Investing for Beginners: 3 Things You Should Remember

By now, investing is no longer a question of why, but a question of how. All investors started just like you, but some of them dived head-on without really knowing what investing in stocks is about.

We don’t want that to happen to you. So, we have listed the three most important things for beginners in investing to understand.

1. Investing has risks

Think of investing as swimming. You swim because you want to reach a destination, perhaps financial freedom or retirement fund. But the water isn’t as friendly as you wish it to be. You can drown, get injured or dehydrated, suffer hypothermia or cramping, or bump into foreign objects and strong currents.

Similarly, in investing, risks are present everywhere. By risks, we mean uncertainties. It’s not certain you’ll lose or gain money over a particular period.

But we won’t say investing is a gamble. When you gamble, you hold on to pure luck. In investing, you study figures. You don’t just pick stocks blindly, but you must do it systematically.

When you decide to invest, you have to understand that it’s not a one-night adventure but a long drive where you need to stop and look back every now and then to evaluate if you’ve taken the right paths and jumped the right bridges.

After all, we can’t time the market. This has been what successful investors are telling us. At times, the market will go bullish. At times, it will swing down. But we can’t predict when.

The risk is in not knowing the market movement. There are also economic, socio-political, and liquidity risks on top of market volatility.

What we can only do is make an informed purchase that can weather market fluctuations. This way, we reduce risks.

2. Buying a stock is buying a business

When you buy a stock, you become part-owner of a business, for example, if you purchase Amazon shares, you buy a percentage of ownership of the company.

But being a shareholder doesn’t necessarily mean you get the benefits and/or responsibilities similar to Jeff Bezos. When you buy into a company, it doesn’t mean you get to be the CEO for a day. Rather, it means you trust the business enough that you decide to put your money in hopes that the company will achieve growth in the long term.

Companies issue stocks to raise funds they can use for operations. Stock investors, such as yourself, can gain profit whenever the share price of a company increases. They can also get money from dividends paid out by the company whenever it registers growth.

The price of stocks is determined not by a company’s performance (although the company determines the initial stock price). Oftentimes, the market doesn’t genuinely reflect what stocks are worth, because the prices are determined by the market sentiment. For example, when there are more buyers, the price will go up; whereas, when there are more sellers, the price will go down.

As a beginner investor, you have to realise that successful investors accumulate their wealth by holding on to their stock picks, not by trading regularly. This is because they want to maximise the interest compounded every year.

3. Investing requires research

We mentioned above that investing, like swimming, has risks. But these risks can be avoided when we are adequately prepared for the investing journey we’re about to undertake.

To reduce your swimming risks, you have to familiarise the currents, practise proper breathing and strokes, hydrate, and do proper conditioning.

Picking a stock is the same. You just don’t close your eyes, roll some dice, and buy whatever the dice point to. You have to check if the company meets what we call the 3R concept: right business model, right management, and right valuation versus price.

If you want to learn more about the 3R concept we use to determine value stocks, join our free online bootcamp.

Investment research includes reviewing if the company’s past three- to five-year financial performance is good, if it has a competitive advantage in the industry, what its plans to grow the business are, and if the business will likely be around in five or ten years.

You also have to delve deeper and evaluate its management: are they performing well, is there trust in their capabilities from their employees, and are they capable of moving the company forward? Lastly, you have to check if their share price reflects their true value and if you’ll make a profit when you buy the stock today.

Investing is not a get-rich-quick scheme. You have to work to pick the best stocks so, in the future, you’ll just sit and relax while waiting for dividends and capital gains from your investments.