Welcome to this 7 step guide to understanding the stock market. I’ve created this easy-to-follow guide to simplify the learning process for entering the stock market.
By leaving out all the confusing Wall Street jargon and explaining things in simple terms, I’m hoping you’ll find this as the perfect solution, if you are willing to learn.
Before we get started, here is a breakdown of the 7 categories for this guide:
1. Why to Invest?
2. How the Stock Market Works
3. The BEST Stock Strategy and Buying Your First Stock
4. P/E Ratio: How to Calculate the Most Widely Used Valuation
5. P/B, P/S: The Single Two Ratios Most Correlated to Success
6. Cashing In With a Dividend Is a Necessity
7. The Best Way to Avoid Risk, and Putting it all Together!!
Why is investing so important?
Let’s imagine a life without investing first. You work 9-5 for a boss all your life, maybe get a couple raises, a promotion, have a nice house, car, and kids. You go on vacation once a year, eat out regularly, and attempt to enjoy the finer things in life as best you can.
Now since you haven’t invested, you get old, become unattractive for hiring, and live with a measly social security allowance for the rest of your life. You might’ve made good money when you were young, but now you have nothing to show for your lifetime of work.
Now let’s say you did save some money for retirement, but again this money wasn’t invested and won’t be invested.
Let’s even stay optimistic and assume you saved $1400 a month for 26 years. This would leave you with $403,200 to live on, which on a $60,000 a year lifestyle would only last you 6.72 years. You’re retiring at 65 only to go broke at 71 and you’ve been a good saver all your life.
Well then what’s the point of saving you may ask? Now let me show you the same numbers but add investing into the equation.
The Power of Saving + Investing
Again, lets say you saved $1400 a month for 26 years. BUT, this money was invested continuously as part of a long term investment plan, solid in the fundamentals you learned from this guide.
Now, including dividends in long term stock market investments, I can confidently and conservatively say that you can average a 10% annual return on these investments.
The same $1400 a month compounded annually at 10% turns your net worth into $2,017,670.19 in 26 years!
But the story gets even better.
With this large sum of money at your retirement, again conservatively assuming a 3% yield on your dividends, you can collect $60,530 a year to live on WITHOUT reducing your saved amount.
Answer: Compounding Interest
By letting the power of compounding interest assist you in saving, you leverage the resources available in the market and slowly build wealth over time.
It’s not some mystified secret or get rich quick shortcut; this is a time tested method to become wealthy and be financially independent, and it’s how billionaires like Warren Buffett have done it all their life.
For those who don’t want to think about tomorrow, I can’t help you. But tomorrow will come, it always does.
Would you rather spend the rest of your life with no plan, dependent on others and unsure of your future? Or would you rather be making progress towards a goal, living with purpose and anticipating the fruits of your labor you know you will one day reap for years after you sow?
The choice is yours, and only YOU will feel the consequences of that choice.
Options to Invest In
There’s many ways you can try to create a return that you can compound into big amounts over time. Some of the most popular options include:
- Real Estate
- P2P lending
There’s pros and cons to each of them, and we could go on for hours about all of them. In fact, if you’re interested in really getting a deep dive on these alternatives, I’ll link a podcast episode below where we really dug in.
For now, let’s quickly review each option and talk about which would probably be best for the average investor.
P2P lending: This is a relatively new investment model that’s offered by various websites.
You basically lend money to someone else. The risk is that the person you lend to won’t pay. And it tends to be that if you want high rewards, you’ll need to bet on someone with a riskier profile. That’s not ideal.
Bitcoin/ Gold: Thought of as a great hedge against inflation and government debt. Prices seem to rise when panic sets in to the marketplace.
I’m not a big fan of investing in bitcoin, crypto, gold, silver, or any other precious metals because of this simple fact– they don’t produce an income, and without an income you can’t get compound interest.
Real Estate: The general mindset around real estate investing is that “it always goes up”, and many people have been successful with it.
However, there are some critical cons with real estate.
For one, your money is locked in and in order to get out you’ll have to pay buyers and sellers fees… you have to pay interest to a bank for a mortgage… it’s hard work maintaining houses and finding renters…
Again it’s not practical for most average people. Not to mention that the returns are often less than what you can get from the stock market (more on that later). If you’re absolutely intent on real estate, try this blog instead.
Bonds: Now we’re moving towards safer and more reliable investments. A bond is a loan to a big corporation, and will be paid as long as the corporation remains solvent.
Now it’s not a guarantee as companies do go bankrupt. But, bonds can be a fantastic way to get consistent, reliable income for no work at all.
The downside to bonds is that they have historically underperformed stocks in the long term, and this is primarily due to the fact that they don’t tend to grow in value very much.
Contrast that to a stock, where you can get a steady income AND get a value that grows in time as the company grows.
Stocks: This is a very practical option for the average investor, and you don’t need much money to get started.
Buying a stock is buying a piece of ownership into a business. That means as an owner, you get part of the profits, and as the business becomes more valuable so does your ownership piece.
The stock market is a fantastic way to for a beginner to get started with their investing, and it has averaged about 10% per year for decades.
Not only that, but there’s powerful compounding potential when you buy stocks and especially dividend stocks. Good dividend stocks will grow the income they pay to you over time, which accelerates the compounding process. Many of the best and biggest businesses started as small stocks.
Like I said, this is a very generalized overview of some of your options. Hopefully it’s simple.
Now that you’re convinced about stocks and ready to move on to learning about how the stock market works. To do that, click this link for step 2:
If you’re more of an audio learner and have more time on your hands, or just want to dig deeper about the different options a beginner investor has with all kinds of investments, you can listen to this podcast episode below.
It was part of our Back to the Basics podcast series dedicated to helping beginners to investing. The whole 5 episode series (starting on episode 43) is great and can be a great supplement to what you’ll find in this 7 step guide.