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Tips for the First Time Investor: Understanding “When” and “How”

Many of my family and friends know the stock market fascinates me, and more often than not a conversation with me will lead to finances of some sort.  I can’t count the number of times I’ve been pegged with the question, “What should I do as a first time investor?  When is the right time to start investing?” 

I wish there was a simple answer to these questions, but unfortunately it just isn’t that easy.  I was intrigued by the market early and started trading in my early twenties.  My interest in the market hasn’t changed as I’ve grown older; now I just invest to help pay for my child’s education and my retirement versus trying to make a few bucks.  

Something I want to iterate early, I started investing when I was 20 years old, but that does not mean that’s the right time for you.  The timing of “when?” to invest may be different for everyone, but there are a few tips I will share on “how?” to begin as a first time investor.  But first, a bit about how I got my start investing.

My Path:

Getting started as a first-time investor likely won’t be easy, but if you are careful you can certainly limit the risk.  As you will read later, my fascination with the market started with a college project. 

I was then fortunate enough to have a father who believed in me double down on my research.  With a $1,000 Christmas gift from him, I opened an E*TRADE account and began my first live trading.  With that money I bought 2 shares of AAPL for $487 each.  Since then, the stock split 7 to 1 with 1 additional stock awarded per share owned before the split and is trading near $300/share.  I took 2 shares worth $974 and have been able to turn it into 16 shares worth $4,800! 

With my newfound confidence from that success, I slowly contributed to my account when I could and ended up investing in AMZN when it was under $1,300 and is now trading over $2,000.  My 3 shares have turned over $2,100 in a 2-year period! 

The big wins are the easy ones to remember and share, but trust me I have had my share of losses as well. 

6 Tips for the First Time Investor

I share some of my successes, but please don’t start investing thinking you are going to make $10k overnight.  When I first started trading, I had to receive a gift of $1,000 and contributed $20 to the account as often as I could. 

Now the part you are all here for, the tips!

Do your research:

When in school, what is the best strategy for being successful?  Do your homework and make sure to study before the big test.  The same could be said with investing.  Before I even considered opening up a trading account, I wrote a 30-page thesis over the company that was my first investment. 

Don’t get me wrong, I know this is outrageous and can’t be expected, but it definitely was a benefit in my case.  There are many fantastic resources available online for first time investors and my big piece of advice would be don’t read just one publication. 

Over my time I have read hundreds if not thousands of articles on investing, and you will quickly find there are a million different strategies, and everyone has an opinion.  Read them all, no matter how crazy they seem, and try to keep an open mind. 

After reading and studying, you can then formulate your own strategy, not based on one idea, but multiple ideas you have read and thought about.  The tough love is, at the end of the day investing is math, and there will be winners and losers.  From my experience the more research you do, the better chance you have to be a winner. 

Long story short – be diligent, be open minded, and create your own strategy you feel comfortable with.

Practice makes perfect:

I promise to get off this horse soon, but if you want to become a better 3-point shooter, what do you do?  You shoot 3-pointers as often as you can! 

The same thing is true with trading.  

There are multiple online simulators for first time investors that are fantastic for practicing with paper money.  This practice strategy is actually what got me hooked on the market. 

A finance professor simulated an investment game for the entire class during the semester.  Each student started with $100K and whoever had the most money in their account at the end of the semester got an A, and could skip the final.  Talk about a strong motivation to encourage learning.  I bet I made 50 trades in the first two weeks, learning the lingo, the system and watching my stocks 7 hours a day.  Then I started to grasp what I was doing, made larger more aggressive long-term trades and didn’t panic as quickly.

Long story short – do not open up a trading account with no experience and start “practicing” with live money.  Get the jitters out with “monopoly” money.

Play the long game:

I would argue the best advice for a first time investor is to play the long game.  One thing I can almost guarantee every first time investor will be tempted to do… day trading.  While tempting, I can assure you this is a tough strategy to be successful at as a seasoned investor, let alone a beginner.   

I know the feeling of the first time you see your account go positive $100, and wanting to collect your winnings! 

I also know the gut wrenching feeling from seeing a stock you own go down $10 in a day and wanting to bail and move on. 

I think the saying goes, “Vegas wasn’t built on winners.”  The same can be said with trading. “Wealthy investors weren’t built on day trading.” 

There is no doubt the stock market is cyclical, and you will certainly see ups and downs.  However, you can’t forget the US economy is still the strongest and the world and looks for continued growth over time.

Long story short – Ride the ship, through good times and bad.

Always be cautious:

Don’t get me wrong; I enjoy taking a risk here and there. 

Three years ago when tensions were high, I thought uranium was a fantastic investment as everyone was threatening nuclear war. I invested $500 in a few different penny stocks and uranium companies, then momentum died and I cashed out for $200 after 6 months of letting it ride. 

That was a calculated risk, but I also made those investments knowing it could easily turn to $0.  I completed similar trades in 2019, investing $1,000 in cannabis companies.  Those companies took off in the beginning and I looked like a hero, now most of them have plummeted and my initial investment is down ~50%. 

Good news is, I still have time for them to pick back up as I ride the ship, but I only invested money I was comfortable losing.  My core investments (85-90%) are reputable companies with strong balance sheets, which is an article for another day.

Long story short – only invest what you are willing to lose, even with doing your homework.

Dividends are your friend:

Most of your flashy tech stocks like AMZN, AAPL, TSLA and NFLX don’t offer or have a very weak dividend.  This doesn’t mean these stocks aren’t strong investment opportunities, but for first time investors a strong dividend is just one more level of protection. 

Example (using round easy numbers) – M (Macy’s) can currently be purchased near $13.50/share, with a dividend of $0.3775 per quarter per share.  That means each year you are making over $1.50 just for owning a share of the stock.  In this scenario you are making over a 10% return per year, just on a dividend. 

How does this help you? 

Now if the stock drops 5% in a year, you are still ahead because of the dividend.  Keep in mind, this tip is even more effective if you follow the previous a previous tip of playing the long game. 

Long story short – a strong dividend is one more level of protection that can be a great shield for a first time investor.

When to begin:

To this point the focus has been on “how?” to become a first time investor.  Now on to the trickier question of “when?” The easy way to this, which lines up with my advice…  

The time to begin investing is when you have some spare change that you can handle losing.  For some people that time may be at age 20, for others it may be age 50.  I can assure you of one thing, if you made it this far in the article you are likely close to pulling the trigger! 

Another motivating factor for me was the growth of my family from 2 to 3.  Standard stock trading was my only focus until about 2 years ago when I started planning even harder for my future.  My strategy turned from trying to turn a profit to planning for my child’s college education with IRA’s and 529 accounts.

Long story short – there is no right or wrong answer on when to start investing if you have the interest.

There are obviously no guarantees with investing and unfortunately as mentioned before there are winners and losers.  However, much like UNO, the deck can be stacked!  Follow these tips, I truly think the stock market is a place you can win more than you lose.