Investing in Stocks: A Beginner’s Guide to Stock Market Investment

Investing in stocks is an excellent way of building wealth. Fiat currencies, like the US Dollar, devalue due to inflation and money printing, which erodes their value over time. However, stock in successful companies typically appreciates, making investing ideal for preserving and increasing capital.

Unfortunately, buying stocks doesn't guarantee profit. As such, strategically investing is crucial, as failing to do so drastically increases the chances of losing money. Investing is typically long-term, so strategy is even more crucial compared to trading, which often involves lower time frames.

People should always strive to use the best possible brokers and platforms to invest in the stock market. STIC Cashback offers users rewards for registering with its specially selected partner brokers, which helps increase returns and offset the cost of investing. Let's dive deeper.

Building an Investment Plan

Before deciding which asset to buy, it's critical to build a well-formulated stock market investment plan. We've broken down this process into manageable steps:

1. Define Goals

Defining your goals is a crucial first step when deciding how to invest in stocks. Consider whether a long or short-term investment best suits your objectives, as this will have a direct impact on which stocks you purchase, your profit/loss targets, and the method used for choosing stocks to invest in.  

Investors often prefer more consistent, stable stocks like Berkshire Hathaway for long-term holds as they boast minimal volatility and a track record of growth. However, high-risk, high-reward stocks offer greater upside potential, making them well-suited to those willing to take on additional risk.

2. Assess Risk

As we touched on, each stock has unique risks, so determining your personal risk tolerance is vital when creating an investment plan. Decide whether you prefer low, medium, or high-risk investments. Typically, riskier assets can yield greater rewards, although this isn't guaranteed. 

Having a mix of different risks in a portfolio can be a good strategy. For example, a cautious individual may prefer to invest in the stock market by purchasing 70% low, 20% medium, and 10% high-risk assets. This approach helps people create a better-balanced portfolio that matches their risk tolerance.

3. Budget for Investments

When you learn how to invest in the stock market, people will typically suggest allocating 10% to 30% of your available capital. However, the optimal percentage figure will differ from person to person based on their income, expenses, and savings. 

An approach better tailored to individual budgets involves investing an amount you can afford to lose and are unlikely to need for any upcoming purchases or emergencies. Investing like this reduces stress, improves conviction, and helps people hold their positions to maturity instead of selling early.

4. Choose the Right Account

Investing inevitably requires people to pay taxes. Selecting the correct type of account plays a significant role in determining your tax liability. Certain account types have deposit limits but offer tax advantages. The basic types of accounts include:

• Brokerage accounts are standard investing accounts. They have no withdrawal or deposit limits but do not offer tax benefits.
• Tax-deferred accounts reduce your taxable income, postponing tax payments until your investment is withdrawn.
• Tax-free accounts allow investments to be withdrawn without any tax liability but typically have fixed annual deposit limits.

STIC Cashback has partnered with brokers offering a variety of accounts and rewards for registering, so it's worth browsing the top options to see which suits you. Check out the latest STIC Cashback promotions.

Investment Strategies for Success

When learning how to invest in stocks, it becomes apparent that randomly throwing money into the market isn't viable. Instead, sticking to a specific strategy can enhance success rates and help investors to manage risk effectively. Some of the most popular investing strategies include:

Portfolio Diversification

Maintaining a well-diversified portfolio is one of the most basic yet important aspects of investing in stocks. 

By spreading your capital across multiple companies, sectors, industries, and asset classes, it's possible to reduce overall risk. It's likely that even if one or two assets perform poorly, the others will help to pick up the slack, reducing potential losses compared to investing in a single asset. 

The Power of Compounding

In relation to investing, compounding refers to how earnings from an investment can be reinvested to generate additional profits, leading to a large increase in value. Earnings exponentially increase as investors reinvest profits, leading to a more significant effect over a longer period. 

For example, $1,000 invested at an average rate of 10% would return $1,000 over 10 years. However, if the investor reinvests their earnings, returns rise to $1,600 or a 60% increase over a non-reinvested position, making the benefits of long-term compounding investments clear. 

Active vs. Passive Investing

When you learn how to invest in stocks, you must decide whether active or passive investing suits your requirements.

Active investing involves making decisions to buy, sell, or reallocate investments in an attempt to beat the market's performance. Conversely, passive investing aims to match the market's performance and doesn't require active management. Investing in the S&P 500 Index is an example of passive investing.

Rebalancing Your Portfolio

The direction of a company can change drastically over several years. As such, it's beneficial to periodically evaluate your holdings to determine if they still align with your broader strategy/goals. Assets no longer relevant should be swapped for others to create a more cohesive portfolio.

Evaluating Stocks and Markets

There are thousands of investment opportunities, but not all are viable. It's critical to properly evaluate a potential investment before committing to it. There are a few different techniques used for this purpose:

Fundamental Analysis

Fundamental analysis refers to a method of evaluating stock market assets to determine whether they're under or overvalued. The technique involves reviewing a company's financial statements, analysing the broader economy, and considering macroeconomic factors like global conflict.

Fundamental analysis is effective for determining if a company is priced lower/higher than its intrinsic value. For example, if the economy is strengthening and a company hasn't moved in price much but has a high profit margin and solid revenue, it could be undervalued and a worthwhile investment.

Technical Analysis

Technical analysis involves analysing price and volume data to spot trends in financial instruments and determine potential future movements. Technical analysis is ideal for identifying key price levels, areas of support/resistance, and when a trend could occur, key concepts of active investing.

Typically, people will look for specific chart patterns, like head and shoulders, which can indicate when a trend is likely to continue or reverse. Technical indicators like the Relative Strength Index (RSI) are also used to identify factors, such as when an asset is overbought or oversold and offers an opportunity.

Understanding Market Trends

Understanding how trends, economic factors, and global events impact the market is critical for investors. By taking time to understand key market-influencing factors, investors can better understand how their portfolio might perform over the coming months.

The government's economic policy sets the market's tone and can make upward/downward moves easier to realise. Changes in economic factors like inflation also have a major impact on stock prices. Likewise, events like war cause uncertainty, driving the stock market lower.

Common Mistakes to Avoid When Investing in Stocks

It's easy to make costly mistakes in the stock market. Here are a few common errors to avoid:

1. Timing the Market - Time in the market is better than timing the market. This popular saying means it can be hard to predict big moves, so it's more effective to enter the market and stay invested for the long term.
2. Overtrading - Excessively buying and selling can lead to stress and mistakes. Therefore, it can be more efficient to wait patiently for promising opportunities instead of trying to capitalise on those with minimal potential.
3. Ignoring Fees - Investors who do not account for fees can erode their portfolios through negligent trading. However, registering for a broker via STIC Cashback gives users a rebate that can help to offset any fees.
4. Neglecting Research - When investing in stocks, it can be tempting to jump in quickly, but failing to perform proper due diligence increases the likelihood of an unprofitable investment. As such, stock purchases should always be based on sound reason and research.

Other Stock Market Guides

We've covered investing in stocks, but willingness to learn is a common trait in successful investors. Our What is the Stock Market for Beginners and CFD Trading for Beginners guides offer additional tips, helping people better understand the market and learn more about investing.

How to Invest in Stock Market FAQs

Is It Worthwhile To Invest in the Stock Market?

Learning how to invest in stocks is worthwhile because it can help people build wealth and hedge against inflation, which reduces their buying power.

How To Invest in the Stock Market for Beginners

Beginners can invest in stocks by drafting a plan, registering for a broker account, depositing funds, researching investments, and purchasing stock in a company.

Can I Buy $100 in Stocks?

While the minimal amount of stock a person can buy varies from platform to platform, $100 is a solid foundation upon which to start investing. Many STIC Cashback partner brokers allow investments of much lower amounts.