Investing in stocks for beginners can seem confusing and even intimidating. And the unpredictable nature of the stock market often leaves many feeling afraid to take the leap.
But with a prepared mindset and a tactical approach, investing in stocks is one of the smartest financial moves to make.
Unlike a personal loan, which is a short-term financing solution, stock market investments can build an individual’s wealth over time, making long-term financial goals — like retirement, achievable sooner.
However, it’s not enough to simply invest. Those who are new to the stock market need to know how to begin to strategically invest.
There are essential questions one must ask themselves (and a financial advisor) before investing in stocks in order to better define their financial goals and make smart choices.
1. How Does Investing in Stocks Work?
It may seem like a basic inquiry, but it’s one of the most important questions to ask before investing in stocks.
While investing in stocks for beginners doesn’t require encyclopedic-levels of knowledge on the subject, it’s critical to have a base-level understanding of what investing in stocks is and how it works.
The act of investing in stocks is putting money or capital towards owning part of a company.
In return, the profits are shared with the stockowners — or stockholders, proportional to the amount of stock they own.
Think of it as using money earned now to make more money in the future.
What, then, are stocks and stock markets?
A stock represents a portion of a corporation or company, usually measured in units that are known as shares.
There are a variety of stock types that can be differentiated by the selling price, company’s market capitalization or value in the stock market, and trading terms.
Common examples include:
- Common or Individual Stocks — Representing partial ownership of a corporation with the added benefit of stockholders having a say in corporate policies.
- Preferred Stocks — A class higher than common stocks with exclusive advantages, including higher dividends, or regular payments a company gives its stockholders.
- Large or Big-Cap Stocks — Those belonging to a company with a stock market value of $10 billion or more.
- Blue-Chip Stocks — Pricey and sold by large, well-known companies, like Coca-Cola.
- Penny Stocks — Selling price is below $5 from small companies with very low financial value.
These stocks are bought, sold, or exchanged between stockholders by way of a stock market.
Stock markets in the United States are regulated by the country’s Securities and Exchange Commission (SEC). The SEC ensures stock markets remain fair and transparent.
Investors buy, sell, and trade their stocks depending on how the company’s value fluctuates and the overarching condition of the economy. By dealing stocks, investors begin to build wealth in the market over time.
2. How Much Am I Willing to Risk?
Investing in stocks, like anything else, doesn’t come without its risks.
One major tip to investing in stocks for beginners is preparing for risk. Stocks fluctuate frequently. One day a stock’s value can be sky-high, then the next week it could drop suddenly.
The reasoning behind the rise and drop of a stock’s value is complex. Those new to investing in the stock market may find its apparent randomness intimidating.
To prepare for the stock market’s unpredictability, it’s important to determine how much you can afford — or are willing to risk — on an investment. Otherwise known as your risk tolerance.
Risk tolerance is reflected in one’s investable surplus, which, like spending money, is extra capital leftover after one’s needs are met.
But instead of using that money to make a purchase, investable surplus is put into the stock market to generate more money.
Investable surplus is assessed based on the person’s current level of debt, including credit card debt, personal loans, mortgage, and even other investments.
Those struggling with debt shouldn’t engage in high-risk investments because they have little to no investable surplus to work with. Playing the stocks can push a person further into debt.
But those with an investable surplus can use their risk tolerance to gauge which companies are worth investing in.
Certain companies are higher risk than others due to the specific nature of their industry. Although, that also means it’s stocks can be more than worth the trouble.
Take biotechnology companies for example. Biotechs create experimental drugs not yet ready for market, so biotech stocks have a high-risk of plummeting should the drugs fail.
In cases of success, however, its stocks may rise amongst the highest in value on the market.
Ultimately, many shy away from investing in stocks due to the market’s unpredictable nature.
But if the risk tolerance is properly assessed, it protects the investor and helps curb disappointment from possible losses, making gains that much more valuable.
3. Why Am I Investing?
Everyone has different reasons for investing in stocks, especially as investments can help attain personal financial goals.
Prior to investing, an individual should define their financial goals. These goals should then be used to make investment decisions.
If the main goal is to obtain a consistent, low-risk financial growth rate, investing in a balanced group of stocks like an exchange-traded fund (ETF) is better than high-risk individual stocks.
Identifying one’s financial goals also helps with forming an investment strategy.
Referring back to the goal of financial growth, those who want to see their wealth increase over time should engage in certain types of investing, like value investing.
Value investing involves choosing high-quality but lesser-known companies that are easily overshadowed by leading companies in the same industry.
The stocks of the lesser-known companies, however, cost less.
Think about your financial goals, what you want to achieve, how long you plan on staying in the investment game, when you plan to sell, and other investments you’re already involved in, like real estate.
All of these considerations shape how to start investing.
4. Do I Understand the Investment?
Who are you investing with and what are you investing in?
How risky is the investment and what does it cost to maintain? It’s necessary to ask these questions before making an investment.
To be a successful investor, one needs to understand their investments.
Two main factors to understanding an investment’s worth are its background and associated fees.
Investors don’t want to get stuck with high management fees that end up costing more than the investment is worth. They also don’t want to invest in a company with a history of underperforming.
To best understand an investment’s background and fees, investors should do a bit of research beforehand. Resources for stocks are publicly available online, and there are different references for different types of investments.
For example, each mutual fund has its own fund prospectus, or documents containing all the information on the fund. Those interested in a certain mutual fund can consult its prospectus before choosing to invest.
Individual stocks rely on other references, such as recent earnings call transcripts. A recent earnings call transcript summarizes a company’s teleconference call discussing its performance over the past year.
Another common reference relating to a stock’s status and that of its stock market is made available in real-time through online indicators like the S&P 500® Index.
As the value of a stock depends on its company’s performance, this is vital information to have in order to weigh the stock’s risk and potential return or profit.
It’s also important when deciding to buy, hold, or sell a stock as you don’t want to lose out on a possible rise in value by selling too early.
5. How Does the Investment Fit with My Asset Mix?
Investors should also ask themselves how the investment fits in with their existing assets.
Like buying the same sweater twice, a stock or investment offers little added value to a financial portfolio if it’s too similar to what’s there already.
Assets should be mixed to offset risks and losses that can occur due to underperformance or economic downturn.
Similar to sailing a boat with no life raft, a financial portfolio made up of only high-risk investments has nothing to secure it if it capsizes.
So, keeping a diverse mix of assets is essential to maintaining good financial health.
A good asset mix can be broken down into three main asset classes — cash or cash equivalents (CCEs), stock market investments or equities, and fixed-income investments or investments that regularly deliver income to the investor, like a U.S. savings bond.
Asset mixes should adjust and develop alongside the investor’s financial goals.
A college student’s asset mix, for example, won’t remain the same years after graduating. As loans are paid off and income increases, the individual’s investable surplus, risk tolerance, and financial goals will undoubtably alter as well.
Their asset mix should reflect such changes.
Before entering a new investment, investors should question what’s in their current financial portfolio. If there’s an abundance of equities in the asset mix already, it’s not necessarily beneficial to buy another share or stock.
Finding the right investments to keep a financial portfolio diverse is simple with the help of a financial advisor.
With professional financial counseling, investors can more easily balance an asset mix to match their current needs.
Invest in Your Financial Health with HRCCU
A lot rides on your financial management — allow the financial experts at HRCCU to help you.
Our resources, such as financial counseling services provided by GreenPath Financial Wellness, start members on the right path towards financial recovery and success.
Through GreenPath’s cost-efficient money management services, clients are equipped with the tools needed to achieve their financial goals. And some services, like debt counseling, are free.
Invest, save, and finance your future with HRCCU. Contact us for more information on how we can set you up for financial success.
