You have decided that you want to start investing in stocks and begin building passive income. The next questions are typically:
- Where do I start and which brokerage should I use?
- How do I buy shares?
Before you begin investing you need to promise yourself one main thing. You will never invest any money into the market that you cannot afford to lose. This sounds worse than it actually is. The goal of investing is to grow your overall capital and to start making passive income, however the market can be quite volatile at times. You might buy shares of even a conservative growth stock like PepsiCo (PEP), and see your shares pullback 5-10% shortly after you make your purchase.
Timing the market can be extremely difficult because anything from natural disasters, to politics, to economic data reports, to even presidential tweets, can move the market. This is why you never invest thinking that you can make a quick dollar. We want to grow a fortune over time, not get in and get out with a quick 1-2% gain.
Choosing a Brokerage
This step of the process is very easy, but most people see all of the different brokerage options and get overwhelmed. The truth of the matter is that the brokerage you invest through won’t really make that much of a difference in your actual investing.
Choosing a brokerage is like choosing which credit card you want to own…it has no real impact on what you actually purchase. Many of the best tools available for researching stocks can be found free on the internet, so our number one suggestion is to go with the cheapest brokerage option, which is Robinhood.
Robinhood is a commission free brokerage. This means that if you invest $1000, you get $1000 worth of shares and you are not charged a fee for the actual purchase or sale of a security.
Robinhood aligns almost perfectly with our investing philosophy because we believe that the average person should not have to pay HUGE fees to purchase stock and to obtain great research. Our newsletters provide valuable research and price targets for an extremely low price, so please try subscribing today!
Funding Your Brokerage
Once you have set up your brokerage the next step is fairy obvious, you need to link your bank account and transfer funds into your brokerage. Transferring funds will typically take 2-3 business days so be patient.
Once you have funds in your brokerage, the next step is the exciting part, buying shares of stock. Before you actually buy any shares though, it is imperative that you understand the different order types.
Market orders tell the brokerage that you want to buy stock and you want to buy it now. The market order is supposed to execute at the best price available, however a price is not guaranteed. It is for this reason we typically prefer limit orders.
Limit orders allow you to set a maximum purchase price for your buy order and a minimum sale price for your sell order. They grant you better control over the price that you buy at and and the price that you sell at. If the market does not reach your limit price, the order will not execute.
A stop loss is a protection mechanism usually used more by traders than investors. When you set a stop loss you set a price at which a market sell order would be triggered if the stock market were to dip.
Let’s say you own shares of XYZ and the stock is trading at $10 per share, you might set a stop loss at $9 so your maximum downside would be 10%. You must understand that stop losses trigger market sell orders though, so your shares are guaranteed to sell when the price hits $9, but they are not guaranteed to sell at $9. If the share price is rapidly declining, your shares might be sold at $8.90 or $8.75.
Stop limits are similar to stop losses. They are another protection mechanism for limiting downside, but instead of triggering a market order, stop limits use limit orders. If you set a stop limit at $9 for shares of XYZ, the stop limit will be triggered to sell once the stock hits $9. If the stock is rapidly falling though, it won’t necessarily be able to execute the limit at $9 and the stock might gap down past your stop limit.
We do not believe in utilizing stop losses or stop limits. We focus on purchasing top notch companies with proven management and healthy fundamentals. When stocks go lower and economic conditions still look healthy, we believe that stocks get cheaper and we look to buy. Do not confuse stock trading with stock investing. Always understand what your goal is before purchasing a security.
Investing takes time and patience like everything else in life. Expecting instant results is not realistic, but once you learn what qualities to look for in a winning stock, you will begin to reap the rewards of the stock market.