How to Start Investing in Stocks?

Robert Kiyosaki once said, "Don't work for money; make money work for you." This perfectly depicts the importance of investing. It is common knowledge that investing is the key to building wealth. However, the golden question is: How to start investing? More specifically, how to start investing in stocks?

If this is the question you have in mind, you are at the right place, as this is precisely what we are talking about today. Notably, we are going to discuss:

• What is investing, and why should you invest?
• What can you invest in the stock market?
• What are the best ways to start investing in stocks?
• Where to start investing in stocks?
• How much money should you invest?
• When to start investing?

We will also provide some actionable steps you can take after reading this blog to start your own investment journey.

What is investing, and why should you invest?

"Investing is laying out money now to get more money back in the future," Warren Buffet once said. There are no better words to define investing. To put it bluntly, investing is putting money in assets that will be worth more in the future.

But why should you invest? There is only one main goal, really — to meet your financial goals. A financial goal can be literally anything. It can be buying a car or buying a house. It can also be achieving financial freedom.

Investing is powerful due to two main reasons. Investing is effective at:

• Avoid the devaluing of your money by hedging inflation. The average inflation rate in the U.S. has been around 2%. This means if you put your money in the bank and do nothing, you lose 2% in value every year.

  

  Figure 1: The annual inflation rate in the U.S. (from 2011 to 2022), source: U.S. Bureau of Labor Statistics

• Increase the value of your money as the asset value grow. The average return of the S&P 500 has been around 10.5%. So, if you invest your money in the index, its value would have increased by 10.5% each year on average.

  

  Figure 2: The returns of the S&P 500 index (from 2013 to 2022), source: investing.com

And these are the keys to building wealth.

What can you invest in the stock market?

Before we dive into the topic of how to start investing in stocks, let’s look at the options we have in the stock market. The stock market is vast and complicated, consisting of various financial instruments. But, the two main financial instruments that are available to most of us are:

• Shares

  Shares can be defined as units of ownership of companies traded on the stock exchanges. When you buy shares of a company on the stock exchange, you take direct ownership of the company and the business.

  Owning part of the companies can bring you profits in two ways:

  • You are entitled to receive any dividends the company distributes
  • Your shares will be worth more as the company grows and becomes more successful

• Exchange-traded funds (ETFs)

  Besides buying company shares, you can also invest in ETFs in the stock market.

  ETF, or exchange traded fund, is a type of security that bundles together a collection of stocks and distributes a number of shares from the collection to be traded on the stock exchanges.

  Imagine this. If every stock is a type of spirit, the ETF takes some of them and turns them into a cocktail. And every share of the ETF is equivalent to a droplet of the cocktail.

  ETFs are often used to track an underlying index. For instance, the famous VOO is an ETF built by Vanguard to track the S&P 500. Hence, if you own a share of VOO worth $100, it is equivalent to spreading the $100 on all the companies in S&P 500, according to the weightings in the index.

What are the best ways to start investing in stocks?

Prior to venturing into the stock market, there is one crucial question that you need to ask yourself — how to start investing in the stock market?

In general, there are two ways that you can get started with investing in the stock market:

• The first option is pretty simple and straightaway — invest the money yourself. You can choose to formulate and implement your own investment strategy. This option, however, comes with some prerequisites — you need to have the time and the knowledge to do so.

• The second option is to utilize ready-made investment strategies. This option is almost equivalent to delegating the task of investing your money to some other parties that are believed to be better at doing this than you.

  The easiest way to do this is to invest your money using robo-advisors like Betterment and Nutmeg. You can also put your money in mutual funds and let the portfolio managers in the funds manage your money for you.

But, how do you decide which one to go for? I understand that this might be difficult for some of you. Hence, I have prepared a decision cascade framework that will help you make this critical decision.

Figure 3: Decision making cascade for investment strategies, source: Alpha Investing Group

If you decide to utilize ready-made strategies, there is not much for you to do, really. Just put your money consistently into the robo-advisors or mutual funds, whichever vehicles you choose, and wait to reap your returns.

However, it is essential to note that you have not eliminated risks by delegating the task of investing to someone else. The results and returns are not guaranteed. You might win, and you might lose. Robo-advisors and portfolio managers don’t always make the right decisions.

If you are risk-averse and want to grow your wealth safely, I recommend you implement the passive investment strategy and invest your money in the S&P 500 index fund. If you are interested to know more about this topic, check out my blog on passive investing.

On the other hand, if you have decided to implement your own investment strategies, sooner or later, you will need to make an important decision — to decide on the investment strategies that you are going to follow.

An investment strategy acts as your game plan in investing. It is impossible to be successful in investing without one.

Before investing, there are four main investment strategies that you should definitely familiarize yourself with. If you are new to this topic and are interested in knowing more about investment strategies, please check out the four main investment strategies.

The best investment strategy for you is one that complements your strengths, weaknesses, investment goals, and current circumstances. Spend some time assessing those factors and choose a suitable investment strategy. It will help you a long way.

Now, you should already have your decision made. If so, continue reading, and let’s talk about how to actually do it.

Where to start investing in stocks?

Now that you have decided on how you are going to invest, it is time to find out where you can start investing your money.

If you have decided to invest with ready-made strategies, you have two main options out there:

1. Mutual funds

   A mutual fund is a pool of money collected from a number of investors and professionally managed by portfolio managers to invest in the stock market. Here are some examples of mutual funds:

   • Vanguard: The second-largest asset management globally, famous for its low-fees mutual funds.
   • Fidelity: An international player with a renowned reputation and an excellent track record
   • Charles Schwab: One of the oldest asset management firms in the world that offers a variety of mutual funds

2. Robo-advisors

   Robo-advisors are digital platforms that use complex algorithms to help you invest your money in the stock market. Their decision-making process is tailored to your circumstances and is fully automated. If you wish to use them in investing, I have some recommendations here for you:

   • Betterment: One of the first and largest robo-advisor in the US, requires no minimum investment.
   • Wealthfront: A major player in the US market that charges minimum investment fees.
   • Acrons: An investment app that allows you to start investing with your spare change.
   • Nutmeg: A major player in the robo-advisor space in the UK, with an excellent track record.
   • Wealthify: A UK robo-advisor with no minimum investment.

If you want to invest with your own strategies, you need a broker. Nowadays, there are a lot of online brokers that provide you with the platform and tools to place your own transactions. Here are some of our recommendations for the best apps to start investing. (As this blog is meant for beginners who are just getting started with investing, we only introduce free platforms here.).

1. For investors based in the US, these are the best apps to start investing:
   • Robinhood: One of the largest online brokers in the US by the number of users.
   • WeBull: A major online broker in the US offering zero commission fees.
   • Etoro: The first and largest social trading platform.
2. For investors based in the UK, these are the best apps to start investing:
   • Trading 212: One of the largest online brokers headquartered in London.
   • FreeTrade: A fully regulated online broker based in the UK.
   • Etoro: The first and largest social trading platform.

For international investors, we recommend you try Etoro, Trading 212, or WeBull. They are widely available in most countries.

How much money should you invest?

It’s time to put your money into investing. But, how much money should you invest?

The answer is — it depends. Different people with different financial situations and circumstances will have different answers to this question. But rest assured, as we have you covered.

Ultimately, it all comes down to two questions:

• Have you paid down all your high-interest debt?

  If you still have any outstanding high-interest debt, such as credit card debt, your answer should be $0. As a rule of thumb, any outstanding debts with an interest rate of 15% or higher should be cleared prior to putting any of your money into the stock market.

  The logic behind it is simple — it is hard to make any significant returns while paying off debts with such high-interest rates.

• Do you have an emergency fund?

  Before you start investing, it is essential to set up an emergency fund. The emergency fund is a pool of money that you keep in your bank account in case of any emergency events happening.

  This is important because your investment values fluctuate. And the worst that can happen is you need to sell your investments when they are down just to have money to keep on living. The exact purpose of an emergency fund is to let your winners keep winning but still to keep the roof over your head.

  So, how much money should you save for your emergency fund? Depending on your living expenses, age, and risk tolerance, your emergency fund should be around 3 to 6 months of your living costs.

Once you have cleared all your high-interest debt and set up your emergency fund, you should be comfortable investing any money you know you won’t need in 10+ years (or 5+ years if you are less risk-averse). Remember, investing is all about the long-term. Personally, besides my emergency fund and money for my day-to-day living expenses, I try to put the rest of my money into investments.

When to start investing?

Now, the final question: when should you start investing?

You probably guessed the answer — NOW!!! Every second you wait is a tremendous amount of money you lose. The best time to invest was 10 years ago, and the next best time is today.

If you are reading this, it means you already have all the things and resources you need to get started with investing. You should now know how to start investing in the stock market, where to invest in stocks, and how much money you should be investing.

So, wait no more. Use the Alpha Investing Group as the springboard to launch you towards the realm of investing. Explore our blogs, and read some great books on investing.

Start investing NOW, just as Carlos Slim said, “Anyone who is not investing now is missing a tremendous opportunity.”