6-Step Guide: Where and How to Get Started in The Stock Market
I have posted since the creation of the site a number of articles dealing with stock market strategy but no detailed tutorial explaining how to start the stock market from scratch, I must believe that I like to do things in disorder.
The question “Where to start?” I was very often asked by the new readers of the site (and also by some regular visitors who decided to take action), I decided to write a detailed guide that will allow you to get started on a good basis.
A good start on the stock market goes through several steps that we will detail here point by point:
- Choosing the right broker (and avoid the No.1 performance killer on the Stock exchange: Fees)
- Knowing how to place a stock order (and know the different types of orders)
- Diversifying the amounts to be invested (always diversify your investments)
- Choosing a suitable stock investing strategy (forget Day-trading)
- Acquiring the knowledge necessary to succeed (do not go blind)
- Knowing how to manage your emotions (a key factor often underestimated)
Step 1: Choosing the right broker
There are many stock brokers available on the market but not all of them are equal. The factor you need to monitor as a priority for your broker’s choice is the fee.
If only 1 or 2% of the fees collected systematically on your trading transactions will drastically decrease your long-term performance because they insidiously hinder the process of Compound Interest year after year.
A graphic example: Here are $10,000 placed over 20 years at the historical average rate of stock markets (without fees):
Here is now the same amount placed on the same duration but with 2% of fees charged annually:
As you can see, 2% of brokerage fees levied each year on your account make you lose more than $20,000 in the long run!
I know that, some people may have the idea of going with their traditional bank when they want to start on the stock exchange to be better accompanied (or simply because they have greater confidence in their bank), but I will strongly NOT recommend this option in the sense that the fees charged on each transaction will simply be exorbitant in the vast majority of cases (e.x $20-50 per order in a traditional bank against $1 -5 at a good online broker (based Of the amounts placed).
You should also know that almost all major online brokers are “backed up” by big banks, so a priori your funds are protected up to a certain ceiling in the same way as in a traditional bank, as long as you do not choose a broker extremely exotic.
Personally I would recommend InteractiveBrokers (this is the one I use), they currently offer the most competitive rates on the market ($1 per 100 shares!), they are very safe and also listed on NASDAQ (IBKR), the only downside of IB is the account opening procedure can be too complicated for newbies. A minimum of $10,000 is required to open an account with them, but i don’t think it’s gonna be a major problem if you’re a serious investor.
Step 2: Knowing how to place a stock order
To place a stock order is nothing complicated. Understanding the difference between different types of orders can be useful for you to better manage your securities account.
A quick introduction to 5 types of stock orders:
- Market Order: you simply buy/sell the stocks immediately at the prevailing price, which means you don’t control how much exactly you want to pay for the purchase or sale, the market does. There’s no guarantee of any specific prices that you though you would get, but Market Orders are still likely to be the most inexpensive of the orders you place.
- Limit Order: It allows you to buy/sell a stock at a particular price you set, the order will not be executed unless you get your price. However, it’s important to keep in mind that you broker may charge more fees for a limit orders, so do the math before any decisions.
- Stop Order/Stop-Loss Order: It allows you to sell stocks automatically if the stock falls to a price point that you preset. If the price stays level or keeps rising, the Stop Order will never be triggered. It’s an insurance to protect you from big losses.
- Stop-limit Order: It’s also a stop order, based around waiting for a specific target price. A stop-limit order will become limit order once the target price is reached, as opposed to market order. For instance, let’s say you only want to buy a stock at $50, if it falls to $50 but immediately shoot back up, a market order will go through anyway. But with the stop-limit order, the trade won’t be triggered automatically and won’t be executed if the price rises again above $50.
- Trailing Stops: Similar to stop-loss orders, but as opposed to protecting against losses, trailing stops are used to protecting profits. If your stock is profitable, you can then use trailing stop order to follow it up, it’s placed as a percentage of the market price. If the price goes down by that percentage, the trailing stop order triggers and becomes a market order, and broker will sell the stock. If the price rises, the trailing stop will follow it up since it’s a percentage of the actual market price.
If you just get started on the stock market, I advise you to use the “market order” by default to avoid any complication. This is the easiest and most polyvalent stock order.
Step 3: Diversifying the amounts to invest
No experienced investors will place all assets in the stock exchange or at least not entirely in shares. If the majority of individuals associate the stock exchange with shares, in fact you can place your money in many other assets using your securities account.
Why not put all his money into stock? Which are yet historically the best long-term investment?
First of all, since you’re reading this article you are probably a beginner, and that as Warren Buffet says “Don’t test the depth of the river with both your feet while taking risk“.
And then, because there will inevitably be periods when markets move strongly (and not always in the right direction), and that it may impact your psychological emotions (and therefore indirectly your quality of life, which is not the goal).
There are strategies to greatly reduce the impact of market falls on your stock portfolio (which I have already talked about extensively on the blog), but none of these allows you to avoid at 100% (apart from those sold by scams of course). So never believe if someone try to sell you magic systems that are supposed to earn money every day, every week or every month “automatically”: It is most likely a Ponzi scheme.
If you want to become an investor, then you must be mentally prepared for the fact that the value of your stock portfolio will fluctuate because the stock markets always go up in the long run, but this is far from being done in a straight line. You must therefore invest only an amount that is psychologically comfortable for you, otherwise you will panic at the first correction of market and you will stop following your investment strategy.
Which leads us to the next point: the choice of your strategy.
Step 4: Choosing a suitable stock investing strategy
The stock trading strategy is probably the one I was able to deal with most extensively on the site (because that’s what interests me the most), so you should find a lot of resources on the subject.
An essential rule to respect is that you do not have to get into stock market without a clearly defined investment strategy: it is a recipe that will surely lead you to disaster.
Keep in mind that for any purchase or sale order you place on the stock exchange, there is a person in front who is willing to sell you his shares (or to buy yours), and who therefore has an opinion exactly contrary to yours on the asset that you wish to sell or buy. To win, your strategy must be better than his.
Coming unprepared and without an action plan, it’s kind of like sitting at a poker table and playing hands randomly against seasoned players hoping naively to win again. Some of them are deluding themselves in the wrong thinking that they can beat veterans without preparation, which is extremely naive. Being that said, if you take the time to read this long tutorial, you are already starting off on the right foot since you are already doing the procedure to educate yourself extensively before you start.
The good news is, that there is not necessarily a need for a very complicated strategy to make money on the stock market. There are simple strategies that work, and there are more complex strategies that work. Or as Warren Buffet aptly says: “The size of your circle of competence is not very important; knowing its boundaries, however, is vital.”
The whole thing being to know how to differentiate the good strategies of the bad and not to follow something that does not work. An example of stock investing strategy oversold by the markets that will reduce your account to zero before you have had time to realize what happened: the day trading. It has been proven academically that 98% of day-traders lose money. And paradoxically this activity is often presented on the internet as the most gainful of all stock strategies, while science has proved exactly the opposite.
You must choose your strategy according to your level, your financial objectives and your personality (and in particular your tolerance to the fluctuations of the stock markets).
I wrote a very comprehensive guide on the main strategies that work on the stock market, feel free to see what inspires you the most
Step 5: Acquiring the knowledge necessary to implement your strategy
If you want to invest passively through trackers or investment funds, you will need less advanced knowledge than if you want to choose your stocks one by one. But whatever the case may be, you will still need a minimum of knowledge.
If you want to go with trackers/fund: You need to understand how these tools work, know what criteria you should compare them with, what fees you will be charged by the manager, choose a portfolio only in the US or international (the 2 have their pros and cons but you have to understand what the currency risk is before you decide), you will need to find out if your fund pays you dividends or reinvests directly, etc.
If you choose to invest in individual stocks (what I do): you will need to acquire the skills that will allow you to evaluate the quality of a company, its durability, its sector of activity, its fair price, its level of financial risk, and so on.
You will need to acquire the basics of fundamental analysis and technical analysis history to understand the forces that are moving the stock markets, what are the factors that are likely to push a stock upward or downward and so on. Then sort through all of this and get to set up a strategy with concise buying and selling rules for each of your stock positions.
Step 6: Managing your emotions and sticking to your strategy
Once you have set up all these elements, you will still have to do the hardest: stay disciplined and stick to your strategy.
Investing in the stock market is a bit like going to the gym: you can spend hours optimizing every element of your workout program, if you miss a session on two because you lack discipline, or you get discouraged after 3rd time because you don’t see the results of your work yet, or they are not up to your expectations, this will not have served much.
The stock markets have good years and bad years. The average of long-term stock returns is around 10% per year but this is not done in a straight line. If you invest mainly in shares, you will have years of +30% and years of -20% (for example). If you panic during the years of -20% and you sell everything, you will miss the years of +30%.
If you lose control, you may find yourself victim of the famous ” Cycle of Investor emotions“:
Perseverance and your ability to save part of your salary month after month and reposition it wisely whatever happens will also play such a critical role in your success as choosing your strategy.
That’s why ideally, you have to choose a stock strategy that will be temporally and emotionally inexpensive for you. It is often due to one of these 2 factors that many traders stop trading or lose money: their strategies are too costly, either temporally or emotionally. None of the strategies I use on a personal basis is very stressful or very time consuming. You have to know your own limits and deal with them.
I think I have told you enough things here so that you can get started in the stock market on a good basis, hope this guide has been useful to you.