How to Invest in Stocks for Beginners – Part One

How to Invest in Stocks for Beginners

My First Attempt at Investing in the Stock Market

In October 1999, I saw an article in an issue of Money magazine recommending Apple as a potential turn-around stock with tremendous upside. Before iTunes, iPod, or iPhone existed, I had the opportunity to buy Apple stocks at a ridiculously low price. The only thing holding me back from buying some shares was I didn’t know how. I needed a guide that would teach me how to invest in stocks for beginners.

Back then, Apple stock was trading at approximately $2 per share. If I had bought them when I wanted to, I could have paid just $2000 and owned 1000 shares.

June 2000:  Apple’s stock shares split two for one. I could have owned 2000 shares.

February 2005:  Apple’s stock shares split two for one again. I could have owned 4000 shares.

June 2014:  Apple’s stock shares split again, but this time it was seven for one

I could have owned…seven times four equals 28…times 1000 equals…

I could have owned 28,000 shares of Apple stock!

How to Invest in Stocks for Beginners

$145.45 times 28,000 shares equals…

How to Invest in Stocks for Beginners

Four Million, Seventy-Two Thousand, Six Hundred Dollars?!#

Because I had never invested in stocks before and didn’t have a clue how to start, I read everything I could from books to magazine articles.

MCI WorldCom, Enron, Friedman’s, and many other companies did.

So after spending over a year studying stock market investing, I lost thousands of dollars actually doing it. My $3000 investment in MCI WorldCom stock vanished into thin air. Later, I found out that Friedman’s also lied on their financial statements, so my $1500 investment netted me a nice profit of negative $750 after I sold them for $750.

I totally failed at my first two attempts at stock market investing, but I never gave up. I knew that hundreds of thousands of people were consistently making money in the stock market, so I just had to figure out what they were doing and I didn’t know of any course on how to invest in stocks for beginners.

4 Reasons Why You Should Invest in Stocks

1. Warren Buffett Says So

How to Invest in Stocks for Beginners

How to Invest in Stocks for Beginners
Even though the 35-yr old invested $250 ($150 more than the 25-yr old), by starting 10 yrs later, the 35-yr old has amassed less than the 25-yr old by retirement at age 65.

What would happen if the 25-year waited 20 more years until age 45 to start investing?

Is this you?

The now 45-year old invested $770 per month for 20 years until retirement at age 65. By waiting 20 more years to start investing, the 45-year old has amassed $228,600 which is less than the 35-year old’s $250 per month investment for 30 years and the 25-year old’s $100 per month investment for 40 years.

Can you afford to invest $100 per month for the rest of your life? Absolutely!

Can you afford to invest $250 per month for the rest of your life? I sure hope so!

Can you afford to invest $770 per month for the rest of your life? Many people cannot.

Start investing as soon as you’ve read this if you haven’t already!

What if the Stock Market Crashes?

If the stock market crashes, it’s going to recover. Period. The federal government has put protective systems in place that help to prevent economic depressions.

This is how I view the stock market: it represents our economy. The S&P 500 represents the 500 (approximately) best companies in the US. If my investments in the 500 best companies are wiped out completely–irrational consumer fear–the last thing I should be worried about is my money. That means $h1# hit the fan, the apocalypse is coming, and zombies are going to roam the streets. My greatest concerns will be finding water, food, and safe shelter for my family.

If you look at the illustrations above about compound interest, you’ll notice that we invested set amounts consistently. The 25-year old invested $100 monthly, the 35-year old $250, and the 45-year old $770 consistently until retirement at age 65. During that timeframe, the markets will rise and fall.

As long as you invest consistently (dollar cost averaging), you will weather every storm and flourish as the markets rebound.

If you can time the market, you can predict the future. Since you probably can’t predict the future, invest by dollar cost averaging (contributing consistently every single month).

I plan on doubling down when the economy sours and invest even more than I usually do in order to maximize my potential gains.

Invest in Your Company Sponsored 401K

Typically, a company will match 50% of your contribution to your 401K up to a maximum of 6% of your pay but some company plans are slightly different.

For example, let’s assume you make $50,000 annually and break down the numbers.

  • You contribute $3000 (6% of $50,000) into your 401K.
  • Your company contributes $1500 by matching 50% of your $3000 investment.
  • The total investment into your 401K is $4500 ($3000 + $1500).
  • You instantly earn a 50% return on investment (ROI) of your $3000 investment.

No investment anywhere can beat this rate of return. Period.

At a minimum, invest enough into your 401K in order to get your company’s highest matching contribution.

The maximum amount you can contribute to a 401K (Thrift Savings Plan if you work for the federal government) is $18,000 for 2017 ($24,000 if you’re age 50 and over). Currently, I’m contributing $18,000 annually to my 401K and add a little to my Roth IRA which I’ll describe below.

Your 401K contributions reduce your taxable income. This is very helpful if you need to maximize your deductions in order to stay in a lower tax bracket. If you invest $10,000 into your 401K from your $50,000 annual salary, your taxable income is reduced by your $10,000 investment. The IRS would only assess tax on the remaining $40,000 taxable income.

Once you’re 59 and a half years old, you may start withdrawing funds from your 401K. However, you will be taxed on the withdrawals. This may or may not be good depending on what tax bracket you think you’ll be in during retirement. If you’re a high-income earner, it might be better to wait until you’re age 70 and have to start taking distributions from your 401K.

I’d rather make more money in retirement and have to worry about paying more taxes. That’s a good problem to have.

Your 401K is an account and not an actual investment. What should you invest in? Warren Buffett recommends investing in the S&P 500 index fund. Your company might have a fund that replicates the S&P 500. The key is to make sure your expense ratio (annual fees charged to maintain the fund) are low (below .5%).

Open Up a Roth IRA

A Roth IRA is an Individual Retirement Account that you set up with a bank or other financial institution that you contribute after-tax dollars into. Your contributions do not reduce your taxable income. However, the amount you contribute may be withdrawn tax-free once you’re 59 and a half years old. Just make sure the funds you’re withdrawing have been there at least five years. The contribution limit for 2017 is $5500 ($6500 if you’re age 50 and over).

You have to select an investment since an IRA, like a 401K, is not actually an investment. What should you invest in? Again, let’s go with Warren Buffett’s recommendation for the S&P 500 index fund and remember that the expense ratio should be below .5%.

Open Up a Traditional IRA

A traditional IRA may reduce your taxable income like a 401K or Thrift Savings Plan depending on how much taxable income you have. Your contribution limit is just like that of a Roth IRA ($5500 or $6500 if you’re 50 and above). Unless you’re trying to get into a lower tax bracket, it probably makes more sense to invest in a Roth IRA after you’ve contributed the maximum to your 401K.

What If I’m Self-Employed?

If you’re self-employed, you can open up a SEP IRA (Simplified Employee Pension IRA) which is similar to a traditional IRA because your contributions will reduce your taxable income.

Every time you contribute to your own SEP IRA, you are required to contribute to every one of your eligible employees’ SEP IRAs as well, so it might be best suited for a sole-proprietor.

Your contribution limit is the lessor of 25% of income or $53,000. If you earn $200,000 per year (I wish), your contribution limit is $50,000 (25% = 1/4 of $200,000).

Summary

Take a deep breath … and let it out … You just read part one of a series that I sincerely hope will inspire you to take action and control your financial future (if you need a guide to learn how to invest in stocks for beginners).

The keys to investing in stocks are:

  1. Start early. The earlier you start, the more you’ll have earned for a comfortable retirement.
  2. Invest consistently (dollar cost averaging) despite the market’s ups and downs.
  3. Take advantage of your company’s 401K, because that’s free money.
  4. Invest in an IRA (Roth, Traditional, or SEP for entrepreneurs). They provide tax advantages and will help you save even more for retirement.
  5. If you don’t know what to invest in, Warren Buffett recommends the S&P 500 index fund.

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful. ~Warren Buffett

If you’re new to investing, did this article on how to invest in stocks for beginners help?

Please share this article and comment below. I’d love to hear your thoughts.

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4 Comments

  1. I’ve thought a lot about stocks and investments this week as my husband and I are in our 40s and still need to do a lot of work to succeed at building a retirement we can live on. My father in law turned 80 this week and it occurred to us that he’s worth over a million because of his choices. We’re wishing that we had held onto some of our investments longer so that our retirement projections would be stronger.

    I like your attitude. You are still excited about stocks after experiencing some significant losses. I also like your sense of humor when you said I should invest because Warren Buffet said so. LOL

    Today, I was calculating what would happen if I had 250,000 invested in stocks and earned a mere 6.5% rate of return (after fees) in 12 months. I was blown away- $16,250.00

    Right now my husband invests in his company’s Roth 401k instead of their regular 401k. We used to invest in his regular 401k, but switched because we want to pay taxes on our income now instead of later, when they could be higher. It’s such a gamble because tax rates could be better later. We’re hoping that having some of it taxable now and some of it taxable later will be in our best interest.

    Only time will tell.

    I found your article to be helpful. There are points I want to discuss with my husband now so we can do even better at planning for the future. Thank you!

    1. I’m glad you’re investing and preparing for a better retirement than many people will have. I have family and friends who don’t have anything saved at all, and I really worry about them. I’m in my mid-40s and still believe the 401K is the best way to go, especially since I need to reduce my taxable income! It’s a good problem to have I suppose.

      I completely understand why you choose the Roth 401K, though. You might want to look into the Backdoor Roth IRA, the Mega Backdoor Roth IRA, and a Health Savings Account (HSA) as you get closer to retirement. I plan on writing some detailed posts on the pros and cons of each one of these investment vehicles in the coming months. In the meantime, I ask Google for answers to questions I have…;)

      I’m glad you found this article helpful. Thank you so much for your thoughtful comments!

      Darren

  2. Hi there! I just read through your website and although the subject matter was not quite an interest of mine, I thought your writing style was very well done! Very honest, good flow, a personal vibe; the writing aspect was enjoyable. For someone who is truly interested in stocks, I’m sure would find your page extremely helpful. The graphs and articles were visually entertaining. Might I suggest splitting the page up a bit though, I found that it was a bit lengthy. Perhaps create separate tabs under the page like you plan to do with your others. That way its not so much to take in all at once. I did take a peak at your other pages but I noticed they were “under construction”. I’d be interested to see what you have to say about those subjects and I am curious to know how you plan on tying those subjects in with stocks? I assume you plan on weaving it all together since it is on the same website. Anyway, continue to write naturally and keep the lessons coming.
    Best Wishes,
    Julianna

    1. Hi Julianna,

      Yes, I’m aware that it’s quite long, and I actually meant to make it even longer! 🙂

      I was thinking about writing an actual mini-ebook because there is so much to cover. My intent, initially, is to help my friends and family with their finances. The tabs are a good idea, so I might actually do that on this page.

      Thanks for your feedback. I do appreciate it.

      Darren

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