Stock investment is seen by many as an important way to increase wealth. By purchasing shares in a company, you can not only share in the growth of the company, but also get returns through rising stock prices or dividends. However, for novice investors, the complexity and volatility of the stock market may be daunting.
This article is a detailed and easy-to-understand guide to stock investment, helping you start from scratch, master the basic essentials of stock investment, avoid common misunderstandings, and gradually realize wealth appreciation.
Why choose stock investment?
Stock investing is widely considered an important way to gain long-term wealth growth. Compared with other investment tools such as bonds and real estate, stocks generally have higher return potential, but also come with greater risks. Understanding why you choose to invest in stocks will help you clarify your investment motivations and goals.
High returns: Stock investments generally offer higher returns than past accounts or fixed income products. Historical data shows that the stock market's long-term annual average returns often outperform other asset classes, especially through the compounding effect, which allows investors to achieve capital appreciation over time.
Share in corporate growth: By purchasing stocks, investors become shareholders of the company. Not only can you share in the capital appreciation brought by the company's business growth, but you can also earn regular returns. Stocks of high-quality companies allow you to accumulate wealth with long-term returns without directly participating in the company's operations.
Flexibility and liquidity: Stock investment currently has higher liquidity than real estate and other real estate investments. You can buy and sell stocks freely in stock market transactions, quickly adjust your investment portfolio and capture market opportunities. In addition, the trading platform and technical tools of the modern stock market enable investors to make investment decisions more easily.
Clarify investment methods
Newcomers to the stock market need to choose an investment path that suits them. Common investment methods have their own characteristics and different requirements for investors.
Individual Stocks
Investors can invest in individual stocks, but they need to have professional knowledge such as financial analysis and industry research, and spend a lot of time tracking market and company dynamics. It is suitable for investors who are sensitive to numbers, keen on research and have plenty of time.
Index Funds
In addition to buying individual stocks, investors can also choose to invest in index funds, which track a stock index such as the S&P 500. Index funds are generally much lower cost and, under normal market conditions, are likely to track the long-term performance of the underlying index well. Over a long period of time, the S&P 500 has had a total annualized return of about 10%, which can accumulate a lot of wealth over time.
Smart Advisor
Smart advisors use big data, algorithm models and artificial intelligence technology to customize index fund investment portfolios based on investors' age, risk tolerance, investment goals and financial status.
Robo-advisors can not only select portfolios for investors, but also optimize investors’ tax efficiency and automatically make changes over time. They can work independently, performing specific tasks when certain thresholds are reached, or they can work in tandem with human advisors.
Planned investment amount
Funds not suitable for investment
The stock market fluctuates greatly in the short term, so funds that are needed in the near future should not be invested in the stock market. Emergency funds are used to deal with emergencies, such as unemployment and illness. Investing in the stock market may not be able to cash out in time due to market declines. Funds that have clear purposes and need to ensure stability, such as children's tuition, vacation funds, and down payment funds for home purchases, are also not suitable for investing in stocks, so as to avoid market fluctuations affecting fund use plans.
Asset Allocation Strategy
For investable funds - funds that are unlikely to be used in the next five years, proper asset allocation is key. Age is a major consideration in allocation strategy. Generally speaking, stocks are less desirable as you age. Young investors tend to have longer investment horizons and a higher risk tolerance, but if you are retired and rely on investment income, the situation is different.
Investors can refer to the "110 - age" rule to help them determine their approximate asset allocation. Subtract your age from 110, and the result is the approximate percentage of investable funds used to invest in stocks (including mutual funds and stock exchange-traded funds). The remaining portion can be used to invest in fixed-income investments such as bonds or high-yield certificates of deposit (CDs). Among them, investors should adjust the allocation ratio based on their own risk appetite and investment goals. Those with a high risk appetite can appropriately increase the proportion of stocks, and vice versa.
Open an investment account
To invest in stocks, you first need to choose a stock trading account. You can get an account through a bank, a brokerage, or an online trading platform. When opening an account, investors need to provide information such as identity information, source of funds, and risk tolerance, and complete relevant risk assessments.
Opening a trading account is usually easy, but you should consider the following details before choosing the right broker:
Account Types
First, decide what type of brokerage account you need. For most people just learning about stock market investing, this means choosing between a standard brokerage account and an individual retirement account ( IRA ) .
Both account types allow you to buy stocks, mutual funds, and ETFs. The main consideration here is why you want to invest in stocks and how easily you want to access your money.
Standard brokerage accounts offer flexible access to funds and are suitable for investors who want to grow their capital in the short term or whose investment amounts exceed the IRA contribution limit.
IRA is designed for retirement savings and has tax benefits. Traditional IRA contributions can enjoy certain tax deductions, tax-free fund appreciation, and tax-free withdrawals after retirement; Roth IRA contributions are not tax-deductible, but tax-free withdrawals after retirement. Self-employed people and small business owners can choose special IRAs such as SEP-IRA and SIMPLE IRA. For investors who aim to retire, IRA can reduce the tax burden and help accumulate wealth.
Transaction costs
Many online brokers have cancelled stock trading commissions, but options and cryptocurrency trading may still charge fees. Some brokers provide rich educational resources, such as investment courses, research reports, and analysis tools, to help novices learn investment knowledge. Some brokers support international securities trading to meet investors' overseas investment needs.
User Experience
The user experience of the trading platform is also critical. A platform with a user-friendly interface and easy operation is convenient for investors to trade. Newbies can use the demo trading account provided by the broker to familiarize themselves with the trading process and accumulate experience in a risk-free environment. Some brokers also have a network of physical branches, which is very useful if you need face-to-face investment guidance.
Select Stocks
Building a diversified investment portfolio
Diversified investment can reduce risks. New investors should include stocks of different industries and sizes in their investment portfolios. Different industries perform differently in economic cycles. The consumer industry is highly resistant to cycles, while the technology industry grows fast when the economy is booming. Taking both consumer stocks and technology stocks into account in the investment portfolio can balance risks. At the same time, large-cap blue-chip stocks and small- and medium-cap growth stocks are combined. Large-cap blue-chip stocks have stable performance, while small- and medium-cap growth stocks have great potential. However, it is necessary to avoid over-dispersion and focus on familiar companies on the basis of moderate diversification.
Focus on familiar enterprises
Investing in familiar companies will help investors better understand their business models, products and services, and market positions. New investors can focus on companies with high-quality products and expanding market share in daily life, and make investment decisions after in-depth research on the fundamentals. They should be cautious when investing in unfamiliar industries and companies.
Avoid high-risk stocks
When a novice investor lacks investment experience, he should avoid stocks with high volatility. The prices of such stocks are greatly affected by market sentiment and news, and their trends are difficult to predict. For example, hot concept start-ups have growth potential, but they face technical and market risks, and their stock prices fluctuate violently. Cheap stocks should also be treated with caution, as low prices may reflect the company's performance and financial problems. New investors should pay attention to the company's fundamentals and intrinsic value, and avoid blindly investing because of low stock prices.
Master basic evaluation indicators
Newbies can use basic evaluation indicators to determine the investment value of stocks. The price-to-earnings ratio (PE) reflects the price that investors are willing to pay for each dollar of a company's profit. A low PE value may indicate that the stock is undervalued, but it may also mean that the company's performance growth is slow. The price-to-book ratio (PB) measures the ratio of the stock price to the net asset value per share. A PB value less than 1 may indicate that the stock value is undervalued. This needs to be judged in combination with the industry and the company's operating conditions. The dividend rate reflects the company's dividend level. Investors who pursue stable returns can focus on stocks with high dividend rates.
Continuous investment and long-term holding
Adhere to the long-term investment concept
Short-term stock market fluctuations are difficult to predict, but in the long run, economic development and corporate profit growth drive the stock market up. This is one of the biggest secrets of investing taught by Warren Buffett. New investors should choose companies with long-term competitive advantages and stable profits, buy them at a reasonable price and hold them for a long time. Long-term investment can reduce the interference of short-term fluctuations, and investors may get a rich return on investment over time.
Regular evaluation and adjustment
The market, companies and investors themselves are constantly changing, so new investors need to evaluate their investment portfolios regularly. It is recommended to conduct a comprehensive evaluation every six months or one year to check whether the stock performance and asset allocation ratio are in line with the investment objectives and risk tolerance. If changes in industry development lead to an imbalance in the investment portfolio ratio, or if the investor's risk tolerance changes, the investment ratio of stocks and fixed income products should be adjusted accordingly to ensure that the investment portfolio matches its own situation and maximize returns.
