The Ultimate Guide to Start Investing in Stocks (2021)
You want to get started with this investing thing. You might have a bit of money saved.
It's probably not enough for a rental property, but you reckon I should probably invest this in something. Maybe you've heard on the news about Tesla or Netflix or Amazon and how, if you'd invested 10 years ago in Tesla then you'd be a millionaire by now or things like that. But if you're new to the game, this whole investment thing can seem like a really complicated black box.
Like, how do you even buy a stock? What even is a stock?
Do you just go on tesla.com and buy some Tesla, like, how does it work? (chuckles)
And if you try and look into this, you get all these acronyms being thrown around like IRAs, ROI. Options, etc
And on top of that, there is the anxiety that we all have that I know investing is risky and I don't want to lose all that my money. So in light of all of that, this is the ultimate guide on how to get started with investing.
It is the video I wish I would have had five years ago when I first started investing in stocks and shares. And we're gonna cover this by thinking about investing in 10 different bite size steps.
So the first one is forgetting about investing completely and just thinking.
1) What happens to money over time?
By default money loses its value over time. Thanks to something called inflation. (bubble pops)
Inflation is generally around about the 2%-2.5% mark. And so that means that every year stuff costs about 2% more than it did the year before.
For example, in the 70s, a cup of coffee cost of $0.25 cents. But in 2019, that same cup of coffee costs a $1.59. Starbucks is like $5 haha.
That is inflation in action.
And so let's say you've got a thousand dollars in your hand right now. And for the next 10 years, you just stash it under your mattress. And you never look at it again, in 10 years time your thousand dollars is not gonna be worth a thousand dollars anymore because everything would have increased by 2% every year.
So the value of your money will have fallen. And so if you put your thousand dollars under your mattress for 10 years, you will lose money over time.
And this is obviously not good. Even if you put your money in a savings account, like these days, a savings account will give you like 0.2% interest which means your money goes up by 0.2% every year.
But because inflation is up by 2% you're still losing money over time. And again, this is not good.
Rule #1 is never lose money (GC) and if banks don’t keep their money banks why should we?
Okay, so that begs the question which is key point number two which is:
2) How to maximize the return on capital?
And the answer is that if we had a hypothetical savings account, one that was let's say an interest rate of 2.5% that would roughly match the rate of inflation. So inflation means everything goes up by 2.5% in terms of price. But our money in our savings account also goes up by 2.5% each year. Therefore we're technically not losing money over time.
Not accounting for taxation and maintenance.
If you're watching this and you have an issue with the word interest, don't worry stick to it for now, investment is not the same as interest but we'll come back to that a bit later. But the point here is that we don't just want to not lose money which is what happens at our 2.5% rate. We actually want to make money. And that brings us on to question number three which is, well,
3) How do we actually make money?
Now, let's go back to our hypothetical savings account. If hypothetically, we could have a savings account that was giving us a 10% interest rate this will never happen because that's just way too high.
But hypothetically if it did, that means that every year we'd be making 10% of the value of the money
in our savings account. So for example, if I were to put a hundred dollars in a savings account right now the next year it would be worth $110. And then the year after it will be 121 because it's 10% of then the 110, and then it would be 130 something. And this would very quickly compound so that in 10 years time, my 100 dollars will have become 259 dollars.
And if we adjust for inflation that our money is still worth 206 dollars in 10 years time, this is pretty good. We have more than doubled our money, by just putting it in this hypothetical 10% interest savings account.
And it really doesn't seem like it would do that because 10% feels like a small amount of money.
But if you extrapolate 10% over 10 years you actually double your money, which is pretty awesome. Sadly these hypothetical 10% saving accounts don't really exist, because it's just way too high and real life is not that nice.
These days, most savings accounts in the US and I imagine around the rest of the world as well, offer less than a 1% savings rate, which means you're actually still losing money over time.
But we do have other options to try and get us to this magical Nirvana of like, you know, this 10% saving thingy. And that is where investments come in. So point number four is
4) So what is investing?
And the answer is that an investment is something that puts money in your pocket. Taking a liability and turning it into a cash flowing asset.
For example, let's say you buy a house for a hundred 1,000 dollars and you want to rent it out to people.
There are two ways, that's an investment. There are two ways you're making money from it.
Firstly, let's say you're charging some rent to the people living in your house. Let's say you're charging the $833 dollars a month. That becomes 10,000 dollars a year. And so every year you're making 10,000 dollars in rental income, which is 10% of what you originally paid for the house. That means that in 10 years time you'll have paid off the a $100,000 dollars that you've put in because you're making 10K a year. And beyond that every year you're just making $10,000 dollars in pure profit.
So that's pretty good.
But secondly, it's an investment because the value of the house itself would probably rise over time. In general, there is a trend in most developed countries that house prices tend to rise over the long-term.
And so your house will probably be worth more than a hundred thousand dollars in 10 years time. And in fact in the US, historically in the past, some people have said that house prices have doubled every 10 years. So maybe your house is worth close to 200,000 dollars. And so you've made money off of the rental income but you've also made money off of the capital gains which is what we call it when an asset increases in value over time. But the problem is that buying a house is a little bit annoying. You need to have quite a large amount of money for a deposit. You need to get a mortgage. You need to actually have the house. You just sought out the rental management, rent it out to people, all that kind of stuff.
If only there were a way of investing without
- having a large amount of money to start with and
- without having to put that much effort into managing the assets as well.
And that brings us on to investing in shares. And for me, basically, a 80 percent of my investment portfolio is entirely shares.
I have alternative percentages in crypto, crowdfunding, and other alternatives. I'll talk about that in a different video. Therefore number five is
4) What are stock shares & how do they work?
So buying shares probably as close as we're ever gonna get to this magical savings account that just returns some amount of money each year. And the idea is that when you buy a share, you are buying a part ownership of the company that you've got the share in (Animation: Light bulb pop up).
For example, let's say the Apple have a particularly profitable year because lots of people love the new sapphire blue iPhone 13 and because Apple are feeling kind, they are choosing to pay out a dividend to their shareholders.
So for example they might say that they're gonna issue a dividend of a million dollars, and that's gonna be split evenly amongst whoever owns shares in Apple, based on how many shares they own.
So for example, if you happen to own 1% of Apple you would get 1% of that dividend that they've issued. So 1% of a million dollars, which is $10,000 dollars obviously no one watching this actually owns 1% of Apple, unless Tim Cook, you're watching, I don't even know if you own that much because that would make you an extremely rich person because Apple is a very valuable company but that's basically how the dividend thing works.
A company decides to issue a dividend as a way of returning some of its profit back to the people who have invested in the company.
And therefore you make money through dividends. The second way of making money from shares
is sort of like with houses in that you get the capital gains over time.
So for example, let's say you bought 10 shares in Apple in 2010, at the time those shares were selling for $9 each. So you Spent $90 on buying 10 shares in Apple.
***As of today, the recording of this video, Apple shares sell for $143. So your 10 shares are now worth $1,430 just by the fact that you only paid $90 for them 10 years ago.***
Okay, so we've talked about what a share is and how you make money from them. And at this point you've probably got a few questions like
How much money you need to get started or how risky is buying shares in a company.
And I promise we're gonna get to that.
5) How do you buy a share?
It's not as simple as going on apple.com/buy and just buying a share in Apple.
It doesn't quite work like that. Instead you have to go through, what's called a broker. And back in the day, a stockbroker was a physical person usually a dude who you would call on the phone and say "Hey, Jimmy, I want to place an order for some shares in Apple." And then Jimmy would type stuff into his computer or a place like a paper order. And then you would be an Apple Shareholder.
Thankfully these days we don't really have to talk to Jim because there's loads and loads of online brokers instead. And so you make an account on an online broker and then you can buy shares in a company through that. A bit annoyingly, every different country has their own different brokers that operate in that country. Because to be an online broker in a country you have to abide by like a zillion different laws. And so in the US the system is different to the U.S. which is different to Canada and Germany and so on. And the US, for example, most banks do have their own online brokerage type things.
So with most bank accounts you can also open an investment account with them and then invest online. But usually the interface is a bit clunky. It's a bit old fashioned. And so you're usually better off going with an online broker. My preference is Robinhood, and I want to show you how I would go about placing an order. Let’s do it together.
I do limit orders so I don’t end up paying more for a share. You can watch my video, towards the end we go through that together.
6) How do I decide which shares to buy?
I personally prefer not to buy individual shares.
It's not a good idea generally speaking to invest in individual stocks. And I'm gonna do a video about this some other time, but essentially the issue with investing in individual stocks is it's kind of risky. Like, yes, if you invest in something like Apple, chances are it's gonna be around 10 years from now.
But historically there've been quite a few companies that people were like, "Oh my God, this is amazing. This is the thing to invest in." And then that company went bust. So you're automatically exposing yourself to more risk if you're investing in individual stock, also in general, like it's easy to say, hey, Amazon grew 10X in the last 10 years.
Therefore it's gonna continue to do the same for the next 10 years. But that's trying to predict the future. And the past is no real indication of future performance. And so the advice that most people would give for beginners is that you should not invest in individual stocks. You should invest in index funds. And this is what Graham Stephan, one of my favorite YouTubers also says as well.
He says, "The index funds are the best, safest, and easiest long-term investment strategy for most people." Which begs the question point number eight,
7) What is an index fund?
So there's basically two bits to understand here there's the index bit and the fund bit, let's start with the fund bit. And a fund is basically where investors will pool their money, so multiple investors would invest in the same fund. And then that fund would have a fund manager. And the fund manager decides which companies the fund is gonna invest in.
For example, let's say I were managing a fund and I called it Gringotts and let's say a hundred people from my audience decided to invest in my Gringotts fund. I as the fund manager can say, okay, the Gringotts fund now that we have a hundred people's money let's say it's a 100 million. So everyone's invested 1 million each I've now got a 100 million. I'm gonna put 20% of that in Apple, 10% in Facebook, 10% in Amazon, 10% in Tesla, 10% of Netflix 10% in Johnson and Johnson, all of that sort of stuff. And so you, the investor don't have to worry about this because you trust me and my fund Gringotts to manage your money. And as you know, the fund performs well, because the prices of these stocks and shares increases you get the returns and I take a 1% or 2% management fee.
So I make a load of money because I'm earning 1% or 2% off of this a 100 million that I'm managing and you're not worrying about having to pick stocks yourself. You trust me as a seasoned professional to do that for you.
So that's what a fund is. Now, the index bit refers to a stock market index. And so a stock market index would for example, be the FTSE 100 which is the a hundred biggest companies in the US or the S&P 500, which is the 500 biggest companies in the U.S. or the NASDAQ or the Dow. And these are all different indices of the stock market. And if we use the S&P 500, for example, these are the components of the S&P 500. So we said, it's the 500 biggest companies in the U.S. So number one is Apple and Apple makes up 6.5% of the S&P, Microsoft makes up 5.5, Amazon makes it 4.7, Facebook has 2.2, Alphabet, which is a Google makes 1.5 and 1.5 is about 3% of the total S&P 500. And essentially we've got these 500 companies if you go all the way down... Oh, Ralph Lauren is 496, but chances are, you've not really heard of many of the other ones at the bottom of the list but chances are, you've heard of most of the companies towards the top of the list.
So the S&P 500 is an index of the U.S. stock market. And if you look at the performance as a whole of the S&P 500, you get a general idea of how the U.S. economy is going as a whole. So this is currently what the S&P 500 looks like and if we do a five year time horizon, in fact, let's go max. So you can see the S&P 500 started in 1980. And since that time this is what the us stock market has been doing. So as you can see, there is a general trend upwards but for example in 2000, there was a bit of a crash, in 2008 famously there was a bit of a crash. And earlier this year, when Corona was first starting to be a thing there was a bit of a crash but then the market basically immediately recovered after that. Okay, so we know what a fund is, i.e. a way of pooling money. And we know what the index is, something like the S&P 500, when you combine those, you get an index fund which is a fund that automatically invests in all of the companies in the index.
And so with me, for example basically all of my investments, all of my money is in the S&P 500, which effectively means that 6.5% of my investments are in Apple, 5.5 in Microsoft, 4.7 in Amazon, 2.2 in Facebook, 3% in Google, 1.5 in Berkshire Hathaway and so on.
So why is this good? Well, it's good for a lot of reasons.
So firstly index funds are really, really easy to invest in. A big problem that beginners have to investing, it's like, well,
How do I know which company to invest in? How do I read a balance sheet? How do I do any of this stuff?
If you invest in an index fund, you actually don't have to worry about any of that. Secondly, index funds give you a decent amount of diversification. There are all sorts of companies in the S&P 500.
So you're not entirely reliant on the tech sector or the oil sector or the clothing sector or anything to make the bulk of your money. You are very nicely diversified across all these U.S. companies. Thirdly, index funds have very low fees. So because it's not a real person who is deciding what to invest in and doing all this research and trying to make loads of money is essentially a computer algorithm that automatically allocate your money based on the components of the index fund. The fees for those are really low. And one of the main things about investing for the longterm is that even a slight increase in your fees is gonna massively impact your financial upside.
And so for example, an index fund with a 0.1% fee is so much better for you than an actively managed fund where a fund manager is charging you even 1% because the longterm difference between 0.1% fees and a 1% fee is sort of absolutely astronomical over the long term. And finally, if you look historically and, you know technically historical performance is not the same thing as future performance, but if you look historically very few funds have managed to actually consistently beat the market i.e. outperform the index. And in fact, someone like Warren Buffet famously says that if you gave him a hundred thousand dollars and asked him to invest it right now he would just invest in an index fund, like the S&P 500. And in fact, in 2008 Warren Buffet challenged the hedge fund industry to try and beat the market.
He said that hedge funds are a bit pointless because they charge way too high fees and they don't actually get the sort of returns they claim to get. And so he set up this 10 year bet which this company called Protege Partners LLC accepted, where Buffett said that he was gonna bet that the index fund outperformed the actively managed fund. And he ended up winning that bet and sort of gave lots of money for charity or something like that. But that just sort of goes to show that it's really hard to beat the market with an actively managed fund. Basically, no one can predict what the market is gonna do in the future. And therefore if you hit your ride on index, i.e. you're gambling on the entire market, rather than thinking, you know what I've got some amazing insight that I'll know exactly which 10 stocks to pick that are gonna beat the market. You might as well hit your ride with the whole market rather than individual stocks.
Okay, so we've sorted out the problem of which stocks to invest in by completely circumventing the problem and instead, just investing in index funds. The next big question people usually have about investing in stocks and shares is the amount of risk. And that brings us to point number nine.
How I invest my money by Josh Brown
8) Isn't Investing In The Stock Market Risky?
And the argument usually goes as follows that, "Hey, okay cool. This investing in stocks and shares stuff. It sounds kind of interesting, but my uncle Tom Cobley, invested lots of money in the stock market. And he lost a lot of money. And my parents have told me that investing in the stock market is a really risky thing and I shouldn't do it. And I should instead invest in real estate because real estate is safe." That is usually the sort of thing, the sort of idea that people have about investing in stocks. And naturally there is the anxiety of what if I lose all my money.
**Amazon link to the psychology of money book. ** Explain where and why we approach the market as we do.
So let's talk about that now. So if we take a step back, the only way to lose money in anything is if you buy a thing and then you sell it for less than you actually bought it. Your car for instance.
Like, let's say you bought a house for $300,000 dollars, and then COVID happens the next day and the house prices plummet. And now your house is only worth $250,000. At that point, if you decide to sell your house, then yes you are losing money and you've lost 50,000 dollars. Equally, the only way to really lose money in stocks is if you buy a stock at a certain price and then you sell it for less than that price. So for example, let's say you bought shares in Apple on the 18th of February, 2020. And let's say you bought one share which time was $79 and 75 cents.
And because this is your first time in investing you keep on looking at the price of the Apple stock because every time are you thinking, oh, have I made money, have I made money?
And really annoyingly for you, you see that over the next kind of few days a few weeks, Apple stock is actually going down. And then on the 18th of March, 2020, you decide screw it. I'm gonna sell my one share on Apple, because I don't want to lose all my money. And you sell it for a measly price of $61.67. And so you technically lost $18 because you bought it at $79 in February, and you've sold it for $61 in March. Then you think, damn, I've lost 20% of my investment. This stock market thing is BS. I'm never gonna invest in the stock market again, and you call it a day. And this would be a very bad thing to do.
Because for example, if we look at Apple stock price in March, it was $57.31 but if you just held onto your one Apple share in that time, what is it today? It's the 8th of October. Apple is now trading at $114.96. So if you just held on for a few months, you would actually made a lot of money. You would have bought it at $79 and within, I don't know eight months, it would now be worth $115. That's a pretty good game. And so the real lesson here is that when you're investing in stocks and shares, and also when you're investing in real estate, these are long-term investments. Ideally, you shouldn't be putting any money into stocks and shares that you need to access within the next five years. And actually a lot of people would extend that to 10 years. And it's exactly like that with house prices, it's like if you buy a house as an investment, and then the houses house prices go down it would be completely stupid of you to sell the house unless you are absolutely desperate for the money, because something major has happened. And instead, if you just held onto the house then you would have made more money in the long run because in the long-term house prices always go up and in the long-term basically the stock market always goes up and that's a bit of, it can be a controversial statement. It is true, but I'm gonna make a video at some other point explaining why it's true but for now take my word for it that over the long term, the stock market always goes up. But having said that again, this is a long-term thing.
And so, for example, if we look at the S&P 500 and look at how it was in 2008 at the financial crash right in 2007, it's $1,500 per bit of the S&P 500. And then the crash happens and then by what is it? February, 2009, it's down to 735. So basically 50% of the value has been wiped off of the S&P 500. Now, if you bought it in 2007 and you saw it, you know, get a crushing and crashing and crashing, and then you sold when it was $800. Now, you've lost a lot of money because you bought high and you sold low. But if you just held on, it took let's see, to June 2007 it's at 1500s, it takes about up until 2013.
So it takes about five years for it to get back to its normal level. And even if you'd invested, like just before the crash and then your investment plummeted by 50%, if you would just held on you'd have bought in at the S&P 500 at 1500. And right now it would be 3,445. So since 2008, 2007, when he first invested over the last 13 years the S&P 500 has more than doubled. So you would have more than doubled your money, provided you did not panic sell when the market crashed. Now, hypothetically could the market crashed down to zero and therefore you will actually lose all your money. Yes, it could, but if the us stock market crashed literally to zero i.e. all top 500 companies, including Apple, Google, Microsoft, Facebook, like literally every company in the top, in the S&P 500, all of those got destroyed overnight. And the stock market crashed to zero.
The world would be in some sort of mega apocalypse and you'd have a lot more serious problems to worry about rather than the value of your portfolio, of stock market indices on Vanguard. In that scenario, in that doomsday scenario money would stop meaning anything and you'd be using money to wipe your bum because money has no value because the stock market is completely crashed. It's basically unfathomable that the global economy could be so completely wrecked, such that every single company goes down to zero. In my opinion, and again, you know, I'm not a financial advisor.
This is technically not financial advice whatever that means, but in my opinion it's unrealistic to think that if I put my money in stocks and shares, I could lose all of it. There's basically no way you're ever gonna lose all of it provided you're diversified. If you invested in, I don't know, Myspace in 2000 and whatever it was, and then Myspace crushes and then you've lost all your money because, you know, they have no money, but if you invest in the top 500 companies in the U.S. or the top 500 companies in the world, or the top 100 companies in the US, it is so vanishingly unlikely that you will ever lose your money. That I don't think that is a risk that we should even be thinking about. So realistic, worst case scenario, yes, investing in the stock market is risky in the short term, but if you're investing in the long-term, the market will always go up and you will always end up making more money in the long run provided you don't have to take money out at inopportune times.
Okay, so at this point, we've established that investing in stocks is very good and investing in index funds is a relatively safe way of doing this.
The next question is usually
9) When should you get started?
Like how old do you have to be? Is it ever too soon to start? Is it ever too late to start?
And here the answer is pretty simple. And basically all investment advice agrees with me on this front. There's a very good website called The Motley Fool @fool.com. and they have a nice article explaining this. Basically, you should start investing as soon as possible. It doesn't matter how old you are. It doesn't matter how young you are. The earlier you start investing the better.
There are three caveats though for like sensible financial advice. Firstly, you wanna make sure that all of your high interest i.e. credit card debt is paid off, because when it comes to compounding even though gains compound, losses compound as well. And so if you've got like a 6% credit card debt that's eating into your bottom line every single month you want to pay that off as soon as possible. Point number two is that you want to make some sort of emergency fund. And people usually say that your emergency fund should have in cash basically three to six months of living expenses so that if you lose your job or if you're hit with some kind of incredible medical emergency, and you're not in the US where medical care is free, or you're in the U.S. or something like that, then you've got money to do that. And you don't have to take money out of your investments.
And caveat number three is that you don't want to put any money into stocks that you think you might need to use in the next three to five years. So let's say you're 24 and you've just landed your first job. And you're thinking of getting a mortgage and buying a house and you need money for the deposit. Do not put that money into the S&P 500 or into any kind of stocks and shares because no one can time the market. And no one knows whether we might you know, there might be a market crash tomorrow. All we know is that in the longterm, the stock market goes up, but if you need to buy a house next year there is absolutely no guarantee that that money will still be worth exactly the same or worth more this time next year. So it provided those two conditions are met.
Like firstly, you have no high interest credit card debt. And secondly, you've already got your emergency fund. And thirdly, you're not planning to gonna have a major expense in the next few years. At that point, absolutely everyone should be investing something into the stock market. In my opinion, whether you're 12 or 20 or 21 or 22 or 50, it doesn't matter. And as they say on the market floor there is almost no way your future self will regret making the decision to invest. And as you know at this point, this is because of compounding. The more time you leave your money in the stock market, the more it comdollars. And there is a huge difference. There's like lots of interesting numbers about this on the internet that people have calculated that if you start investing at the age of 20, versus if you start investing at the age of 25 or 30, it makes such a huge difference to your bottom line.
That basically, as soon as you watch this video and hear about investing, you should start investing provided those three conditions that we talked about are met. All right, so we're nearly there. Now, we're point 11 out of 12 where we said, okay, you sold me on this idea of investing in index funds. All of these three conditions are met. I don't have a high interest credit card debt. I've got my emergency fund, or I'm a student. And therefore my parents are my emergency fund and I'm not planning to buy a house or a big thing in the next three years.
The next question is usually
10) How much money do I need to get started with investing?
And I know a lot of students watch my channel and I had a lot of comments on Instagram saying, "I'm 14 years old and I don't have any money. How do I get started with investing?" And the answer here is again, quite easy, basically start with whatever you can. For some of these websites and some of these apps that you can use to invest in stock market indices. You can start with as little as $5 or $10 dollars, depending on the website. You might need to start with a 100 dollars or a 1000 dollars. You can research this and it kind of depends on which country you're in, but basically you want to start investing as soon as possible. And it doesn't matter if it's a tiny amount of money to begin with.
Firstly, it's useful to invest small amounts of money because compounding is always good. But secondly and more importantly, the sooner you start investing the sooner it becomes a habit. And so for me, for example, I started investing in 2015. I knew absolutely nothing about it before then, but I really wish I'd started investing in like 2009 when I first had my first part time job because a, that would have encouraged good financial habits within me.
I would have kept aside maybe 10% or 20% from the top line to put into my investments. Secondly, it would have meant that investing became a habit. And so I would have known about the fact that stock market indices exist. I would have done the research. I would have watched videos like this, although these weren't really a thing in 2009. And what I'm really annoyed about with myself is I started making actual money in like 2012 when my first business started to do very well. And between 2012 and 2015, I did not invest any money just because I didn't know that you could. And I didn't know how and I always kinda thought that, "Huh, I'm making money now." It's just sort of sitting in my bank account. And I know that inflation is a thing.
So I know my money's losing value but I just didn't think about investing and didn't realize how easy it is and that it's a thing. And so I really wish I'd started investing my real money in 2012, but the only way I would've done that is if I had started investing from 2009, when I first started making, I don't know, six dollars an hour during my part time job. So again, and I can't state this emphatically enough. Like it doesn't matter if all you have is a small amount to invest even if it's one pound, even if it's 10 P.
The process of making the account and researching online stockbrokers in your country and figuring out how to actually do this stuff is like the most valuable thing that you could be doing with your time immediately after watching this video.
And finally, point number 12 is okay, I'm sold, I've got a $100 dollars here and I want to put it inside a stock market index fund.