12 Simple Rules to Start Investing in Stocks

How to invest and not lose a shirt doing it? The thing is people who never invested money are afraid to do so. It may look too hard to start. Too complicated. Intimidating. It sounds almost like a casino where you could gamble out your hard-earned money in a very short time. You put money on red, 12, and seconds after that is swooped away in one smooth motion. Next bet, please! Let me tell you that it doesn’t have to be like that. By following simple rules investments could be a rather pleasant experience and quite profitable one as well.

What we learn in school sucks

Part of the problem is the schooling system. They don’t teach kids much there. I am talking about real-life skills and knowledge. What the hell is “interdisciplinary studies” doing in high school? Here is another one: “Cooperative education”. OK “Guidance and career education” maybe something somebody could use later in life. Maybe, probably not. But what about finances? No subject like that in curriculum and in my opinion it is needed, badly. Money matters accompany us from an early age up to the last days of life. We ought to know more and better how to handle our own money. Earn it, protect it, spend wisely, invest with confidence, make smart choices and not to waste it. Nobody wants to be a village idiot and walk into Suckersville where a fool and his money are soon parted!

Let’s examine investing

Investing can take many forms. Real estate, precious metals, mutual funds, GICs, bonds, ETFs … there is no shortage of ways to invest money. For the purpose of this article, we’ll concentrate on real McCoy only, stocks. Stocks represent the most common opportunity to invest money into commercial activity and hopefully earn more. Investing in stocks is open to everyone who wants to put a small effort to establish an investing account. Stocks also allow Average Joe to have a piece of any big company he wants. That is exciting and profitable.

Why more people don’t buy stocks?

There are many reasons and I know what you are thinking:

• How do I even start?
• Opening account must be freaking complicated?
• Is brokerage like a bank, how do you select the right one?
• Process looks intimidating
• Shouldn’t buy stocks be left to professionals only?
• There are more than 10000 stocks in the USA how do I select the right ones?
• Isn’t it like the casino, you bet and lose money?
• Is it like betting odds, you lose some and gain some?

Finally: “F***, I can’t risk my hard-earned money. Forget it”. Slow down buster. We’ll address everything. We’ll list step by step and walk you to the sweet end.

1. Select stock brokerage

First thing first. Find a stock brokerage. Here you should not take an obvious choice, like a bank where you already have a checking account. Usually, they charge too much per trade counting on the idea that you will be too lazy to search for better. Go for a low-cost brokerage like E-Trade, TD Ameritrade, Ally Invest and similar. In Canada, I would go for Questrade or Interactive Brokers if you aim to be an advanced investor. Common for those brokerages is that they are simple and secure to do business with. No monthly fees, just per trade fee of $5.00 to $7.00 which is very reasonable. That means whenever you buy shares or sell them you pay a trading fee. It says that Robin Hood in the USA has no trading fees at all which is great. Most of the brokerages have mobile apps, some don’t. I wouldn’t recommend using mobile apps to trade for beginners. It is easy to make a hasty decision and a small screen may create finger trouble. So at least for starters do your trading from desktop, laptop or tablet.

2. Open account

After selecting a stock brokerage that you like you will want to open the account. Everybody is eligible. Trust me it is not hard to do it, even that it is a bit annoying. Remember you are doing it only once. Go on-line and click OPEN NEW ACCOUNT button. You will be guided through several screens. They will ask a lot of questions. Like the name, address, EIN or SIN, ask about assets, employment, and similar stuff. Don’t get mad at the brokerage for asking those things. They are not pain in the ass, the Government is. Brokerage, banking and everything with money is highly regulated and they must collect those details. When it comes to question, what kind of account you want just to take a regular trading account. Forget everything else for now. Easy peasy lemon squeeze is your choice for the day. Don’t worry, it is a computer on another end. As long as they are not asking you to pee in the cup or provide blood for DNA you are good. On the last page, the computer will congratulate you on your new trading account. Things from here are looking much brighter. You will be provided with login info + your own password. Keep that handy.

3. Fund your account

Now after you joined millions of other investors you can buy any stock offered through your stockbroker. Wait, there is a simple matter of having some money in the account before starting trading. So you must send some money to your new account. There will be several options. A most used one will be to transfer money from your bank account using ACH or check or Interac or something like that. Use the method you are comfortable with. Forget credit cards, they won’t take them. A debit card will do. Usually, the minimum is $100, but for all practical reasons send 500 dollars or 1000 just to kick start your trading. You will want to add later, this is just testing the water. Most of the legwork is already done under item #2 so this is something you are doing for yourself. You are investing your own money. Remember this is not gambling, but investing. You are putting your money to work to bring you more money. Money sitting in the drawer, bank account or mattress is doing nothing for you. It’s actually losing value. Slowly but surely, eaten away but ever persistent inflation. Everybody and his dog know that inflation is your enemy. It is lost value in time. For example $1.00 from 1913 by today lost more than 98.5% of its value. Today 1 dollar is worth only 1.5 cents compared to the “old” dollar. That’s terrible. Read the article about what inflation does to your money HERE.

4. Some ground rules first

By now you must be pretty excited. I remember the same situation some 24 years ago, I was as very excited as well. Ready to buy first stock. You are about to become a real investor. It is not only a nice water cooler story but it means reinforcing financial security and ensuring a brighter future. Now when you become a stock investor you will learn things about companies and economy and currencies and return of investment and many other things you never thought about before. You will likely talk and exchange opinions with your friends, relatives, co-workers and unknown people on forums. You will learn fast and be eager to do it. It is not a chore but may turn into a passion. Never forget that by buying a single share of some company you are becoming a part-owner and that is not a small thing. The stock market is giving you the chance to be part-owner of the Apple, Tesla, GE, Pfizer, Boeing, Raytheon … you name it, you can buy it. A few simple rules first, we’ll elaborate later:

• The stock market is open from 9:30 AM to 4:00 PM every day except weekends and holidays.
• Don’t buy less than maybe 200 dollars worth of stock at the time. Nobody will stop you from buying a single share but the simple reason why not are trading fees.
• You shouldn’t be buying stock with debt instruments, like credit cards.
• Don’t start things up by buying speculative stocks.
• Don’t even try day trading. Leave that adventure for later, maybe never.
• You should set yourself for long term goals. Stock fluctuations in value are normal.
• Don’t fall for crap where “somebody” heard from “friend of the friend” that specific stock will skyrocket soon.
• Do NOT buy Bitcoin or any crypto. It is not investment, it is speculation that will end up badly.

There is sure more but that’s enough for starters.

5. Let’s select the first stock to buy

So you have an account opened. You have a software platform loaded into your device of choice. And there are funds in the account. Before buying the first bunch of shares lets first select one out of 10000+ available ones. We want to make a responsible choice right from the start, right? Even that first order is just to see mechanics of it we don’t want to lose money on it. That means we need a safe investment. I like to drink Coca Cola, how about you? Yes! Every day a 1.9 Billion Coca Cola drinks are consumed and you may be one of the users. So Coca Cola it is! You can’t go wrong with KO. A stock ticker is KO. Type it into the BUY order form. The software will most likely Immediately present the current price and populate other relevant info. If you have 500 dollars ready to buy some stock at a present cost of $53.84 today you will be able to buy 9 shares of KO.

• Remember, you must be logged into the WEB or dedicated trading platform you have access to.
• It has to be during stock market working hours (9:30AM - 4:00PM).
• Enter a number of shares you want, 9 in this case.
• Default purchase is a market, meaning your shares will be purchased at the present price asked by sellers.
• Click OK or BUY

Voila! What do you know, less than a second later you purchased your first shares! That is great and it feels good. You just invested in American iconic company and your future financial well being.

6. What’s next?

Now when you got wind of it, how easy and simple it is to buy stocks you are ready for more action. You should fund your account with more money and decide about investment strategy. Basically, there are 3 types of stock investors:

Day trading

It’s really a job. Complete dedication, focus, a bunch of money, research, fastest live feed from your brokerage. Day trading means buying a stock now and selling it in the next few minutes, or 10 minutes, sometimes even under a minute. Day traders usually watch only 1-3 stocks and look for volatility. Buy at small lows and selling for profit and first peak (opportunity). That peak may be as low as 4 cents or 10 cents. By the end of the day, they are finished. Sold all positions and go to sleep quietly. It is important to say that day traders use tens of thousands of dollars per trade. The simple reason is that they are after small changes expressed in cents so the amount has to be relatively large to produce meaningful gains. Example: any stock that moves in a zig-zag pattern with identifiable bottoms and peaks. Stock cost is $10.00, day trader buys 1000 shares for $10000. The stock goes up to $10.10, day trader sells it immediately. The profit is $100. Not bad for maybe a minute or two of trading effort.

Swing trading

Swing traders would watch more different stocks than day trader. When an opportunity arises and the trader believes that there is an uptrend possible he will buy a stock. A swing trader may keep it for a few days or weeks. His best friend is local or global events that affect certain stock or specific groups of stocks. Swing trader never buys single stock with all money and waits what will happen. He will do that with several different stocks. Also, he will never invest all the money available because you never know when an amazing opportunity comes up. Example: troubles brewing in the Strait of Hormuz. XOM (Exxon) stock goes up as well as all other oil stocks. Swing trader picks up the first bad news, buys XOM and hangs on the position until he feels that crises blew up all steam. Oil stocks start dropping to normal levels but he sold with a profit.

Long term trading

That would be me and millions of other small investors who can not risk and do not want to risk hard-earned money. We invest conservatively, into “safe” stocks and are not selling it at first hiccup. We are into it for the long term, years and possibly decades. Take a word from Warren Buffet, the most recognizable investor in the world. He buys rarely but then keeps stocks forever. Man is the largest single shareholder of Coca Cola, ticker KO. Example: let’s take Johnson and Johnson, ticker JNJ. You buy it today and hold it forever. Why? Do you ever go to the supermarket into a section with household cleaners, baby products, hygienic products? Most prominent stuff there is all made by Johnson and Johnson. 8 out of 10 your wife will pick up something they make. There you have it. The flow of customers all but guaranteed. Very importantly, you as an investor know that they pay dividends, but we’ll come back to that later.

7. How many stocks investors should have?

There are three schools:

1. One preaches very few selected stocks. Warren Buffet does that, but he is a Warren Buffet.
2. The second one is more about diversification, spreading a risk over several industries and various stocks. Let’s say about 15 stocks max.
3. The third teaching emphasizes diversification over many or all industries and buying 40, 60 or more stocks.

Here is what I think about that. To do the first one you must be knowledgeable or just damn lucky to hit jackpot with each stock. I am not that guy. I can’t select 3 stocks and say that they will thrive under any circumstances. That would be all my money (and there is no much) relying on only a few stocks. I can’t take that risk. “B” is my cup of tea. At this time I have 9 stocks and when there is money I add to existing positions, not really buying more different ones. The idea is if let’s say oil is going down that stock or maybe two of them will stagnate or even go down. But I can take it. I’ll not run to sell them but hang onto them and happily watch other ones doing better. “C” would be too much for me. It is not very hard to find 50 good stocks out of 10000 but it is hard to watch your flock for performance. It’s simply too much information and things that could go wrong. Besides that, by diversifying risk so much you are also diversifying a profit. Example: you have $100000 to invest. You find 50 stocks and buy $2000 worth of each. By sheer mathematical probability, some of the stocks will do well, some very well and some will be dogs. If one of them is 40% up you are making $800 on it. But the other 15 stocks are marginally good or even losers. Profits on good stocks will simply be drowned in the sea of other stocks. I am sure that many people will still like this strategy. Maybe the answer is adding more money to gainers while keeping the rest stagnant? It’s not for me, but feel free to test it and explore it. Tell us about it here on Data Driven Investor.

8. Finally, how to select good stocks?

The first rule I like to use is: buy only what you understand! For example, Cisco is a good company, probably. They make network equipment, but what the hell is it? I don’t understand it, I don’t know their products. I am not saying it’s a bad choice by any means, but it’s not for me. But Tyson Foods (ticker TSN) is different. I have to eat every day, 3 times a day most of the time. Other people as well. Tyson is in the food processing industry. Thousands of trucks leave their plants every day delivering food across the Continent. When you go shopping groceries a good chance is that you will buy their meat products. That is probably a good choice. Then there is a Pfizer (ticker PFE). They are in pharmaceuticals. Every man and his dog know that medications are expensive and still most people need them. It is unlikely that people will stop buying medicines. I guess that would be another good stock choice. I think you are getting a point. Stick to what you know and understand. You are a taxi driver and you are sitting in the sam damn yellow taxi cab the whole day long. A Lincoln. But wait, it is the same car for the last 5 years and it has 400000 miles and keeps going. It’s built like a tank. Never left you at the curb. Lincoln is made by Ford company (ticker F). They must be doing something right and maybe deserve your investment, right? You also want to check the fundamentals. This is typical info about stock - company. It shows technical details about a specific stock. Just google company you want to invest in. I am not emphasizing this step since you may not understand most of the parameters, but you will learn in the process. Investing is like a hobby that makes you money It is interesting and engaging. Especially if you are successful that you see your gold nest grow before your eyes.

9. Buy leaders

There is nothing wrong with startups, the only thing is, they are risky. Yes, a new fertilizer producer may be in for big gains, but it may also fail. At the same time, there is Agrium that is a leader in that industry. No brainer. Or you want to invest in the world of big machines. You believe that construction business building highways will take off. You want to look at Caterpillar stock, not some startup from fantasyland. You are positive that electric cars will take off. Tesla comes to mind. The wind is in the wind. Wind turbines everywhere. Get yourself GE. Basically, your long term financial goals are best served with companies that are on the market for a very long time. The ones that survived through thick and thin. Young companies may be promising high returns but can also tank. Much later in the game, you may want to try to risk some money on the speculative side but not now.

10. Kings of all stocks - dividend payers

For every long term investor this is an absolute most important rule that will propel you into being a successful investor: Must pay dividends! In my books, every stock I buy is a dividends payer. If a stock is not paying dividends don’t even consider it. Not only that but I don’t buy a stock that pays less than 4% dividends. There are many solid stocks that pay around 3% but I am a bit greedy there, I want more, so 4% is my absolute minimum. What does that mean? Simply, If you have $100000 invested you will receive at least $4000 cash per year, usually in quarterly distributions. Not only is the investor rewarded for holding a stock of specific company but the company that pays a healthy dividend is paying it for reason! Companies that are in deep doo-doo are not paying dividends. Companies with no profits don’t pay dividends. Companies with a lot of debt can’t pay dividends. New companies can’t pay dividends. You got the picture, right? Only old companies, established, profitable, well managed, have excess profit can pay dividends. In the long term, dividends make all the difference in the world. Companies that pay dividends do it like clockwork. Usually quarterly but some do it monthly. If you have even a single share of some stock you will get a dividend. How great is that? More shares you have dividends payouts will become significant.

11. You can have your cake and eat it too!

In my opinion, the best stocks to have are REITs and utilities. Every investor, new or old should have some or all of those. Here is why: REIT = Real Estate Investment Trust. It is a special kind of company that has apartment buildings, plazas, business buildings, malls, medical buildings, parking lots and whatnot. The company is regulated in a special way. It has to pay up to 85% (generally accepted figure) of income, which is basically renter’s money to the shareholders. Every month. How great is that? YOU get paid a part of rents straight to your brokerage account. Most of the people dream about having some condo or house and rent it out. But remember you must buy a damn thing in the first place. Put down at least 25%, mortgage out the rest. Look for tenants. Vet them. Repair and renovate the place. Collect checks. Handle small or big repairs. Evict non-payers … and more. On the other hand, you buy as much REIT stocks as you want with funds available and they do the rest. That is what they do, manage properties. You get paid. And it is maybe a hefty dividend, in 6% - 8% range. UTILITIES = very similar to REITs you should have utilities in your portfolio. You are at home. Turn on the light, you are using a power feed handled by the power utility. Then you go to tap and pour a glass of water. It is provided by your water utility. Furnace turns on, there is your gas utility at work. You can not live without utilities! Even when you are in Florida on vacation and not using any of those utilities at the moment you are paying monthly subscription kind of payments to each of them to keep things alive. They are smart, they have you by the balls. They can put a lot of shit into the bill and you will swallow it and pay it. You simply can’t not to. You will not buy a new iPhone or go ski in Colorado or get new shoes but you WILL pay utilities. Find stock of your local utilities and buy it. Not only local. Get any. Like Florida FPL or DUK for Duke Energy. It’s all good. They pay dividends and likely will never, ever, go out of business.

12. Use autopilot, stupid!

Finally last advice. If Tesla has autopilot so could you. Not only could but should. Remember item #10 and #11? You follow the simple rules and now dividends start coming in. Then you call your brokers and say magic words: “Please enroll all my eligible stocks into DRIP, ciao!” DRIP is a Direct Reinvestment Plan. Every stock that you have, and remember it should be all of them, sends you dividends. For example, you get 85 dollars for having a Duke energy and stock is currently $20.00 a brokerage computer will buy 4 shares for you automatically as soon as money lands into account. It can’t buy a fractional share so $5.00 will remain as a cash in the account. You can buy manually whatever you want when you notice that there is enough. Example: you have 100 shares of some company. Dividends arrive and the DRIP computer buys you 3 shares. Now you have 103 shares. Next month (REIT, remember, pays monthly) comes new dividends and now it’s paid on 103 shares. You get 4 more this time. Now you have 107 shares. Next month … same thing … forever. It’s your personal money-making machine. It will be running forever and you don’t have to do a damn thing. Just watch your holdings grow. At any time you can sell some of the stocks and withdraw the money. It’s your show and you are in the driver’s seat! Also, it is important to know that DRIP shares are purchased with no trading fees. When you are trading manually you must pay trading fees when buying or selling a stock. Imagine having 10 different stocks and all of them paying dividends (good man!) and all of them get reinvested. That would be 50 - 70 dollars for 10 trades if you were to do it manually. But not with DRIP, “Look ma’ no hands”, no fees.

Conclusion

Everybody should be involved in investing. They didn’t teach you any of that in basic school, neither in high school, none in college or university. The government wants sheep, not a financially educated population. Like that they can walk you thirsty over the water and you will take it. It is time to educate yourself. Remember, it is your own money, didn’t fall from the trees. Come hell or high water by investing in stocks that money will work for you and will earn more money. Think of children to put through schools, get a decent life, live in a nice place, think of retirement. It is inevitable. Starting investing in stocks may be the best and most wise financial decision you ever made. You’ll thank me later :)