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Stocks for Beginners: 10 Tips for Ordinary People

Believe it or not, you don’t need special access to start buying stocks. You don’t even have to be super wealthy. Ordinary people can buy stocks, but they are often overwhelmed. This stocks for beginners post will help you get past that.

stocks for beginners
I used to be in your shoes. I was just another kid with a dream, who wanted to get rich. But the sad part is, I never even considered the stock market until I was 23.

The good thing is that I’ve got a lifetime ahead of me to compound those stock market returns. And whether you’re around my age or much older, you can have that same opportunity.

Now I’m by no means an expert. But I have been investing my money since 2012. And I remember exactly all the feelings I felt and thoughts I thought when I was just a beginner in stocks.

So I’ve written this post with you in mind. I know the doubts you have. And you should. The second anyone tries to convince you that making money in the stock market is fast or easy, you should run the other way.

The stock market isn’t fast OR easy. If it was, everybody would be doing it. But the truth is that you can do very well for yourself, and you don’t need to be an expert to do so.

Just use common sense, and try to learn about the markets as much as you can. I’ve tried to share everything I know based on my experiences of investing since 2012, as well as sharing my own model portfolio online.

Keep these tips in mind, and always be learning. Don’t be discouraged. I know it’s so much to learn at once!

Just take it a day at a time. Learn just one thing a day, or even read just 1 article a day. The thing about investing is that you take it with you no matter where you go. Whether you lose your job or lose your home, you will always keep your ability to invest, and the knowledge you’ve learned with it.

I’m excited for your potential, and am happy you are taking this first step. Understanding that the stock market is a lifetime journey, and not a short term race, will help you stay successful and avoid heartache.

stocksforbeginners
Remember, the tortoise always beats the hare. Both in the parable, and in the stock market. That brings me to your first tip.

Stocks for Beginners: Tips 1 – 3

1. Always buy stocks for the long term

Your best chance of making money in the stock market comes when you invest for the long term. You see, you and I don’t have a chance at being able to guess what the market will do tomorrow.

But that’s not a bad thing. We can actually use the fact that we don’t have physic powers to our advantage.

A common rookie mistake is to jump in and out of the stock markets quickly, trying to make a quick buck. But that kind of a strategy isn’t sustainable, because you can’t accurately predict the market consistently.

You might be thinking… Then how do we have a chance to win?

You must understand that the market goes up and down, everyday. And, it crashes. Stock market crashes are actually pretty common. They could happen every 5 to 10, or even 15 – 20 years.

But you won’t lose money in a stock market crash… AS LONG AS YOU HANG ON. It’s like riding a roller coaster. You won’t die from riding it, as long as you don’t jump off during it.

The stock market is the exact same way. Because the economy has been able to keep growing (if even at a slow pace), the stock market has also continued to grow.

That means that the stock market has generally been going up for a very long time. Over the last 100 years and more.

And so people who buy stocks and invest for the long term tend to make money. Even if the stock market crashes.

But the key is “buy and hold“.

We know the stock market has continued to rise since even before the 1900s. As long as you have bought stocks and held for the long term, you have done well.

This single concept has created more wealth than anything else, and it’s the foundation to buying stocks. It works because of its nature, which brings me to your second tip.

2. Buying a Stock is Buying a Part of a Business

Here’s another common mistake. People get so caught up in the stock market, as if it’s a big casino. There’s numbers flashing on the screens at home and on the TV. People forget what the stock market represents.

All it really does represent is a group of big companies. Because stocks are just little pieces of ownership in a business.

These businesses take capital from investors and use them to grow. As the businesses grow, so do their cash flows. They are then able to pay their investors back because these businesses have gotten bigger, and that’s how the stock market works.

So when you are investing, you need to separate the “game” from reality. Look at a stock as if you were buying the whole business.

Ask yourself this question:

Would I see my grandchildren using this business’s products?

If the answer is no, then you might not have found a great business to invest in. After all, we’re interested in the long term profitability of a company, and not it’s short term results. Which brings me to tip 3.

3. Avoid the high flying stocks

I know the newest technology stocks are the most fun to talk about. But in reality, they can be some of the most risky.

There have been companies that have taken the mainstream by storm. Stocks like Pets.com and Cisco were heralded as bringing a new age of technology during the 2000s. Unfortunately, as we all learned later, these stocks crashed and burned.

But did you know that there were stocks that didn’t crash and burn during the dot com bubble? Big, boring companies with steady earnings have quietly been plodding along, enriching investors all along the way.

Just like the tortoise with the utmost patience, the big, boring companies with lots of earnings and cash flow make for the best investments.

Sure the high flying stocks are the most fun to talk about. Sure they capture the world’s attention and demand for TV and media time. But they don’t make for good investments. Stories that glorify these stocks are always rare occurrences.

For every high flying stock story there’s 100 boring companies that nobody is talking about, but that are constantly providing shareholders with reliable returns. Those are the companies that will make you rich.

No matter how many times I say it, people will always be drawn to these stocks. And like the flies that get too close to the light, they’ll never learn until it’s too late. This is why we always see bubbles and crashes.

stock market for beginners
Our world has a love affair with gambling. And gambling is what stock buying is, when you’re only buying high fliers.

Stocks for Beginners: Tips 4 – 5

4. Avoid high P/E stocks

Have you ever heard the saying, “the bigger they are, the harder they fall”? Whoever coined that must’ve been talking about the P/E ratio.

Now, what do I mean by high P/E? Without getting too technical, I want to explain to you this vastly important concept. It will save you from losing a bunch of money that you can’t afford to lose.

Basically every company has earnings. The #1 goal of a company should be to make profits. These earnings are the name of the game. The stock market revolves around earnings, because lots of earnings means more cash for shareholders.

Think back to the example of buying a business. Let me now ask you a question. Would you rather buy a lemonade business that is earning $20, or an ice cream business earning $10? Obviously the lemonade business right?

But the stock market isn’t that simple. Just because a company is big like Apple doesn’t mean that you are getting more earnings than a smaller one.

That’s where P/E comes in. P/E is just a ratio that tells you how much you are paying for earnings. A low P/E is fantastic, it means you are getting more profits.

Take the business example, but let’s say the company (lemonade) earning $20 is selling for $500, and the company (ice cream) earning $10 is selling for $100.

Well you’d want to buy the ice cream company selling for $100, because you could buy 5 of those for $500. And you’d be making $50.

Whereas if you bought the lemonade company earning $20, you can only buy 1 for $500.

See, you just learned P/E ratio!

So only look for companies with a low P/E for starters, because you are paying less to get more profits. Go for at least less than 25. (P/E < 25).

One last P/E example to get you convinced.

In the year 2000, a fast growing company called Cisco (CSCO) was trading at a P/E ratio of 109. Absolutely astounding. Of course, the company crashed from $77 to $16 during the dot com crash.

A low P/E ratio will keep you from losing this kind of money. It protects you from the bubble stocks which crash the hardest. Remember, the bigger the P/E, the harder they fall.

5. Diversify, Diversify, Diversify

You know this phrase, “never keep your eggs in one basket”. They weren’t talking about Easter eggs, but they were giving you valuable money advice.

The stock market shouldn’t be a place where you go to chew on your fingernails in nervousness. While some people like to play this way, those aren’t the people who are going to build wealth in the market.

The best way to limit your downside risk is by diversifying. You never want all of your money in one stock, because the world is so unpredictable.

Even a world class investor like Warren Buffett is humble enough to respect the market. He knows that the market can take you out faster than you can say “wait!”. So smart investors like Warren Buffett diversify their funds.

You must buy several stocks when you are investing. Even if you are starting small, it’s ok. You can work your way up and add more companies as you go, but always have diversification as a main goal and priority.

When you are diversified, one big loss won’t kill you. It’s this avoidance of the big loss that you need to keep yourself fully invested for the long term, which I revealed in tip 1 as your secret to success.

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So don’t get prideful and don’t be stupid. Spread out your risk by diversifying your stocks. You’ll be rewarded with a healthy portfolio.

Stocks for Beginners: Tips 6 – 8

6. Buy Stocks that Pay Dividends

Many investors skip over this part. And it truly makes me sad. Because the concept is so simple, yet so many people don’t understand it.

I like to explain it in this way.

Let’s forget about the stock market for right now, and pretend to be a real estate investor. Now what does the typical (and smart) real estate investor do?

Well, they’ll buy a place (hopefully cheap) and fix it up and then rent it out. They wouldn’t try to flip it, do I need to remind you all what happened to flippers during the 2007 housing crash…

So a real estate investor buys property and then rents it out. Just like in Monopoly, you’re building streams of cash, and compounding them.

Over a long period of time… BOOM wealth. You can take your rental income and save it, then buy another property, rent it out and have double income, then buy a third and triple your income, etc.

So it makes sense right? You’re buying real estate for the rent. And you should do THE EXACT SAME THING in the stock market.

Look, I’m gonna buy a stock. It’s nice if it goes up tomorrow, but I don’t care too much about that. What I do care about is that the stock will pay me a dividend, and keep paying me that dividend.

Because that dividend is like my “rent money”. And the more “rent money” I collect, the richer I will become. But so many people forget to think about investing in this way, and instead try to make a quick “flip”.

Don’t be one of these people. Understand that wealth is a long process, and that you can get there by collecting “properties” (stocks) and reinvesting your “rent” (dividends) to buy more “properties” (stocks).

So simple, a 5 year old can understand.

7. Avoid all of the Media Drama

Do you know what the media is good for? Keeping me updated on what is going on with the Kardashians.

Do you know what else it is good for? Nothing else.

In fact, the media can be detrimental to your investing results. The media works for 1 reason, and that’s to make profit for the company. They make profit by getting more viewers, so that advertisers will pay them more money.

So the media draws users the best way it can, through fear and entertainment. Every single time you hear them talking about the stock market, they are always dramatizing it in the most extreme way. They want you to stick around for the commercials.

While the TV may be screaming at you that your stocks are screwed, you should know better. Your investments will be fine, we are playing for the long term remember?

Unless you think that the Armageddon will happen in the next year, you should keep your money in the stock market and hold for the long term. As long as you think there will be markets, and commerce, and business, and civility, then your money will be fine.

Turn off the screaming heads and “experts”. Most of them are wrong anyways (47% of them to be exact).

Instead of listening to these entertainers, do yourself a favor and pick up a book. There’s so much knowledge about investing in books, it’s how I’ve learned it all.

8. Get in the Head of Success with a Book

I’d rather learn from people who are successful in what they do. Books give you this unique opportunity, yet most of us forget this.

Sure we have the internet now, where any amateur can pick up a keyboard and lead you astray. But morality and quality is still upheld with books, and especially classic books for that matter.

Look, I wish I could sit here and tell you that all of my inspiration and stock market wisdom pooped on me while I was sitting at Starbucks and staring into the sun. But that’s just not how life works.

I started to see serious results in my investing when I decided to take it all seriously. It’s amazing how well that worked out.

But see, most people are too lazy to go through with this. They think that they can take buying stocks as seriously as they do that new TV show on Netflix. They think they can Google it, buy a stock, and then be a millionaire.

I don’t blame anybody for being this way. That’s how I was too.

But it’s your call whether to continue with this kind of thinking, or do something to change it. I’m telling you that this is the most important tip that I can give you.

Yes, all my tips are very useful and very effective. But I’m giving you my number #1 secret here. This is where I get my inspiration. And my knowledge. Somehow it all translates into my ego feeling compelled to teach to you.

Books are powerful. They turned a boy who dropped out of school at the age of 10 into one of the most influential people of our time. That person was Benjamin Franklin. He owes it all to books.

knowledge
I think you owe it to yourself to see what the rage is all about. I can give you these fish, these tips, or I can teach you to fish. I’m teaching you, go read.

Stocks for Beginners: Tips 9 – 10

9. Compounding Interest is your Best Friend

I could go on and on about compounding interest. Actually, I already have. So much so that I called it the 8th wonder of the world.

(I didn’t really call it that. Everybody calls it that).

Because it’s true. Compounding interest is the single force that can make you wealthy. Compounding interest is the reason why it seems impossible to get out of credit card debt.

It seems like the harder you try to dig out, the more and more money you have to burn just to keep your balance level. Now imagine that force of nature, but working on your side instead of against you.

That’s what compounding interest can do for you. It’s literally how fortunes have been made. And it works because you make money, and reinvest it, and that new money makes you more money.

It’s like a snowball. It’s hard to build at first, but once you get it rolling there is no stopping it. Compounding interest can work wonders in such a fashion, that an initial investment can double, triple, quadruple, or more over time.

My favorite compounding interest example is the following. Take the average income in the US, $50,000 a year.

If someone was to invest just 10% of that and make 10% returns in the market, then in 40 years that person would have $2.4 million.

And 40 years is all it takes for a 25 year old to retire. Imagine retiring with several million dollars! You could finally live in that tropical island for the rest of your life, sipping mai-tais and catching rays.

The freedom that you desire will be made possible by compounding interest. But it’s up to you to take action. The longer you wait, the less your possible compound.

10. Relax and have fun

I know that it’s all overwhelming at first. But seriously, don’t take it all too seriously. It is just money after all.

You can enjoy all the best parts of life without money. Even supremely wealth individuals like Felix Dennis have admitted to this.

People like Warren Buffett and Bill Gates have even pledged to give away 50% of their wealth in their lifetimes. They understand that money is just a tool, and they don’t let this tool run their lives.

Because the second you let money run your life is the second you will get crushed in the stock market.

This isn’t extreme sports. You can’t use superior talent, or extreme brute force to make a lot of money in the stock market. Sorry, it’s just the facts. You will make money in the stock market the way it always has, slowly and surely.

Once you turn into the hare, you guarantee a burn out. I don’t know what that can look like for you, but I don’t want you to go through that.

So relax, take a deep breath with me, and enjoy the stock buying process. Join me for this fascinating and rewarding experience. Now let’s make some money.

**Stocks for Beginners: 10 Tips for Ordinary People**
**All Rights Reserved. Investing for Beginners 2014**
**Photos shown above found: Attribution 1, 2, 3, 4, 5**