I’m just going to come out and say this. I LOVE STOCKS. Just because I love them, doesn’t mean you have to love them when you are a beginner investing in stocks. But, I do think if you understood them, you would love them too. Investing in stocks for beginners can be difficult at first. When it comes to investing in stocks, there are a whole lot of examples of people making huge mistakes. These stories reverberate through society, especially during negative economic times; when people sense more risk and danger when investing in stocks. This doesn’t need to be the case if you approach stocks correctly.
In this article, we are going to go over some of the basics to hopefully give you a better understanding of investing in stocks for beginners.
Here are 3 Important Ideas – Investing in Stocks for Beginners
1. Stocks are Pieces of Businesses
I cannot stress this fact enough: stocks are ownership shares of BUSINESSES. The keyword here is BUSINESSES. Stocks are NOT numbers on a computer screen that bounce around on a daily basis. When you purchase a share of a stock, you become a part owner of that company.
All companies trading on the stock market have a certain amount of stock shares outstanding.
For example, Chipotle (CMG) has approximately 28.7 million shares outstanding. If you owned all 28.7 million shares of Chipotle, you would own the entire company. If you own 100% of Chipotle, you would own 100% of the profit. Chipotle doesn’t pay a dividend. Instead, they invest their money back into the company in order to expand their operations. The goal of investing in a company like Chipotle is to increase your stock price, not to earn dividend income.
You can see my portfolio with my chipotle investment here: My Stock Portfolio
Obviously, it will cost a lot of money to own the entire company. So instead of owning all 28.7 million shares, you may own 10 shares.
If you own 10 shares of chipotle you literally own 10 shares out of 28.7 million shares outstanding. You would own .000035% of the company. It is not a large amount of the company that you own, but you ARE an owner.
This is how you should think about all stocks; stocks are an ownership share in a business.
By the way, I like GuruFocus for my research.
2. Active Investing Vs. Passive Investing for Beginners
Stocks are pieces of businesses, and there are two ways to approach investing in stocks for beginners. There is the active investing approach and the passive investing approach.
When you approach investing as an active investor, you are selecting which companies you want to invest in, and you are purchasing stock in those companies. The goal of an active investor is to do better than the market or the index most closely related to the way you invest.
The passive investing approach is when you do not want to manage the purchase of different stocks, but just take part in the market via an index fund. For example, you may invest in an index fund that tracks the S&P 500 (many of the largest 500 stocks in the US market).
Passive investment does not try to beat the index or market; a passive investor is content with averaging the market or index they are invested in. Many investors start out learning about stock investing as beginners by using a passive strategy with an index fund. Again, there is more about this on this page: My Stock Portfolio
3. Trading vs Investing for Beginners
Trading vs. investing is a huge source of confusion. Many people lump traders and investors into the same group. However, traders are not investors.
Traders do not own stocks for long periods of time. They care much more about short-term trends and in many cases, they don’t care much about the underlying business at all. Their core philosophy is not that stocks are pieces of businesses, but rather, stocks are numbers that bounce around. They try to create strategies to buy and sell stock, sometimes on a daily basis.
You can take a look at my video here:
If you decide you want to be a trader, that is your decision. But don’t mix up traders with investors. An investor owns a stock because they want to invest in the company. They believe it is a great investment to hold for a long period of time because they believe the company will appreciate and increase their profit over time. If you really think about it, they call them “daytraders” for a reason. They do not call them “dayinvestors”; investing is a long-term process, not a short-term process.
These three concepts are important to know when investing in stocks for beginners. If you understand stocks are pieces of businesses, you will learn to truly care about those businesses and the products and services they produce. When learning about investing in stocks as a beginner, the more you understand the idea of passive investing vs. active investing, the more you will understand if you are the active or passive type of investor. Finally, understand that “daytraders” are not called “dayinvestors” for a reason. If you are an investor, you shouldn’t think like a trader; you should only care about the underlying businesses you purchase. If you are a passive investor, you should just try to take part in the stock market over the long run.
Thanks for reading. If you learned something today, don’t forget to join the Stock Street club!
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