Invest in the stock market when you know nothing
Investing in the stock market is one of the best investments you can make in the long run. However, getting started when starting from scratch can sometimes seem complicated: you have to open your account, know how to place a stock market order, define an amount to invest, choose in what to invest, and know how to manage your emotions. In this article, I propose to guide you through all these steps so that you can start investing in the stock market quickly and on a good basis.
Step 1: Choose your broker
To start investing in the stock market and be able to place buy and sell orders, you must first choose a good broker. It is possible to buy shares through your usual bank, however this is not a solution that I would advise: their fees are usually very high and in most banks you will have to call your advisor by phone to place your orders this will make the process cumbersome and restrictive.
The best way to reduce costs and buy the titles you want in a few clicks is to go through an online broker . There are a large number of competitive stock brokers, your main selection criteria should be the fees (the lowest possible) and the quality (always choose an authorized broker and real profits online easily reachable). If you have little money and few orders, go to a low cost broker instead. If you are more active, some brokers may offer packages that are likely to suit you better than a basic offer. To keep things simple a “low cost” broker will do the trick for 99% of people who want to go public.
Beware of one thing too: some brokers demand a minimum of capital to open an account at home and this amount can be very variable. It is for example 1000 euros at the French broker “Bourse Direct” and 10 000 euros at the American broker “Interactive Brokers”. So choose also based on this criterion and the amount you want to invest in the stock market. Which leads us to the next point.
Step 2: Define the amount you want to invest in the stock market
how much to invest?
Many people will say, “Never invest in the stock market what you are not prepared to lose.” I do not like this advice because it has a very pessimistic connotation: nobody wants to invest in the stock market with the back thought that the money placed must be supposed as already lost. In addition, if you lose all of your capital, it is because you have probably really, really badly done things at the base: a good investment strategy should never expose you to a risk of total loss of capital invested.
So I advise you to invest in the stock market an amount with which you feel comfortable psychologically . The goal is to find the right balance between an amount large enough to earn money, and a reasonable enough amount so that market movements do not keep you awake at night. The “ideal” amount does not exist : there is only an ideal amount for you, which will depend on your tolerance for market fluctuations. I personally know that I can tolerate quite a lot of fluctuations, but I do not really mind because I have confidence in my methods and I have already experienced several periods of heavy stock market falls, so I already know how I react emotionally to these decreases.
A general rule when you start is to take the maximum amount that you think you are willing to invest in the stock market and divide it by two. This will allow you to get used to the movements of the markets without however frightening you.
Step 3: Learn how to place a stock market order
Once your account is open, you will have access to real-time (or deferred) market data, and you will have the opportunity to buy and sell securities. You can search for the titles you want either by typing the full name, or by typing the title code (for example, for the title L’Oreal, the code of the action is “OR” which is simpler than type the full name). You can also search for a title using its ISIN code (a unique multi-digit identifier code for each action). You can easily find the ISIN code of an action or a fund by not passing Google or Boursorama .
Once your title is sought, you will have access to a window that will allow you to place orders. There are several types of stock market order but here are the 3 main ones (the others being relatively little used):
– Market order : this is the order you will use by default if you want to do things simply. You just have to enter the desired quantity, select “market order” and you will buy the stock directly at the price at which the stock is quoted at the time you place your order.
– Limit order : The limit order allows you to set a price limit beyond which you do not want to buy your stock. Let’s say for example that you want to buy the action “Total”, this one quotes at 43 euros but you do not want to buy more than 42 euros: you can place a limit order to 42 euros. As long as the stock will quote at 43 euros, your order will not be executed, if the stock falls to 42 euros or less, your securities will be automatically purchased. This type of order can be useful to avoid buying at the height of the day but it can be dangerous because if the action rises strongly, it is possible that you never have your titles and you miss the rise.
– The stop order(or trigger threshold): the “stop” order works in the reverse of the limit order, it will be triggered automatically if the action passes a certain price threshold. For example, if you want to buy “Total” at 42 euros, maybe you will say that you are not ready to lose more than 5 euros per share on this purchase. You can put a “stop” order at 37 euros: if the action falls below 37 euros, your securities will automatically be sold. This type of order can be useful if you can not track your stock regularly and want to protect your portfolio against sharp declines. It can be dangerous because some titles sometimes fall below the threshold of your order and then go back up later: you will have sold at the worst time. It can be useful in scenarios like the one of 2008: quickly triggered “stop” orders avoid strong and lasting drops. The “stop” order can be a good risk management tool, which will ensure you do not lose more than the amount you have set yourself in advance.
And if you do not want to bother: simply use “market” orders: you will be sure to have your securities, and if you invest in the long term, a difference of a few cents on the purchase price of your shares will not make a big difference.
Step 4: In what to invest?
This is where things can sometimes seem complicated. In fact this does not need to be the case. There is a saying that investing in the stock market can be as simple or as complex as you want, and that’s very true. We will explore both options: complex and simple.
The complex solution is to choose your actions yourself. If you do it right, you will earn above-average returns over time, and you’ll have better control over the stocks you hold in your portfolio. However, this requires learning, you can not just open your account tomorrow and start buying shares at random: you could lose a lot of money. If the scholarship interests you the first option and therefore to train and learn how to select quality companies. Personally, I invest in this way.
The simple option, if you do not have the time or the money is to go through products that are called “indexed funds” or trackers . These stock market products are simply very simple, low-cost funds that will replicate a stock market index. This will allow you for example to buy all 40 values of the CAC 40 index in one goor the 500 values of the S & P 500 Index (US Index). The fund holds all the securities for you, you simply have to place a buy order on this fund and let your stock market grow. This solution can also be interesting when we know that the returns of the US S & P 500 long-term index are around 10% per year (however, as you can see in 2008, fluctuations in stock market prices may however, be quite violent, and one must be able to tolerate these strong short-term variations in order to be able to take advantage of attractive long-term returns).
If you would like to know more about the different trading strategies you can use, I invite you to read the article ” The best strategies for investing in the stock market “.
Step 5: Manage your emotions
Here we are no longer in purely financial criteria. However, controlling your emotions is THE factor that will determine your long-term success in the market. A common phrase in the world of investing is that the stock market does not lose money to investors: investors are losing money to investors.
Succeeding on the stock market often means having the discipline and strength of character to do the opposite of what the majority does. In 2008, everyone thought that you had to be crazy to invest in the stock market and that the entire economy would sink. The few investors who held their positions or bought at that time doubled or tripled their money in the years that followed.
In 1999, everyone thought we had to be crazy not to invest in the actions of an industry that was going to change the face of the world: the internet. In 2000, most stocks in the sector lost most of their value during the speculative bubble explosion. It is therefore essential to always maintain an objective judgment and not be fooled by current trends.
To help you here is a small (humorous) illustration of the emotional cycle usually experienced by an investor looking for the “right moment” to invest in the stock market.
invest in the stock market
To avoid being a victim of this cycle, you will need discipline and method. Here are three simple strategies that will help you never lose a lot of money:
– Define an automatic investment plan : you can decide to set up an automatic monthly transfer to your securities account, so you will buy your shares gradually, and you will avoid the risk of investing all your capital at the worst time.
– Set up a “stop loss” order : you can place a “stop” sale order when you make your purchase to protect yourself from a possible decline in your securities. If you buy your shares at 100 euros, you can for example decide to sell automatically if they fall below 90 euros. Thus you will be sure to never lose more than 10% of your capital on your position.
– Diversify your investments : Using multiple asset classes (rather than just investing in equities) reduces risk. If you have 50% of your portfolio in stocks and 50% in bonds, for example, you will lose less if the stock market drops sharply, because bonds tend to rise when stocks fall . You can, for example, decide to invest 30% of your portfolio in equities, 30% in bonds, 30% in Gold (and keep 10% in cash or on a Livret).
If you implement one of these three very simple strategies, you will not take significant financial risks and you will be able to benefit from the high returns offered by the financial markets in the long term, without putting your capital at risk.