In today’s article, I will present a short guide on how to start your adventure with investing, what to do before we even set up a brokerage account, what you should absolutely avoid and what to pay attention to.
Investing is a process by which our hard earned money comes into play, and probably none of you would like to lose it. Therefore, I believe that the more you should be properly prepared to make your first transaction on your brokerage account.
Are you ready to learn 8 steps that will lead you from the level of the stock exchange layman to the level of a beginner investor?
Yes, after completing these 8 steps you will not be a seasoned investor yet, but you will know the basics of the stock market and move efficiently around the market as an investor. Investing is a complicated process, so continuous learning is standard here.
I wish you a pleasant reading.
Step 1 – Read a lot
Banal, but how important. Reading is a fundamental start for any prospective investor. It’s not just about buying books on capital markets and reading them cover to cover. The main point is to learn a professional language before starting the adventure with investing.
Concepts such as: subscription right, IPO, buy / sell option, PEG order, horizontal trend, balance sheet, cash flow and many more should be known to anyone who intends to invest even the smallest amount of money.
What to read? Virtually everything related to the stock exchange and financial markets. Start with simple, friendly and not complicated things.
At the very beginning, it is worth reading educational articles (there are a lot of them on the Internet, this one is one of them), browse the “Education” tabs on brokerage houses’ websites, subscribe to interesting channels on investing on YouTube, like brokerage houses, financial services on Facebook , read the financial press. There are a lot of possibilities and before we buy any book, it is worth doing such a “riser” or we will find ourselves in it at all.
Step 2 – Start training
Why should I practice stock market investing? – you ask. Just like an athlete trains before a competition, a team before a match, and an employee also has to learn and practice certain skills before he starts working.
In the case of investing, the matter is so difficult that in order to gain practice in investing, we have to put our money on the table. This leads to the fact that people are often torn by emotions and stop thinking rationally. The share price drops by 50%, and we do not react, but live with hopes and the conviction that we could not be wrong. It drops by 90%, and the company declares bankruptcy and we are finished. Unfortunately, this is a common practice.
Instead of wasting your money in the above way, it’s worth testing your skills another way. Various types of stock market simulations are available on the Internet. Of course, the most popular of them are all kinds of forex platforms (currency trading), but I do not recommend them due to the fact that we do not learn to control risk there.
Step 3 – Collect capital
I suspect that 90% of you thought at this point – well … where does the money for investing come from? The answer is simple – from savings, only and exclusively. Investing on the basis of a bank loan is not profitable and involves great risk. The so-called student loans, which usually have a fairly long interest-free period, and their repayment begins only 2 years after graduation.
Nevertheless, I recommend investing amounts that we are able to realistically set aside every month. Do not spend all your salary or turnover for the entire month on the first purchase of shares. Why? Because it significantly affects the psychology of our investing. If we risk amounts of money, the total loss of which, or the loss of a significant part of it, will lower our standard of living or cause an irreversible change in our lives (e.g. business bankruptcy, loss of job, home, family), we will not act rationally. Moreover, we will not have much chance of making profits as our emotions will guide the decisions we make in the market.
The capital that you spend on investments must come from a steady source and it must be capital to which you can say “goodbye”. On the stock exchange, you can get rich several times, but you can also lose everything in a very short time. So it’s better to put on a black scenario. It’s easy to write or talk about, but much harder to do, so please pay attention to it.
Step 4 – Find Your Investing Style
It is commonly referred to as an investment strategy. Those who have been reading my blog for some time probably know what it is, you can find here a lot of materials on this subject and examples of various strategies.
Basically, this step is to answer some important questions:
1) do I want to invest short or long term?
2) what rate of return (in real terms) do I want to achieve?
3) what risk am I able to take?
4) how much time can I devote to analysis?
5) how much capital can i invest?
6) what is my investment goal?
After answering all of the above questions, we can choose the appropriate market, financial instruments, investment method, etc.
Example: I currently have 10,000 to invest. I am able to put aside this amount every year and allocate it to investments. I do not have time to analyze the stock market, I would not like to risk too much and I intend to build capital for the future (e.g. retirement, child studies). All I need is a rate of return higher than on the deposit.
After obtaining such information, you can create an investor profile and select an appropriate strategy for it. In this case, long-term investments in dividend companies or in times of high interest rates – in bonds, also with a long term, will be the best.
If you do not know what strategy, method or market will be good for you, but you can define your profile, write to me. I will do my best to help you and share my insights and experiences.
Step 5 – Choose a brokerage house
The next step on the way to your first investment will be choosing a brokerage house. There are several factors worth paying attention to here, depending on your trading style (see step 4). If we are a long-term investor, brokerage fees are not that important for us, because we will make few transactions. If we like risk and want to try our hand at the futures market, it is worth analyzing what the fee for buying / selling one position is. If we often follow quotes, it is worth buying access to the full order book and comparing offers in this area.
There are more factors affecting the attractiveness of a given account, but it is often the case that the account of office X is attractive for investor A, but not for investor B. It is best to compare office offers personally. When going to the facility or by contacting us by phone, the advisor will convince us that we are in the perfect place because their offer is tailored to our preferences. Not true.
Step 6 – Analysis of financial instruments
Probably the most complicated step, taking the most time, giving rise to the most doubts. Theoretically, we should familiarize ourselves with the structure of the stock exchange and the instruments listed on it after the second step, where we trained our skills on a demo account.
Having more knowledge from books, films and articles from financial websites, we should focus on choosing our investment path. Beginners usually choose the path called “technical analysis”, which is reading graphs. At the beginning, it may be enough, but if we intend to buy shares of a real company that has some value, it is also worth checking its financial statements, shareholding structure, management board, etc.
If we have chosen our investment method, e.g. long-term investment for dividends. All we have to do is select companies from the entire stock exchange that have been paying dividends on a regular basis for 5 or 10 years. The question of how many years and whether regularly – you decide, it’s your money and you risk it.
Step 7 – Make your first transaction
Once we have decided on a specific brokerage house, we will deposit funds there and choose the securities in which we will invest them – it’s time to start playing! First transaction. Often the most exciting moment, for some also the last one related to the stock exchange (unfortunately).
However, if you carefully followed the advice in the previous steps, you have a definitely more than 50% chance that the first transaction will end in profit. However, one aspect is important here – placing the order.
Often people who start their adventure with the stock market, excited that today is the day of purchase, choose the company’s shares, set a price and place an order. They are waiting and waiting, and the order has been hanging on the sheet for several minutes and nothing. An hour passes. Finally, we cancel the order and place it with the PKC (At Any Price) condition. The order is being carried out. We have purchased shares, the rights to which we will be drawing in two days (the exchange is T + 2 transaction settlement, but you already know about it, right?).
Step 8 – Be active in the world of investors
When we have seriously started our adventure with the stock exchange, it is worth being up to date with the world of this financial machine. We absolutely should not consider that after the first profitable transaction we are “gods of the stock exchange” and that we can take out a loan against the apartment, and put a notice of termination on the boss’s desk. We can never, ever feel confident. There is no certainty on the stock exchange, here every economic decision, every word of politics resonates in share prices. Humility and patience are what counts.
That is why it is worth continuing education. First of all, I recommend checking the financial press, valuable articles (especially those where the companies we are interested in are described), contact with other investors.