Investing for Beginners

An investment is an effort or action where you reasonably expect to get a future reward or return.

Investing is a broad category that includes finance. Compound interest doesn't just apply to money, it also applies to investments in knowledge, health, and relationships. 

An investment in knowledge pays the best interest (Ben Franklin). Time is not our most valuable resource, truth is. True knowledge is our most valuable resource because it allows us to make better use our time. 

There are guarantees in life including opportunities, challenges, and choices. Gaining new knowledge helps us to better manage our opportunities and challenges, and make better choices. 

Personal finance is a subset of personal investing, it is basically how an individual manages their money. Knowing where your money comes from, what it does, and where it goes.

The financial industry is very profitable, and therefore, a very competitive industry. Be very careful investing your money. The finance industry could be considered a "zero sum game" where there is only a finite amount of money and investments available at any one point in time, and there are many smart people attempting to gain as many good investments as they can. 

That may feel discouraging, however, the financial industry has a specific structure, including written laws, deliberate systems and processes, along with unwritten natural laws of human nature, and the sooner you learn and apply the structure of financial investing, the more possibility you have of seeing a better return on your financial investments.  

Understand some banks, credit unions, and investment companies have some federal insurance (FDIC or NCUSIF) to protect a certain amount of cash investments in savings, checking, some trusts, and CDs. Not all investment organizations provide such insurance, and money invested in stocks is not insured.

Why invest in stocks at all? The average annual stock market returns are roughly 8-10%. I'm not saying that is what you will get investing in stocks, but it is more than just keeping the money in a savings account. Most savings accounts have annual returns way lower than 8%. The last I checked, there are only a few banks offering high yield savings accounts with over 1% annual returns.

Almost anyone can set up and manage their own personal or business stock market investment account with a brokerage. Personal accounts include a regular cash account, or a retirement account, including the popular Roth Individual Retirement Account or Roth IRA. What makes the Roth IRA different is that qualified withdraws from the account, during retirement age, are tax free, or tax exempt.

A personal Roth IRA retirement account requires people to keep the money in the account until they reach a specific retirement age, if they want to get the tax free benefits. If they withdraw money from the account before then, they pay extra fees. Get the details from your brokerage.

A personal cash investment account with a brokerage allows people to deposit and withdraw anytime without any extra fees, just the normal fees the brokerage may charge, and taxes, as it does not have the tax benefits of a Roth IRA. 

The three main types of stock investments are individual stocks, mutual funds, and exchange traded funds (ETFs). Mutual funds and ETFs are collections of many individual stocks, which involves some level of diversification. Mutual funds are usually bought and sold by certified financial professionals, for their customers, during premarket and post market times. Exchange traded funds can be bought and sold by individuals during normal stock market hours (9:30 am to 4:00 pm, Eastern Standard Time). Stocks are tracked and traded by their "ticker," which is a one to five letter symbol that represents the stock performance of a publicly traded company.

Funds have the benefit of being diversified among many different stocks, so if one or even two publicly traded company's stocks crash, the loss to the fund will be minimal. A few popular ETFs are the QQQ that reflects (indexes) the Nasdaq, the SPY that reflects the S&P 500, and the DIA that reflects the Dow Jones. 

Funds have specific goals, like reflecting (indexing) a specific stock market, or to invest in stocks of specific companies that are in a specific industry like precious metals, real estate, or foreign companies. Some funds invest in stocks of companies that have a high ESG rating or companies that are more environmental, social, and governance conscious. Some funds invest in stocks from companies within a specific size and category like large value stocks, or small growth stocks. Value stocks are usually less volatile and provide smaller but more stable returns. Growth stocks are often more volatile but provide larger returns when they do rise in value.

Morningstar is a popular stock research company that created the Morningstar Style Box. Their Style Box classifies stocks in nine areas considering their size and category. The three sizes of stocks are small, medium, and large (based on their market capitalization). The three categories of stocks are value, growth, and blended. 

There are three main stock markets which are the Nasdaq, the S&P 500, and the Dow Jones. Each of these markets show companies that have "gone public" and made their stock open for individuals to invest in. Stock exchanges are the infrastructure that allows people to invest in the stocks on the stock markets. Brokerage companies are the link between individuals and the stock exchanges, that allow people to set up their own stock retirement account or stock "cash investment" account.

Popular brokerage companies that allow individuals to invest in the stock market include, Charles Schwab, TD Ameritrade, Vanguard, Fidelity, Merill, E Trade, and Ally. When comparing a brokerage company consider their customer service, fees, and whether they offer two factor authentication login (2FA). A 2FA login provides a second layer of protection in case your password is compromised or intercepted by a keylogger or public video camera. 

When comparing a professional finance expert consider their certification, or their past performance. There might be some online databases where you can check an individual finance expert's certifications, or check and see if an individual finance expert is currently under investigation or involved in litigation.

Some financial experts don't recommend investing in individual stocks, usually because the stock prices go through cycles of gains and losses, often depending on external circumstances, and people often get emotional and sell the stock when it is near a low price in the cycle, and buy when it is at a high in the cycle. This buying when the price is high and selling when the price is low is a good way to lose money in the stock market. Investment experts recommend to either buy when the price is low and sell when the price is high, or buy and hold the stock through down cycles, because the markets eventually rebound.

If you want to invest in individual stocks, some financial experts recommend investing in companies that you like, and think of it as a partnership. Most finance experts and brokerage companies include in their disclaimer that past investment performance does not guarantee future performance. However, there are some technical analysis indicators that can help understand where a stock is in their price cycle. Doing some basic fundamental analysis and technical analysis, with good indicators, can help speculate what stocks will do in the future.

Investing is basically buying and holding for the long-term. Trading is buying and selling short-term or medium-term. Day trading is buying and selling each day, while swing trading is buying and selling short to medium-term (a few days to a few months).

A stock consideration of many wealthy people is whether the stock pays dividends. Dividends are recurring payments from the company to all stockholders for each share of stock, regardless of whether the stock returns are positive or negative. These dividend payments are often small, but add up if you own a lot of shares, and hold them over time. You can get an idea of how much your annual dividend returns will be for your investment amount by checking the dividend yield. The dividend yield is the expected annual percentage of dividend returns on your investment. 

Consider that most savings accounts in a bank do not pay very much interest on money invested in them. There are many stocks and funds that pay dividends of more than two percent interest annually, on money invested in them. There are even some stocks that pay dividend yields over five percent. However, many times the higher dividend yields are often stocks with lower, or even negative, percentage performance over time. Brokerage companies often give you the choice to automatically reinvest the earned dividends.

When comparing funds to invest in, people should consider their goals and especially consider their fees. The ETF fees are usually expressed as a percentage and labeled as an "expense ratio." If you prefer investments that pay dividends then make that a consideration also. Many finance experts claim even a fraction of a percent of fees can make a big difference in returns over decades. 

If you have a considerable amount of money you want to personally invest in the stock market, consider the fact that despite the market continuing to rise over time, there are stock market cycles. If you can manage to invest a large amount somewhere in the low end of a cycle, your return on investment, over time, will be larger than it would be if you happened to invest it in the high end of a cycle. You can get an idea of where the market cycle is by observing the different time periods, with a few different indicators.

There are some online websites that have virtual stock exchanges or "paper exchanges" where people can practice stock market investing. These practice exchanges provide an online account with a virtual $100,000 cash to investment. The platform then mirrors the real stock market investments with a time delay. The investments on the virtual stock exchange, with the virtual money, will reflect the performance of the actual stocks and funds on the real markets. A few popular virtual stock exchanges include WallStreetSurvivor.com, HowTheMarketWorks.com, and MarketWatch.com/games. Those virtual stock exchanges offer the option of making your virtual account a stock market game where you compete with other people. There are a few brokerage companies that offer real stock market investing and virtual "paper" investing to practice with.

There are a few brokerage companies that allow people to invest in the stock markets and in the relatively new crypto currencies, including Robinhood, Interactive Brokers, Tradestation, Webull, and FTX. In case you have not heard, FTX is currently going through a bankruptcy and time will tell if it ceases to exist or if it gets reorganized and survives. FTX was a popular and more advanced investment platform/company.

I have not learned much about crypto currencies. I know that many financial experts don't like crypto currency, mainly because the only value most crypto currencies are based on is people just agreeing they have value, or the inherent scarcity (if the crypto is truly limited or capped). However, many wealthy people have also made a lot of money investing in crypto currency. 

You can invest in crypto directly, or invest in stocks or funds that invest in crypto. There are two main ways to invest in crypto directly, either buy and store it online in a "hot wallet" or software wallet, or  buy and store it offline in a "cold wallet" or hardware wallet. Some popular hardware wallets include the Ledger Nano, Trezor, Ellipal Titan, and Safepal. With either a software or hardware wallet the crypto exchange should provide a "seed phrase" with the initial crypto purchase that allows people to restore a hacked, destroyed, or lost crypto wallet. The seed phrase should be kept in a very safe location. It's my understanding the more ways a hardware wallet connects with internet devices the more possibilities of being hacked. Some hardware wallets connect by radio frequency (Bluetooth, WiFi, or NFC), and some connect by a physical connection (USB port), but there are some hardware wallets that are 100% "air gapped" and can't connect to the internet by radio wave or a physical cable. These hardware wallets communicate by a camera and QR codes.

Back to the stock markets... The following screenshots show the performance of the ETFs, QQQ (Nasdaq index), SPY (S&P 500 index), and the DIA (Dow Jones index). The first screenshot shows about a five year period including the drop/loss in 2022. The second screenshot is 2022 year to date of the losses between January and November.

Notice how the QQQ/Nasdaq (blue line) had the most gains during the up cycle, but also had the most losses during the down cycle. Notice how the DIA/Dow (red line) had the least gains during the up cycle, but also had the least losses during the down cycle. Notice the SPY/S&P 500 (purple line) was the more moderate of the three. Some stock market experts recommend using the S&P 500 as a benchmark or guide to assess how your personal stock market investments are performing. 

Dave Ramsey 

Founder of Ramsey Solutions, and The Ramsey Show, and author of Baby Steps Millionaires, Financial Peace Revisited, and The Total Money Makeover. Key advice includes follow a budget, have a $1,000 emergency fund in cash, start the debt snowball (to pay off debt), save for 3-6 months of expenses, and invest in a retirement account with mutual funds through a financial professional. Money management is 80% behavior and 20% knowledge, act your wage and stay out of debt. Put compound interest to use. Day trading or investing in one stock is not advised, especially investing in just a few stocks at a time, because investments should be diversified..

Warren Buffet

Founder of Berkshire Hathaway, and recommends the book The Intelligent Investor. Key advice includes, invest in an S&P 500 index fund and hold it. He actually gives this advice in the 2016 Berkshire Hathaway Annual Report (page 24, last paragraph), which is a free pdf download available on their website. If you must invest in individual stocks, buy ones from companies you like and hold them like a partnership. Day trading is dangerous because most people can't seem to successfully predict what the markets will do, and they struggle to control their emotional desire to buy high and sell low, when they should buy low and sell high.

Robert Kiyosaki

Founder of Cashflow Technologies and author of Rich Dad Poor Dad, Rich Dad's Cash Flow Quadrant, and Rich Dad's Guide to Investing. Key advice includes our greatest wealth is our education or knowledge. Many people are highly educated but still financially illiterate. Make your money work for you by investing in real assets. Real estate is not always an asset, and debt can be good if you invest the debt and it makes more in returns, than it charges you in interest and fees. In other words debt is only good if it is used as an investment that makes more returns than it costs in interest and fees. 

Ray Dalio 

Founder of Bridgewater and author of Principles, and Principles for Dealing with the Changing World Order. Key advice includes spending less than you earn, and diversify your financial investments. He also recommends having clear goals, accurately identify and diagnose problems, design a plan, and do what's necessary. Foster an environment of confidence and fairness with clear principles, and implement best practices, so conclusions can be assessed with logic and data. Emotions are not helpful in making important decisions.

Dave Ramsey... 

Baby Steps Millionaires

The Total Money Makeover

Financial Peace Revisited

Robert Kiyosaki...

Rich Dad Poor Dad

Rich Dad's Cash Flow Quadrant

Rich Dad's Guide to Investing

Other popular finance and investing books...

The Psychology of Money by Morgan Housel

A Beginner's Guide to the Stock Market by Matthew Kratter

The Little Book of Common Sense Investing by John Bogle

One Up On Wallstreet by Peter Lynch