Intro
Hello, I am Tjerk of all Trades and today we will be looking at how to get started on the stock market as a beginner. Investing in the stock market can be a bit intimidating for beginners. There are many things to consider, and it can be hard to know where to start. But don’t worry, you are not the only one. With a little bit of knowledge you can start your journey towards buildings wealth and securing a financial future. In this video, I will walk you through a simple, basic strategy in the stock market that beats a lot of other strategies. We will delve into several fundamental concepts that every novice investor should understand. They include stocks, ETFs, compound interest and dollar cost averaging. If you stick around until the end, you will get a bonus tip on how to be more successful on the stock market. Enjoy the video!
What is a stock?
Owning a stock means that you own a part of a company. Other words used for a stock are shares or equity. When you buy a stock, you become a shareholder in that company and have a claim on a portion of its assets and earnings. If you want to buy or sell a stock, you can do that on a stock exchange. Famous examples of stock exchanges are the New York Stock Exchange or the NASDAQ. You can access a stock exchange through your broker. A brokerage account lets you buy and sell your stocks on different exchanges. In a future video I will explain to you what to look for when picking your broker. Stocks are usually referred to by a ticker. A ticker is a unique series of letters representing the company. Examples are A-A-P-L, which is Apple, and M-S-F-T, which is Microsoft. There are two types of investments on the stock market I want to highlight. They are individual stocks and ETFs. Owning an individual stock means that you own one company, like Apple or Microsoft. Owning an ETF, which is short for an Exchange Traded Fund, is a bundle of stocks that are combined into one product. So instead of buying one stock you buy the whole bundle at once. Doing this will automatically make you diversify and spread your risk. There are a lot of different types of ETFs. Some are based on a sector, like technology. Some are based on an ideal, like renewable energy. And some are based on a region, like the USA, Europe or the world. The two most commonly traded ETFs are region based and are the S&P 500 and the MSCI World. The S&P 500 represents the 500 biggest companies publicly traded in the USA, and the MSCI World takes the big companies of 23 developed markets. For a beginner it is very easy to buy an ETF. The advantages are:
- You are spreading your risk, because you own a lot of companies at once.
- You don’t have to be an expert on individual stocks, because you follow a bigger basket of stocks.
- You follow the general market, which has on average been going up since the start of the stock market. As long as your investing horizon is long enough.
- ETFs are a good choice for beginners because they’re relatively low-cost.
- ETFs offer liquidity and flexibility, because they can be easily bought and sold when the market is open.
There are many reasons why people invest in the stock market. Some people invest to save money for their retirement and others to grow their wealth or generate a passive income. The stock market has the potential to generate high returns over the long term. However it is important to know that the stock market can be a volatile place. This means that in the short run, the value of your investment can go down. But, on average, in the long run, the stock market goes up. So if you want to use time as your friend, make sure to only invest money you will not need for a couple of years, or you might have to take it out at an unfavorable moment. In order to make high returns in the long term an investor should take advantage of what Einstein called the 8th wonder of the world: Compound Interest
What is compound interest?
Compound interest is the magic of investing. Compound interest is when your investment earnings start to earn money on their own. This can lead to significant growth of your wealth over time. Let me give you an example. If you have $1,000 and your return in year one is 10%, then you have $1,100. If you make another 10% in year two, then you have $1,210 in total. In the second year you do not only get 10% of your initial investment as a return, but also 10% of the $100 return you had in year one, which is $10. This $10 is your interest on interest, also known as compound interest. Ok, $10 doesn’t sound like a lot, but let’s continue for 10 years. Without the compounding effect, you would expect about a 10 times 10% return, which is 100%. But because of the compounding effect this is actually a 159% return! But it gets even crazier. Do this for 30 years and your return is 1,645%, instead of 300%. The graph on screen will show you the exponential relationship between time and return if you let your returns compound.
As you can tell from the graph you just saw, there is one factor that is most important when it comes to compound interest…and that is time. The longer your horizon is, the longer the power of compounding will affect your returns. By allowing your investments to compound over an extended period, even small amounts can grow substantially. So we now know that an ETF is a relatively safe way to invest and when you have enough time you can let your investments grow to significantly higher amounts because of compound interest. But how often and how much do I invest? And how do I know if the market is going to go down soon? The answer to your worries is Dollar Cost Averaging.
What is dollar cost averaging?
Dollar cost averaging is a strategy for investing that involves investing a fixed amount of money on a regular basis. Dollar cost averaging can help you smooth out your investment returns and reduce your risk. For example, let’s say you invest $100 every month. If the market is down for one month, you’ll buy more shares. And if the market is up one month, you’ll buy fewer shares. The beauty of dollar cost averaging is that it removes the pressure of making investment decisions based on short-term market movements. They don’t matter anymore. It eliminates the temptation to time the market or make impulsive investment decisions based on emotions. By investing consistently, regardless of short-term market performance, you will buy the stock or ETF when it is high or when it is low. If you trust your stock or ETF will go up, you will follow it on its ride up. At the start of the video you were promised a bonus tip, well here it is. A lot of investors do worse than the market because they trade too often. They sell their winners too early and make too many transaction costs while trading often. This way you can not let the compounding effect work for you, and your portfolio will only be full of losing stocks, because you sold all your winners. Be smart, don’t trade too much.
Is investing in the stock market risky?
The short and most responsible answer is yes. When you invest, there is a chance you will lose money. If you take advantage of the effect of compounding by buying ETFs, and applying dollar cost averaging, you will limit that risk immensely and improve your chance of success. When you buy an ETF that tracks most of the world or US economy, the whole economy would have to be in trouble in order for you to lose a big percentage of your investment. With this ETF you have a diversified portfolio, spreading over many stocks and many sectors, which protects you from many risks. In this video we have looked into investing for beginners and given you the most basic strategy to get started. We learned what a stock is, what the difference is between a stock and an ETF and why it is smart to get started. We also looked at the effect of time on compounding and what dollar cost averaging is. After that we found out that we shouldn’t trade too often, to prevent selling winners and making a lot of transaction costs. We finished off by realizing that no investment is risk-free, but found out that by buying widely spread ETFs, we can actually mitigate the risk of a big loss. I want to thank you for watching my video. If you appreciated it please give me a like and leave a comment. If you want to stay up to date with my latest videos, then please subscribe. Thank you and see you next time!