The Best Guide to Investing in Stocks (2021) - The Invest Addict (2024)

When I started working, earning some income, I knew I should save money but I just wasn’t in the habit of doing so. I had dreams of owning some rental apartments. That was the only form of investing I knew about back then. As time went by, I came across stocks and shares and I immediately fell in love.

For those of you wanting to build wealth but don’t know where to start, this blog post should help you understand the stock market better and get you started. I gathered a few tips I wish I got when I started investing in the stock market. Hopefully, you find them helpful.

The value of money decreases over time. This is due to inflation, which decreases the value of money each year due to an increase in the prices of goods and services. Inflation is expressed as a percentage. This means the value of your money decreases by a certain percentage every year. In South Africa, the inflation rate is currently at 4.28%. Your money will lose its value by 4.28% if you were to leave it under a mattress or a savings account offering you less than 4.28% in interest. Simply put, prices will increase by this percentage rendering your money relatively weaker than the previous year.

Savings accounts are essentially ineffective in protecting your money against inflation as they normally offer interest rates lower than inflation. I have realised that banks are not our friends when it comes to savings. Since money will lose money when left in a savings account, we have to find a way to fight or beat inflation.

To beat inflation, you have to make money on your money, earn some interest on your money. The interest you earn should be above the inflation rate to ensure that your money does not lose value. If you manage to earn interest higher than the inflation rate, your money would maintain its value… Inflation beaten!

It is important that you just don’t lose money. You should make money on your money. How? Since saving money clearly will not help us preserve the buying power of our money, inflation eats away at savings. This means we need to find something effective at preserving the value of our money. The only thing that will help us is getting in the habit of investing our money. There are many types of investments ranging from businesses to buying shares. Before we invest in any type of investment, we should be sure we understand how the investment works.

An investment is anything that puts money into your pocket. A rental property, a car you use to make money or a business. You could also call your investments assets. There are physical assets and those on paper like shares, index funds, Exchange Traded Funds(ETF) e.tc.In choosing your investments, you should aim to get interest rates higher than the inflation rate.

When it comes to beating inflation, some investments are better than others. The stock market has proven itself over a long period to be more effective than most types of investment. On the stock market, you can invest in Shares, ETFs, Index Funds and many other types of investments. These investments are known to beat inflation rates.

When you buy shares of a certain company, you are buying part ownership of that company. You become a part-owner of the company owning a small percentage. As a part-owner of the company, you can earn money in the form of dividends. Dividends are a cut of the profits made by the company. Dividends can be distributed monthly, quarterly or annually. Companies usually grow in value over time. This works in your favour as a part-owner because it means the value of your shares of the company will keep rising as well. This also has a direct impact on your dividends. You will earn more money over time.

To buy shares, you need to go through a broker. In the old days, you had to physically call someone (a broker) to place an order to buy shares. In this day and age, you can access brokers online and through apps. Every country has its brokers operating within that country. In South Africa, some banks have these brokerage services which you can access and buy shares. There are also some independent brokers such as Easy Equities and SATRIX Now.

These platforms make it very easy to invest. You can now invest at any time while you are in bed or lazying on the couch. You are also able to buy fractions of shares. This means you do not have to buy a full share to invest. If you think you need a lot of money to start investing, this solves your problem.

The rule of thumb of investing by prominent investors such as Warren Buffet is to avoid single stocks/shares by all means. What this means is that you should not find yourself having to figure out which company you want to invest in. The reason is that a single company can easily go bankrupt. These things happen, Murphy’s Law? What can go wrong will go wrong, you know? If a company were to go bankrupt and you had a lot of faith in it that you put all your money in it, you would lose all your money. You surely do not want this.

To avoid this catastrophe, you have to spread your risk. Investing is risky. To spread the risk you have to invest your money in several companies. Do this and you will have diversified your investment portfolio. This means you will have spread the risk therefore there are slim chances of a total loss of your investment. The best thing to do then is to put your money in an index fund as they track the market performance of many different companies.

A fund: Investors pool their money and a fund manager is appointed to decide what to invest the fund into. Investors need not worry about selecting companies to invest in.

Index: A portfolio of investment holdings that represents a segment of the financial market. An example is the S&P 500 which is an index of the US stock market. It is made up of the 500 biggest companies in the US.

As a beginner investor, it will not be easy to decide which companies to invest in. The index funds will help eliminate this problem as your money automatically buys these different companies in the proportions decided by the fund manager. Diversification is maximal in index funds because your money is never in one company more than the others. Another upside is that index funds charge very low fees because there is little manpower required once the fund has been set up and proportions decided.

The risk available in investing in the stock market is in the form of the market rising and falling from time to time. But if you were to study the S&P 500 chart, you would realise that it has had an upward trend over a long time. The ups and downs of the chart do not mean you are losing your money. The value of your investment will go up and down with an overall upward trend over time.

How You Could Lose Money In The Stock Market

The only way to lose money in the stock market is if you buy shares of an index fund at a high price and sell at a lower price than the one you bought at. If you wait out the ups and downs you would gain more money through compound interest. Money is very emotional. Beginner investors tend to always keep an eye on their portfolios. This gets them spooked as they see the ups and downs and feel like they are losing their money and end up selling low. You should review your investment portfolio twice a year instead of always watching what the market is doing.

You may still be feeling like your money is at risk even after you have learnt about index funds. Won’t these companies go bankrupt? After all, I mentioned Murphy’s Law. But think about it… What are the chances that all the 500 top companies in the US go bankrupt? It is almost impossible. Unless the world is hit by some mega apocalypse. If a mega apocalypse hits, your money will not mean anything because your biggest worry will be survival. Your money will not have any value in the case where the earth is infested by zombies.

So we have nothing to worry about investing in the stock market. However, the stock market works well with long term investments. That is anything 5 years and longer. In a short period, you would probably lose money in the stock market as there are those ups and downs I mentioned earlier. You should also only invest money you do not need to access in the next 5 years into the stock market.

There is a saying that goes, “ The best time to start investing was yesterday.” Start as soon as you can. Your age has nothing to do with whether you can invest. If you have an income, an allowance or any form of income, you should start investing in the stock market. The longer your money is invested the more money you stand to make as an effect of compounding interest.

You must note the following too before you start investing. Be on top of your money game. By this I mean to be in the habit of budgeting and knowing your financial state. If you are in debt, ensure you pay off the debt before you start investing. Debt holds you down and slows down your progress. It would be useless trying to accumulate some interest through your investments while you have debt charging you interest and inflation being against you. So, first, tackle your debt and then build a 3 to 6 months worth of expenses as your emergency fund to guard you against any unfortunate happenings that may come your way.

Investing is the smartest decision you can ever make. You are going to thank yourself later on in life when things are much easier for you. Retirement will be bliss because you will not run out of funds in your old age. This of course provided you invest enough money. If you were in doubt about investing, I hope this article changes your mind.

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