Beginner’s Guide to Investing in the Stock Market: What to Know Before Start Investing

Learning how to start investing might seem like an intimidating subject to confront. I can tell you now, it really doesn’t need to be.

When I first looked into investing, I didn’t know where to start either. Listening to all the gurus out there with their stock market strategies and language that I couldn’t understand a bar of was immensely overwhelming. 

It doesn’t need to be a complicated process

It took me a while to realise that investing money in the stock market doesn’t need to be a complicated process. In life, usually, the simplest option is the best option. That is exactly why investing is for everyone. You don’t need to be an expert or a millionaire to invest in the stock market. You mostly just need common sense.

Why you should invest

You might be wondering why I would choose to invest and risk my money rather than leaving it in my savings account. I agree, savings accounts and term deposits are less risky options. But investing in shares can give your money the chance to grow faster than it would if you left it in a bank account.  

That is why I choose to invest money, but only money that I’m prepared to lose.

I’m not the type of person to invest for the short-term gain. I always believe in building a portfolio and investing for your long-term financial freedom.

I want you to believe that investing is not a complex subject, because it really isn’t. I’ll try my best to make this guide as simple as possible, so that it makes sense to a beginner investor.

We’ve got a lot to cover, so let’s start from the beginning…

What is the first step to investing?

The first step toward investing is to figure out your reason for investment.

You should ask yourself questions like:

  • Do I want to invest for the short term or long term?
  • How much am I willing to invest?
  • Am I going to make regular contributions or a once off investment?

Answering these questions and sticking to them will stop you from making irrational decisions down the track.

Why should you invest?

There are two main secrets to becoming wealthy.

Firstly, well-off people don’t rely on just one paycheck, they always have more than one income stream.

Secondly, they find ways to grow the money they have already earned.

So, investing helps them achieve both. The good thing is, you don’t need to be rich to start investing. You can easily start small and eventually build your portfolio.

Stock Broker looking out the window

What is the stock market?

The stock market (a.k.a. share market or stock exchange) works like an auction where investors buy and sell shares of stocks. Stocks are a small piece of ownership of public companies.

The Australian Securities Exchange (ASX) is the largest stock exchange in Australia and consist of almost 2,200 companies.

Also Read: How to save money fast

What is a share?

One share represents one unit of ownership of a company. Purchasing shares in a company buys you part ownership of that company.

Why do companies list on the share market?

Companies list on the share market (aka…’go public’) to raise money for their business or future projects.

They accomplish this by selling shares to investors in an Initial Public Offering (IPO) or ‘float’.

How do you make money with shares?

You can make money from investing in shares through one, or both, of these ways:

Capital Return

This is also known as ‘capital growth’ or ‘capital gain’. What this really means is that you make money when you sell the share at a higher price than you bought it for. At the same time, if the share price falls below the price you purchased them and you decide to sell, you will lose money.

Dividends

Some companies will share their profits with the shareholders as dividends. This is a cash payment generally made once or twice a year.

Stack of coins with growing plant
Image by Nattanan Kanchanaprat from Pixabay

How do I buy shares?

In Australia you have access to stockbrokers via the following means:

Online

This is usually the easiest and the cheapest option, where the brokerage fee starts at $8. With the online brokerage option, they won’t provide you any advice on which stocks to buy and how much to pay.

If you’re smart about it though, almost all of these online brokers have results of their research and recommendations available on their websites. Do your own research and save!

Full-service

Full-service stockbrokers will assist you in completing all required paperwork and will place the trade on behalf of you. They will also advise you on which shares to buy and sell in order to gain the most.

Brokerage fees usually start at $80 per trade. This might not be the best option for you if you are not intent on making a large purchase.

Also Read: Why do you need a life insurance

What should you consider when choosing a broker?

Brokerage fees

This is a fee that will apply every time you buy shares. Depending on the platform and the size of your transaction, this fee may vary. It could be a flat fee, or it may end up being a percentage of the total transaction cost.

Some brokers also charge additional fees such like an invoice fee. This means that if you don’t engage in any buying and selling activity for an amount of time (specified by the broker) they will charge you a fee.

What they offer

Some platforms offer access to the ASX only, while others allow you to trade on stock exchanges all around the world.

Interface

Consider how user friendly each platform is and what will work best for the type of trading you want to do. Most providers give you the option of a free demo account for a short period so you can trial the features they offer.

Customer support

This one is very important. If you ever have an issue with your account or have questions regarding your service, you need to ensure that you’re going to be supported. This is one reason why I advise investing through the big four banks as a hassle-free option for newbie investors.

What should you invest in?

I’m not a qualified financial advisor, so I really can’t answer that question for you. However, when I first started, I followed these two main rules:

Start investing in index funds

This is a great rule to live by, at least until you get your head around investing in the stock market directly. Index funds will give you the opportunity to invest in big global businesses without having to buy their stocks individually. This is a great way to diversify your portfolio.

“Don’t put all your eggs in one basket.”

You’ve heard this a million times before, probably in relation to a thousand different circumstances. When it comes to investing, this is one saying that never gets old. Buying stocks is a risky investment. But you can limit your risk by spreading your money into different investments. This concept is called “diversification”.

Final thoughts

Investing doesn’t have to be a tricky process. As long as you do your research, work with a good broker, and use your common sense, you’ll be well on the way to earning extra income via the stock market.

Have you invested in stocks in the past, or are currently investing? What would you say are your top three investment tips?

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