Stock Market Investing: The Ultimate Beginners Guide You Should Have Been Given at Birth!

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Published: 28th March 2012
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Stock market investing is not for the faint hearted! One wrong move and you’re toast! So, what I’ve done is written an article that will serve as a guide and compel you to think strategically about stock investing. I’m a big fan of evolutionary investing and earning your right to risk. If you’re new to stock market investing then this beginner’s guide should point you in the right direction to safe and highly profitable stock market investing. There’s no doubt about it that stock investing is a key part of wealth building. Oftentimes, I’m asked by early-stage investors: “How do I go about investing in the stock market?” Oftentimes, I blithely respond “Don’t, you’re not ready yet”. I say this for impact. I want people to take note and avoid getting roasted by the stock market. I want people to ask themselves the real question behind the question, that is: “Am I ready to invest in the stock market?” Puzzled!? Let me explain. If you’re a stock market beginner, listen up!
Pyramid Investing – What Shape is Your Pyramid?
No, I’m not talking about buying shares in heavily-eroded ancient Egyptian pyramids! A sound investing framework is regularly depicted as a pyramid - investing first in a secure base of cash and cash equivalents (Money Market Funds, Certificates of Deposit etc) then moving up the pyramid into bonds (government and corporate) before you start investing in large-cap stocks and so on.
Most novice investors I know get involved in stock market investing too early without having earned the right to risk. They haven’t built a sufficient, secure base to their investment pyramid first and leap-frog their way to the top of the pyramid in pursuit of high returns. Indeed, some make the same mistake by leap-frogging into real estate investment too soon also. Their lack of experience and financial intelligence means they expect to make quick and large returns, but oftentimes instead end up losing a lot of their hard-earned capital. As budding sophisticated investors, we want to avoid these pitfalls. I believe in earning your right to risk. Read on to see what I mean by this.
Earn Your Right to Invest/Risk
Here’s my take on becoming wealthy through stock investing. First of all, if you haven’t saved at least 6-12 months of living expenditure you are not yet ready. Since we are interested in wealth building and learning how to become rich for life (and not just temporarily) then we want to follow a process that enables us to become wealthy and stay wealthy. After you’ve put away 6-12 months in expenditure, you’re now in a position to invest in the base of your pyramid i.e. cash and cash equivalents. After that you can move up the pyramid into the domain of government and corporate bonds etc. Only then have you earned your right to risk. Only then do you have a secure enough financial footing and intelligence to now be in a position to invest in the stock market safely.
Investing isn’t a hobby and shouldn’t be treated as one. Hobbyist, novice investors get toasted. They invest too much of their capital, too soon. If their stocks soar quickly, they get emotional and greedy and invest more capital with no sound investment basis. They might get lucky once or twice and make large gains but more often than not the opposite occurs. If their stocks plummet they get emotional and fearful and sell up everything... at a loss.
Beware the Dinner-Party Investment “Tip”
Dinner parties and pub talk are great ways for socialising but not so hot when it comes to investment strategies. In fact, you could do worse than take a contrarian view and sell when everyone’s talking about buying and vice-versa. Rather than thinking short term and chasing after the next big stock rise tipped at dinner-party tables, I believe it’s better to behave like a long-term investor. For me, this means owning low-cost index mutual funds or exchange-traded funds (ETFs) in the most tax-sheltered manner i.e., using pre-tax money in retirement accounts like 401ks, IRAs etc
It should be pointed out that I don’t think buying individual shares is the central pillar of any smart wealth building strategy. Unless you’ve got oodles of time on your hands and a real penchant for technical analysis I suggest avoiding spending the remainder of your stock investing days, hand-picking individual stocks.
If you really must, and you’ve already built up sufficient security elsewhere in your investment portfolio (as per the investment pyramid framework mentioned above), it’s ok to play with a very small amount of capital (e.g. less than 10%) on buying stocks directly so long as you’re thinking long-term and intend holding onto these stocks for years or possibly even decades!
Know Your Fundamentals
There are numerous stock investing trading strategies – scalping, momentum trading, technical trading, fundamental trading, swing trading etc. If you’re a beginner at stock investing than I think the best trading strategies is fundamental analysis. After all, one of the world’s best know and wealthiest investors, Warren Buffet, undertakes fundamental analysis of the stocks and securities he buys.
Fundamental analysis requires that you understand the key business financial indicators such as Cash-flow, Earnings and Balance Sheet positions as well as some of the main financial ratios used to value stocks e.g. P/E Ratio, Return on Equity, Earnings Growth Rate, Debt to Equity ratio, Dividend Yield etc. Developing your fundamental analysis skills will stand you in good stead in both the investment and business world.
Where to Trade – Should You Have a Stockbroker?
With the advent of online trading anyone can be up trading within 24-48hrs of reading the latest edition of “Stock Investing for Dummies”! However, from my experience online trading platforms are littered with financial casualties. Novice investors get torn to shreds not by the online platforms but by their own lack of knowledge, technical unfamiliarity, and the emotions of greed and fear.
Momentum trading through online platforms (e.g. OptionsExpress,, eTrade, SaxoWebTrader etc) requires you to develop Technical Analysis skills and have in-depth knowledge of technical indicators (e.g. Moving Average Convergence/Divergence (MACD), the Rate-of-Change (ROC) indicator, the Relative Strength Index (RSI), Bollinger Bands, Stochastics etc) and identify chart patterns (e.g. Head and Shoulders, Cup and Handle, Triangles, Breakouts etc).
If you do want to jump onto some online trading platform and begin stock trading then it can be a really good idea to begin stock trading with a virtual/simulated account. That way you make your mistakes using phantom money.
Even though I’m somewhat sceptical of the average stock-broking firms’ modus operandi, it can be a good starting point for budding investors. Treat the whole experience as an exercise in sleeping with the enemy! Sure, you’ll pay higher trading commissions than you would through an online trading platform and you may or may not make some gains. However, that said, you should at least avoid getting skinned alive and you’ll gain some valuable insights and knowledge from the process.
In Summary:
Remember the words of legendary businessman Donald Trump, “sometimes your best investments are the ones you don’t make”. When it comes to stock market investing this saying could be more apt! I highly recommend beginning stock market investing when you are ready i.e. after you have earned the right to risk. If you’re interested in learning more about this wealth building concept then check out my website and other articles.
Many beginner guides to stock market investing focus on: understanding risk, valuation methodologies, stock market indices etc. I think there’s enough info on this already out there so what I wanted to do was offer some structure and some strategic thinking behind your stock market investing beginnings. I hope you found the article worthwhile. Thanks for taking the time to read this. If you like what you’ve read and think this could be useful to someone else, please share...share the knowledge, share the wealth!


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