Before we begin, I’ll just like to say that this is going to be an article specifically for beginners. If you’re someone who already some experience in the markets, this is a refresher of the basics.
There is a lot of noise out there when it comes to investing. With the emergence of crypto and the metaverse, it can get overwhelming for someone who’s just starting out. Here’s a simple way to invest, even if you have ZERO financial knowledge.
First, let’s start with the WHY.
Inflation rates range from 2% to 2.5%. Every year, the prices of goods and services go up by 2% to 2.5%. If we leave our money in the bank earning less than 1% interest, we are going to lose out to inflation. Just because you don’t notice it does not mean it’s not there. Over time, you realise that your purchasing power drops significantly.
What Is An Investment?
An investment is anything that puts money into your pocket. It doesn’t even have to be stocks, but we’ll be focusing on that here.
In the stock market, there are 3 ways in which you can make money.
1. Capital Gains
You get capital gains when the stock price goes up.
This is like interest that’s being paid to you. It can be yearly, semi-annually, quarterly, or even monthly.
3. Capital Gains + Dividends
This is a combination of the 2. You get the upside of capital gains, and a steady income stream in the form of dividends.
Now that we’ve got the basics out of the way, here’s a step-by-step guide on how you can get started.
Step 1: Open a brokerage account
Obviously! Without a supermarket, you can’t buy groceries. Similarly, without a brokerage, you can’t buy stocks. There are many low-cost stock brokerages out there.
Here are 2 which I use most frequently:
ThinkorSwim (ToS) by TD Ameritrade
This is my favourite brokerage, one that I’ve used for a few years now. My only gripe is the lack of P&L chart and that they only offer US markets. Other than that, I would highly recommend it for beginners as it’s user friendly and low cost.
ZERO commissions on stocks
LOW commissions on options
Only US market available
No P&L graph for tracking portfolio returns
Interactive Brokers (IBKR)
For IBKR, I use mostly the phone app instead of the desktop one. There’s a nice P&L chart to track your returns. Funding the account is also a breeze (your funds arrive within 30 mins).
IBKR has also got a trader workstation app which you can download on your computer. That’s something which I seldom use as it’s not too user-friendly.
LOW commissions on stocks and options
P&L graph to track portfolio returns
Poor user interface on TWS
IBKR is giving away $1 in IBKR stock for every $100 deposit. If you’re keen on opening an IBKR account, you may do so here.
Step 2: Invest in index funds
For beginners (and even for investors with some experience), investing in index funds is a safe and guaranteed way to compound your wealth.
Don’t just take my word for it. Warren Buffett himself is a big advocate of index funds.
Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.”
According to a 2020 report, over a 15-year period, nearly 90% of actively managed investment funds failed to beat the market. If you’re a beginner who’s just getting started investing, invest in a low-cost index fund.
Now, you may ask, “What is an index fund?”
An index fund is a fund that automatically invests in all the companies in the index.
Let’s break this down into 2 parts:
A fund is a where investors will pool their money. This fund is managed by a fund manager. The fund manager decides which companies the fund will invest in and is paid a small management fee.
An index refers to a stock market index. An example would be the S&P 500, which is the 500 biggest companies in the United States. The S&P 500 is the index of the US stock market.
Over the last 15 years, the S&P 500 has delivered an annualised return of about 10%.
Why investing in an index fund works?
The “fund manager” behind an index fund is a computer algorithm that automatically allocates your money. Poor companies will be kicked out of the index and replaced by a better company periodically.
Over the long term, the stock market ALWAYS goes up.
Have a look at the S&P 500 ETF (ticker symbol: SPY) chart:
Step 3: Invest only what you don’t need for the next 5 to 10 years.
A common mistake that people make is investing money that they need in the short term. They are then forced to sell at low prices when the market falls, when they really should be doing the exact opposite.
Be sure to keep at least 3 to 6 months of emergency funds for rainy days.
If you could summarise this article into 2 points, it will be:
1. Open a brokerage account (if you don’t already have one)
2. Invest in low-cost index funds like the S&P 500, with spare cash which you don’t need in the next 5 to 10 years.
Don’t underestimate doing the simple stuff. Simple becomes powerful when implemented.
P.S If you enjoyed this, please share with your family and friends.
Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This article is a reflection of my opinion, and is not to be taken as investment advice.
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