim is to only invest money that you can afford to lose. Very wise.
A Capital Idea
When thinking about a stock exchange it is worth remembering that it is a capital market. The primary purpose of a capital market is to enable businesses to raise money to provide working capital to fund expansion and growth. In exchange for this money, the companies issue equity in the form of stock, creating stockholders. Each stockholder ownes a piece of the active business relative to the amount of money they invested.
Should the company management and majority owners choose, they can pay one or more dividends per year to stockholders. The money for these dividends will typically come from profits earned within the business. In most countries, these dividends are subject to income tax payable by the receiver. Often there is a withholding tax taken at source to ensure that non-resident shareholders pay as well.
Since the underlying businesses operate in differing markets, sectors and countries, their quoted prices move independently as supply and demand in them rises and falls and new information is released to the public about the current business situation. It is the changing of prices that offer investors the opportunity to make a capital gain (or loss) via ownership.
To make comparisons between companies, sectors and markets a little easier, there are a number of mathematical models used. The most common and often the most helpful is the P/E ratio. The Price to Earnings ratio takes the share price and is divided by the earnings per share. It is possible to calculate this using past earnings, projected future earnings and with all sorts of moving averages ;-) Therefore, this is one number that it is vital for any investor to know and understand.
To Conclude...
We
hope that this beginner stock market investing guide sets you on a good
path towards further research and learning, investment success and
profits. It really is possible to be a successful investor if you want
to be, but it will take time, effort, dedication and patience. If you
can find those within yourself and treat investing as a journey that
will take years, you can do it too.
To visit more pages in this section and learn about the stock market for beginners, please follow the links below:
Stock Exchange Beginners Guide - Part 1
Stock Exchange Beginners Guide - Part 2
How To Start Investing On The Stock Exchange
The Suitability Of Stock Investments
Why Should You Start To Invest On The Stock Exchange?