CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

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How to Start Investing in Stock Markets?

December 29, 2020 02:00 UTC
Reading time: 15 minutes

This clear and concise guide on how to start investing in stock markets will present various important topics related to investing in stock markets. Learn how to open an investing account, how to choose the best stocks and investments that work for you, what a penny stock is, what a dividend is and more!

how to start investing in stock markets

How to start investing in stocks

Perhaps you've been asking yourself, "How to start investing in stocks?" or "How do beginners buy stocks?". Well, you're in the right place. In this article, I explain all you need to know to start investing in the stock market so you can make the best decisions possible for yourself.

When is the best time to start investing in stocks?

Many young people these days are asking themselves, "How to start investing in stocks at 16?", "What age can you start investing in stocks?", and "How do I start investing with little money?". Whether you want to know how to start investing in stocks at 18 or at 60, the same simple principles apply to everyone.

The amount you are able to invest and the losses you can afford to take will influence the size of your returns. At the same time, the amount of money you start with will determine how successful you'll be in the long run. A strong strategy, a never ending education, a good temperament and good risk management strategies can help make trading a positive and, for some, lucrative experience.

So, instead of focusing on questions like, "How to start investing in stocks as a teenager?" or "How to start investing in stocks at 21?", begin educating yourself on strategies and risk management. With the right risk management strategy, regardless of whether you want to know how to start investing in stocks with $50 or 100 dollars, trading can become a positive experience for you in the long run. Let's start!

 

Selecting your preferred stocks

This is one of the first decisions in how to start investing in stocks. Once registering and funding your brokerage account, you then begin the process of selecting stocks. A good place to begin is researching companies you know as a consumer. The endless stream of data, along with real-time market movements may overwhelm you initially, so keep it simple by looking for companies that you want to part own.

One of the greatest investors of all time, Warren Buffett, once said, "Buy into a company because you want to own it, not because you want the stock to go up". Starting with the company's annual report, the management's annual letter to shareholders can provide a decent general narrative of how the company is performing, and what its future plans are.

In addition, analytical tools that you need to evaluate for the business will be available on your broker's website, such as recent news, conference call transcripts, quarterly earnings updates, and any company lodgements with the regulator. Many brokers also provide articles and tutorials or seminars on how to use their tools, and how to select stocks.

How to start investing with little money

While many people find it difficult to believe, there are many ways to start investing without lots of money. With a small amount of money, you can begin investing through Exchange Traded Funds (ETFs), Mutual funds, Contracts for Difference (CFDs), mirror trading or social trading. Let's look at each in more detail.

Exchange Traded Funds 

If you want to diversify your portfolio so you're investment is not at the mercy of one single stock, but will fluctuate with the movements of several different stocks, consider an Exchange Traded Fund (ETF). ETFs are a kind of asset that tracks the performance of several stocks or different instruments.

By investing in an ETF, you are essentially buying into a bundle of several stocks. In turn, you immediately have a diversified portfolio. An ETF may be a bundle of stocks within a single industry or may be a tracking of an index.

Mutual funds

Mutual funds collect money from investors and put the funds into a diverse range of stocks. This creates a diversified portfolio for the investors.

While mutual funds and ETFs appear similar, they differ in major ways:

  • Investors trade ETFs on the market just like stocks. Throughout the day their prices fluctuate
  • With mutual funds, you can buy shares at the end of the day
  • Mutual funds are managed actively by a fund manager. This means that there is a person who decides on the purchase or sale of the shares as well as the overall composition of stocks within the fund's portfolio
  • ETFs have single associated prices and are not managed in this way.

If you're curious about trading ETFs but aren't sure if you're ready to get started, why not open a free demo account?

A demo account allows you to trade the live markets risk free, using a virtual account balance. This means you can get used to the trading platform, decide which strategies work best for you and better understand the ETFs that most interest you, all of which can prepare you for when you start trading for real.

Learn more and sign up below!

Free Forex Demo Trading Account

Contracts for Difference 

Another way to profit from changes in stock prices is via Contracts for Difference (CFDs). However, a CFD is a derivative, which means that you won't actually own any shares. Instead, you will be trading the difference between the price of the stock on the day you open the contract and the price on the day you close it. In other words, you are trading on your expectations of how the price of a stock will change over time.

A key feature of CFDs is that through leverage offered by a broker, traders can multiply the size of their profits. However, the risk is equally as large when trading with leverage and traders can lose large amounts of funds quickly. This is why CFDs are not common among beginner traders. I suggest keeping them in mind for when you become a more experienced trader.

Mirror trading

A new way of entering the stock market with small amounts of money as a new trader with limited knowledge. is Mirror trading. In short, mirror trading allows you to copy a more experienced trader. Through a broker, you'll connect your account to the account of a more experienced trader. As such, when that trader executes a trade, the same trade will be executed on your account. You may be asking yourself, "Can I trust that my account is linked to an adequate trader?" You want to be sure that your account is connected to someone who is executing trades for a profitability and risk level with instruments that you're comfortable with.

Social trading

If you prefer being more involved with your trading decisions, consider social trading. Social trading is a new form of trading that merges the benefits of social networking with trading in social trading platforms. Through social trading, you can communicate with other traders and identify strategies that meet your criteria and look promising. Open and close trades based on the strategies you acquire and the general knowledge you gain from these platforms.

Besides what instrument you decide to use to make trades, you'll also need to learn how to begin. Here are the basic steps to invest in stocks:

  • Choose the basic process

WillThis means: do you wish to make trades by yourself, or will you enter into a portfolio that is managed by professionals, such as a mutual fund?

  • Remember that trading usually entails holding positions for short periods of time, while investing means you'll buy and hold stocks for a longer term.

As such, you can decide what is best for your money. Are you interested in long term growth or short term, intraday trading?

  • Define Set a reasonable budget that is within your means.

A basic rule is to never invest more than you can afford to lose. A part of this decision often entails deciding if you are ready to start now, or if you will wait until you have saved more funds.

  • Choose the right broker or financial institution.

There are many ways to enter the stock market so you'll need a broker offering the services that you have decided on. Also, be sure to pick a broker that is reliable, trustworthy and offers reasonable fees or none at all.

  • Get Learn how to use the investment platform and how to execute trades on it

The best way to do this is with a demo account.

  • DefineEstablish investment strategies and the tools you'll utilize in your analysis
  • Begin and adapt

When you start trading and investing, you'll gain real-life experience. And, as with all trades in life, education never ends. Studying, learning from experience and adapting your strategies will help you minimize risk and maximize earning potential.

  • Take profits, reinvest some of it back into your portfolio and establish your wealth.

Try to be slow but steady in your decision making as you begin trading. Be careful not to rush into buying up stocks just because a broker offers low fees or a minimum investment of a couple euros or pounds. Consider all of the costs associated, such as broker fees for every transaction you make when buying or selling stocks or withdrawing your funds. Some brokers charge a single rate for each transaction, others charge a percentage of the transaction value, and some use a mix of both.

The price movement of any position you are in should be large enough to cover the fees you'll have to pay on any transactions associated with that trade, plus a bit more to ensure that you still earn a profit.

Before I close this article, I'm going to mention two more options for investing with little money. Penny stocks are one option, though they come with some unique risks. The second are Dividend stocks.

Let's look at them in detail:

Investing in penny stocks

A loose definition of penny stocks are stocks that are traded at a value below $5. When it comes to penny stocks, it's best to start with small investments and move slowly. We suggest making penny stocks a small fraction of your total portfolio.

If penny stocks interest you, then your first step is the same as it is for any stocks. You'll need to open up an account with a broker. This is a very important decision. Not all brokers offer penny stocks because of the risks associated with trading them. In short, pick a broker, sign up by filling out their application form and providing ID. Then fund your account.

A common reason traders are attracted to penny stocks is the idea that they can earn large sums relatively quickly. However, penny stocks entail incredible risk and there are more risks than there are opportunities for reward.

These risks include:

  • Limited liquidity — A lack of interest from buyers is one of the main reasons the price for penny stocks is so low. . This results in liquidity problems. When you are ready to sell your shares, there may not be anyone to buy them. You can easily get stuck with them.
  • Little information — It can be difficult to get company information if a penny stock is traded on an Over The Counter (OTC) exchange. In some cases, it may not be available at all. There can be very few reports to help you make decisions.
  • Large spreads — This is connected to the low liquidity of penny stocks. Fewer buyers = larger spreads. Because of this, you could pay $3.50 for a penny stock while the market rate for that stock is $3.00. In such a case, you would immediately lose %15 on your investment.
  • The business might not make it — These stocks are typically in companies that are barely solvent. If you invest in a company and it later goes out of business, whatever investment you had in that company now disappears, along with the funds you invested in it.
  • Possible schemes — As penny stocks are often sold on OTCs, there can be less regulation of the businesses selling their stock there. Be aware of scams. In a pump-and-dump scheme, a person claims they have information about the company to generate interest and inflate the price. Or a promotor may short a stock at a high price, then spread bad news about the company to get its stock to fall. Beware of anyone promising immense returns.

Whether you want to trade offline, or you want to learn how to start investing in penny stocks online, the basic information and risks to be aware of are the same.

Minimize risks in penny stock Investing

If you choose penny stocks, you'll need to be prepared. Be ready to do whatever is needed to minimize risks.

Here's what I suggest:

  • Start with a good mindset — Remember the risks I just mentioned. Approach penny stocks as speculations, not investments. In doing this, you will remain cautious, which will help you make the right decisions in this environment.
  • Find penny stocks on exchanges — Not OTC markets. For example, try penny stocks listed on the NYSE and Nasdaq. These businesses will be more reliable because they have to follow regulations. It's also worth mentioning that being on such an exchange usually indicates that the company is more serious about their future direction.
  • Penny stocks should make up a small fraction of your whole portfolio — As these are so risky, it's best to allocate no more than 10% to them. Invest the rest of your portfolio in something more stable, like bonds or real estate.
  • Diversify your investment in penny stocks — Don't buy into only one penny stock. Split your money among ten or more stocks. Most likely, only a few of them will pay off, while the rest fall to zero. Spreading your money across many penny stocks can allow you to take advantage of this scenario.
  • Identify the core values of the company — A company that's in a bad situation should have something that could allow the company to grow into a substantial business down the road. Look for trademarks, a promising product line, or a valuable product line. In short, find some tangible value within the company and avoid companies that are promoting more of a concept without any tangible value connected to the business.

Investing in dividend stocks

Now I'm going to cover how to start investing in dividend stocks. Dividends are a piece of the company profits that are paid out to their shareholders. Dividend stocks are critical to some investors. Since 1925, almost half of the returns investors generate from the main US stocks have been from the reinvestment of their dividend income into shares.

How much will the company pay me?

What a company pays out in dividend is determined by dividend yield. This is calculated by taking the most recent annual dividend and dividing it by the current share price.

For example, if the most recent annual dividend was $0.05 per share, while the price of a share is $2.00, the yield is $0.05/$2, making a percentage of 2.5%. 

Dividend security: how do I know they'll actually pay me?

Companies aren't required to pay dividends. Also, if a company paid out dividends the year before, this doesn't necessarily mean they will do the same next year.

Most companies don't want to reduce their dividends. This is a sign that something is going wrong. So be selective with which dividend stocks you invest in.

Stable stocks that pay dividends can be a crucial part of a solid foundation for an investment portfolio. Here's how to go about it:

  • Cash/Earnings: search for companies with strong cash flows as well as strong long term earnings expectations. Look for companies with consistent annual growth.
  • Low debt: look for companies that are not saddled with debt. Companies in debt are more likely to pay off their debt than dividends.
  • Sector trends: you should not only analyze a company's numbers but also look at the sector they operate in. Look at what the trends are in that sector and what that indicates for the future of the company. For example, an oil company may be growing rapidly, but a sudden hike in oil prices could kill demand while skyrocketing supply.

How to set up your investment portfolio with Admiral Markets

Now that you know the basics, you can either get hands on experience with a free demo account. Or you can open a real trading account and set up an investment portfolio with these steps:

  1. Open a Trade.MT4 trading account
  2. For MetaTrader 4 (MT4): select Trade.MT4
  3. For MetaTrader 5 (MT5): select Trade.MT5
  4. Select your stocks
  5. Seek companies with strong long-term growth prospects
  6. Decide how many shares to buy. Base this on your budget and desired allocation
  7. Choose your order type. Use "market" or "limit" in most cases

Please note, stocks are available for investment with Admiral Markets through the MT5 Invest.MT5 account only. All other Admiral Markets trading accounts offer CFD trading only.

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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