Tips for beginner investors
Wednesday, April 7, 2021
Stocks are equity investments that represent legal ownership in a company. You become a part-owner of the company when you purchase shares. Investing in stocks can be an efficient way to build wealth over time. Learning how to invest wisely and with patience over time can result in substantial returns. Almost every member of the Forbes 400 wealthiest Americans made the list in 2019 because they owned a large number of shares in a public or private corporation.
Here’s an overview of what you should look for and stay away from when choosing your first stocks, as well as some tips on getting started to invest in the stock market.
Assess your goals
Do you want to build wealth for retirement, save for your kids’ education, or save money for the unexpected? It’s recommended that you shouldn’t invest in stocks with money you’ll need within the next three to five years.
Open an online brokerage account
Before you start investing in stocks, you’ll need to open a brokerage account. You can compare the features of some of the best online brokers to find one that is the best fit for you.
Understand the basics
Before you purchase your first share, you should be familiar with relevant financial definitions and metrics. You should also be familiar with popular methods of stock selection and timing, stock market order types as well as the different types of Investment Accounts.
Look for Advantageous Stocks
Most stocks with competitive advantages fall into one of these categories:
- Network effects: A network effect occurs as more people use a service or product and the product or service itself becomes more valuable and desirable as a result.
- Cost advantages: A business can have a few different types of cost advantages. For example, an effective distribution network can make it cheaper for a company to get its product around the country or a well-known brand name giving the company the ability to charge more than rivals.
- Intangible assets: In addition to a brand name, patents are a great example of an intangible asset that can protect a company against its competitors. For example, Blackberry still has quite a bit of value due to its portfolio of over 44,000 patents, even though it doesn’t sell as many phones as it used to.
- Sector leadership: Most of the best starter stocks are either leaders in their respective fields or very close to it.
Know what stocks to avoid
As a beginner investor you should stay clear of stocks that fall into these categories:
- Rapidly growing companies: It’s a good idea to wait until you’ve built up your portfolio and understand stocks somewhat before you try to invest in the next big company or industry.
- Penny stocks: Penny stocks are stocks that have market values less than $200 million, have share prices under $5.00, or don’t trade on major exchanges, penny stocks should be avoided by all investors, not just beginners.
- IPOs: IPOs, or initial public offerings, are how companies become publicly traded. Investing in newly public companies can be highly volatile and is generally not a good way for beginners to buy stocks
- Businesses you don’t understand: If you can’t explain what a company does and how it makes money in a sentence or two, don’t invest in it.