For Part 3 of this guide, I will show you the absolute best strategy you should always use when investing and will help you overcome the biggest hurdle beginning investors face: buying your first stock.
Buying just 1 share of your favorite company when buying your first stock is like taking your first step into the market.
I can’t stress enough how important buying your first stock is, as you can read and read until your eyes turn blue but you won’t start to see progress towards your results until you take action.
Trust me from a guy who has been there before, buying your first stock gives you a sense of empowerment and excitement of being part of the stock market. First, a reminder to the 7 steps of 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!!
Before going over buying your first stock, I am going to reveal the absolute best stock strategy you can use and most wealthy investors use. It is called: Dollar Cost Averaging.
Dollar Cost Averaging
What do investing greats have to say about dollar cost averaging? The godfather of value investing and Warren Buffett’s mentor Benjamin Graham wrote in his book The Intelligent Investor that dollar cost averaging:
enables you to put a fixed amount of money into an investment at regular intervals… You buy more – whether the markets have gone (or are about to go up), down, or sideways.
Warren Buffett called this book “by far the best book on investing ever written” and it is the resource many investors refer to for guidance.
Dollar cost averaging is simply investing the same amount of money every month, year, or week, into the stock market– with the effect of forcing the investor to buy more when stock prices are lower and buy less when stock prices are higher.
By dollar cost averaging, the investor is always invested and will not be devastated by the losses that come with trying to time the market.
Stay Away from the “Psychics”
In your investing life, beware the analysts who claim they know the exact time to buy low or sell high.
In retrospect everyone believes they would’ve been able to predict the highs and lows of the market, but in reality it is in fact impossible.
Trying to profit from timing the market will drive you nuts and always leave you regretting your decisions. Most investors will sell too early and miss out on bigger gains or will sell because stocks have fallen significantly, which is the absolute worst time to sell.
Or, investors will often feel good about their investments when they are doing well and will as a consequence buy a lot more at the time where stocks are very high already and there is very little upside.
Dollar cost averaging gives you the necessary, patient discipline you need to stay in the market for the long term and through the ups and downs.
How does this strategy help you buy more when prices are low and buy less when prices are high? Take this simple example.
Say a stock’s price is $10 today, and you are buying $500 of stock a month in a dollar cost averaging strategy. So, the first month you buy 50 shares of this stock. Let’s say next month the price has dropped to $5.
Instead of getting pissed that the shares have fallen so much and cursing the world, the smart investor sees this as an opportunity to buy more stock at a discount.
So, again you invest $500 in month 2 knowing that you are in for the long term, and you end up buying 100 shares. Let’s say in month 3 the price is still at $5 and you are buying 100 more shares. Finally in month 4 the price recovers and is now at a whopping $15.
Compare where’d you be if you had, or hadn’t, dollar cost averaged.
With dollar cost averaging, you have 250 shares of stock now worth $15, and you are sitting pretty with some nice gains.
Let’s say you didn’t use dollar cost averaging and you had invested all $1500 at once. You’d have only 150 shares, and when the price dropped to $5 you might’ve sold at the worst possible time, unable to stomach any more losses.
Remember: Don’t Try to Time the Market
While this might seem like an extreme example, you’d be surprised how often this happens to investors, which is the reason why many shun the market after being burned like this.
Little do they know that a simple strategy such as dollar cost averaging reduces the possible downside and keeps you disciplined and invested long term.
If the price had instead gone up initially instead of down… yes, investing all of it at the beginning might have been best in the short term for you now, but over many trades and years of investing, you’d find you’re getting burned more often than you are gaining.
Plus, how would you know when to sell? No one is able to predict the future no matter how much convincing you may hear, and the true answer is no one knows. That’s why it’s important to stay long term invested while taking some profits along the way, without getting greedy or attempting to sell at the highs or buy at the lows.
Market timing will lead you to despair, and those who claim otherwise have yet to be burned by it but eventually will.
Time for Action: Buying Your First Stock
Now that I’ve showed you why to invest, how the stock market works, and the best investing strategy you can use, my next recommendation is getting your feet wet and taking the first step towards taking control of your future by buying your first stock.
The best online broker I can recommend for buying your first stock is TradeKing (bought in 2017 and renamed to Ally), and let me tell you why.
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UPDATE [2020]: I’ve since changed my tune on Ally due to their poor customer service and frequently crashing website. I’d instead go with a reputable broker like Schwab or Fidelity, who also offer commission free trades. But, these screenshots provide a good example of just how easy it is to open an account.
Please be aware that the process takes about 15 minutes to apply, and then 1-3 business days to get approved.
Once that is completed, you are able to log in and buy your first stock!
Wealth building doesn’t happen overnight, so this is a good opportunity to practice that newfound patience. On the first page, scroll down to open an account:
Click to zoomEnter your first and last name and your email address, then hit register.
Select the type of account you want to open. If you are starting out and just want to buy a share, I suggest an Individual Account. Here’s an article where you can learn more about an IRA if you’re curious.
Hit the Next button and then fill out your information on the next page.
Next, fill out your Employment Information. Don’t worry they will not be contacting your employer, they just need to make sure you have the ability to fund an account before opening.
The next step are survey questions and shouldn’t have any weighting on your application status.
Finally you need to designate a beneficiary, someone who will get access to your money in case anything happens to you.
Hit submit and that’s it, you’re done! Told you it was easy.
I hope this quick picture guide was helpful and informative. I only recommend services that will help investors on their way to wealth, and getting your feet wet with Ally is one of the best first ways.
Once you have ownership of a stock, you gain a sense of empowerment and can truly understand that the market isn’t as foreign and foreboding as some might’ve thought.
Once you’ve completed this step, be sure to continue with the Investing for Beginners guide. You will learn how to evaluate stocks in order to make the best decisions for your investing journey.
