Investing for Beginners

Getting started in the stock market may seem overwhelming if your experience with the stock market is from films like The Wolf of Wall Street or The Big Short.Who doesn’t love parties and making tons of money? I’m sorry to burst your bubble, but I can assure you that your experience as a stock investor is going to be different. Yet, who am I to say what you’re going to spend your stock earnings on? Your goal in investing may be to buy fancy cars and throw parties where you can spray your friends with champagne. I don’t judge.

For me, my earliest experience with the stock market came about in 2000 when I finally saved up $700 to buy a yellow go-cart from Sam’s Club. For over a year I saw that go-cart move around the store; hanging from the ceiling one week, up on an angled shelf looking down at me the next. Sam’s Club product placement team sure knew how to capture the hearts of pre-teens with their dynamic displays. You can imagine my joy and subsequent despair when I finally reached my savings goal, and my Dad swiftly took my $700 and bought Proctor & Gamble stocks in my name. I was devastated and pouted around for weeks – what was I supposed to do with these intangible stocks; I can’t ride that around the neighborhood. I was devastated and felt like my Dad was a bad guy for doing that.

Fast forward to 2014 – I was in graduate school and needed cash to avoid taking out loans. Lo and behold, guess who had $1,700 from that $700 investment? To my surprise, this money had grown over 130%, or about 10% per year. The average interest rate at any bank is currently less than 1% per year. You better believe I immediately felt terrible about giving my Dad so much drama back in 2000.

Most people aren’t as lucky as I am to have parents who slowly exposed me to the stock market over time. I grew up hearing about the highs and lows of the market, but overall my family did well by taking a conservative strategy, and just investing funds that weren’t required for survival. From my experience, here is the best way to get started in the market and earn a moderate return without feeling overwhelmed.

Decide how much money you can afford to potentially totally part with.

Think of it as a budget that will be expended (like your budget for shoes). You will have the cash – then you will spend the cash and it will not be in your bank account anymore. (Although a brokerage account acts somewhat like a bank account, you must budget as if that money will be figuratively spent).

Choose a brokerage website and open a brokerage account (ex: E*Trade, Fidelity, Scottrade).

They all have very similar attributes and fees, but check for minimum balances required to open the account. If you have an IRA account anywhere, I recommend using that broker if the fees are similar to those of the big online brokers. For ease of management, I always recommending keeping your accounts consolidated as a millennial. Note: the application to open an account asks some pretty strange questions like if the purpose of your account is for speculation. WTF does that mean? See note at the end about example questions and how to answer them on an application.

Transfer the budgeted amount to fund your brokerage account.

It may take a few days to get approved, but once your account is open, transfer the funds from your checking account into your brokerage account.

Research stock options to match your risk appetite.

I personally am very cautious of losing the money I put in, so I invest in lower risk, lower return stocks. I also look for stocks that consistently pay a dividend so that, even if the stock stays stable, I’ve still made some return. My investing goal: earn anything over 2%. On average, the stock market produces returns of 7%. As such, my strategy is to just do a little better than banking interest and ensure that my principle investment stays intact. As a general rule for stable stocks: look to big blue-chip companies like Proctor & Gamble, GE, Boeing, Intel. Chances are good they are staying in business and, assuming no big scandal, will continue to grow in value.

Purchase the stocks and set your threshold for selling.

I see my stock portfolio as something I do not want to touch (I see this money as spent). However, if I did need to take out the funds to use in real life, I’ve set some guidelines for when that happens. Firstly, the goal is to only sell stocks if you can recover your initial investment. Remember, you don’t win or lose until you press sell on the stock. Then, I would look to sell a stock that may have some future instability. For example, I have an oil stock that is based on an oil well that is expected to dry up by 2020. This is the first stock I would sell if I needed money next month. Next, I don’t want to sell a stock that is consistently paying me dividends. Finally, consider the length of time you’ve held that stock. If you’ve held it over 365 days, you qualify for capital gains tax rates (less than ordinary tax rates). If you do think you may need to cash out these funds in the next year or so, it’s important to think of your selling plan so that you’re prepared and can monitor the stock situation as it gets close to the time that you need the money.

Application Note: An online brokerage application is trying to uncover the type of investor you are to determine if there is a conflict of interest or risk. You will most likely answer no to a lot of the questions such as working at a brokerage firm or being a 10%+ owner in a publicly held company. Also, the application may ask where your investment funds come from and the goal of opening the account. For most beginning investors, we are funding the account with income from earnings (job wages) and looking for growth. Don’t be intimidated by the application, brokers have many federal requirements to sniff out fraud and be mindful of advanced investors using borrowed funds to make risky trades.