The information provided in this post is for informational purposes only. It should not be considered financial or investment advice. You should consult with a financial professional to determine what may be best for your individual needs.
Investing in the stock market can be intimidating if you don’t know how to start. You may think that you don’t have enough money to invest in the stock market, but that’s not the case. You can get started investing in the stock market with as little as a few hundred dollars.
In this post I will teach you my techniques to begin investing in the stock market with just a little bit of cash and no investing experience, and common mistakes new investors make that should be avoided.
Opening a Low-Cost Brokerage Account
The first step to investing in the stock market is opening a brokerage account. I highly recommend Vanguard. Not only is Vanguard one of the largest investment firms in the world, they also have some of the lowest fees on their funds.
The primary reason I am recommending Vanguard for people who are just beginning to invest are their commission-free funds. We will go into more detail on these funds later.
There are several types of investment accounts you can open, individual, joint, retirement, trusts, but in this post we will be using an individual investment account. I would recommend consulting with a financial professional to find the account that is best for you.
An individual investment account doesn’t have any of the tax advantages of a retirement account, but you are able to sell your investments and have access to the proceeds without any early withdrawal penalties associated with retirement accounts.
Once, you open an account with Vanguard. You can associate your bank account and deposit your funds into a Vanguard money market account. Now, you are ready to start investing.
Start Investing in Exchange Traded Funds
Exchange Traded Funds (ETFs) are a type of security that typically tracks an index fund, commodity, or bonds and is traded like a traditional stock. For example, the Vanguard 500 Index Fund (VOO) tracks the S&P 500 index of the 500 largest publicly traded companies in the U.S.
You can purchase one share of VOO and it is essentially buying a very small piece of the 500 companies that comprise the S&P 500.
Vanguard has a great selection of low-cost, commission free ETFs for their customers. Using a collection of these ETFs, you can build a diversified portfolio of assets with a limited amount of funds.
Dollar-cost Averaging the Vanguard S&P 500 Index Fund
Dollar-cost Averaging is an investment technique of purchasing a fixed dollar amount on a regular schedule, regardless of what the share price is. By using this technique, you will purchase more shares when the share price is low and purchase fewer shares when prices are high.
To begin building a portfolio from scratch, dollar-cost averaging the Vanguard S&P 500 Index ETF is a great way to begin.
Since you can’t buy fractions of a share, we will take a look at an example of what your portfolio’s performance would be if you saved $200 a month and purchased 1 share of the Vanguard S&P 500 Index ETF from January 2014-December 2016.
While this isn’t a dollar-cost averaging by definition, it is a practical example of real-world investing.
|Average Share Price||$180.99|
|Market Value of VOO Shares as of 12-01-16||$7,615.00|
|Total Return on VOO||16.88%|
|Cash in Money Market Account||$1,153.72|
|Total value of cash and securities||$8,768.72|
As you can see from the example, you invested in 36 shares of VOO over the 36 month period, with an average share purchase price of $180.99.
You would have received $223.84 in dividends and still have $1,153.72 in your money market account at the end of the period.
These funds could be used to purchase more shares of VOO or you could use it to purchase other ETFs or individual stocks.
Not a bad return for a beginning stock investor!
Common Mistakes New Investors Make
They Don’t Have an Investment Plan
When I began purchasing stocks, I didn’t have a clue what I was doing and I learned some lessons the hard way, by losing money. One of the lessons I learned was to have a plan when I would buy or sell a stock.
When you invest in the stock market, you shouldn’t be needing the money you are investing in the near-term. In my opinion, you should have at least 3-months living expense in cash before you invest in stocks.
If I was buying a stock, did I plan to hold it for a few months, a few years, or forever. I learned to ask myself, “Why am I buying this stock?” If I didn’t have a legitimate reason backed by facts, then I would need to do some more research.
This leads us to our next mistake…
They Haven’t Done Their Research
I know several people who put more research into building their new gaming PC than they do the companies they are investing in. I know reading financials reports and annual reports can be extremely boring, but spending a few hours reading annual reports can provide some valuable insight into the company’s financial situation, vision, and potential challenges.
Some of the articles are better than others because they are written by amateur investors, but getting both sides of the argument can help you make a more informed decision.
Invest Too Little in Individual Stocks
When you are first starting to invest in the stock market it is tempting to just buy a couple hundred dollars worth of an individual stock to start. The problem with this is that the commission your brokerage charges.
Most brokerages charge around $7.00 a trade.
So let’s say that you want to buy $500 worth of a stock and your brokerage charges $7.00.
Your stock appreciates by 5%. It is now worth $525.
You decide to sell the stock and your brokerage charges you another $7.00
So after you pay commissions you only actually made $11 or 2.2%.
So you can see commissions can take a big bite out of your returns if you aren’t investing enough money. This is one reason the commission-free ETFs Vanguard offers are so great for new investors.
There are also some new brokerages out, such as Robinhood, that are offering commission-free trading. They then try to upsell you to their premium services.
Buying What is Trendy and in the News
Today more than ever you are bombarded with financial news to buy this, sell this, this stock has been upgraded, downgraded, and it goes on and on.
You may hear about a stock that has increased over 100% in the past year and everyone is praising the stock and it’s CEO.
You have to learn to ignore the noise. Buy the time you have heard about a stock’s amazing run, chances are you’ve missed your opportunity.
That’s okay though, just because you missed one opportunity, doesn’t mean that their won’t be more.
Stick to your plan, do your research, and ignore the noise of the media and analysts.
Trading Using Options and Other Derivatives
For those of you not familiar with options contracts, they are contracts that give you the right, not the obligation, to buy or sell the underlying asset at a specific price on a specific day.
Options can be a great way to reduce the risk of your portfolio, but most of the time they are used for speculation. Options can be highly volatile and are a great way to lose money, fast.
If you are speculating on options contracts, not only do you have to get the direction of the price right, but you also have to get the price movement correct before the option contract’s expiration date.
While option contracts have their purpose, I highly suggest staying away from them if you are not a veteran trader.
Selling Low and Buying High
This advice sounds so simple, yet it is difficult to follow. When a stock has taken a 30% tumble and you are watching the market value of your investment plummeting, it is hard not to get emotional and want to sell to prevent further losses.
This is a guaranteed way to NOT make money in the stock market. I’m not saying to never sell stocks at a loss, there are times when you will need to cut your losses and move on (I’ve had quite a few myself), but you want your decisions to be made logically, not emotionally.
Buying low can also be challenging to do as well. When all you are hearing about is negative news about the stock and analysts are downgrading it to a sell, this is when I am looking to buy.
My mindset when there is a big drop in one of the stocks on my watch list is that the stock just went on sale.
Before you jump into a stock after a break price drop, you want to do some research into why it dropped, and if it is going to materially affect the company’s performance in the future.
I hope this article has helped get you started on your investing journey. For more experienced investors, how did you get started investing in the stock market?