This is a summary of the 7 lessons that make up Level 1: Stock Market Investing for Beginnersof our free course: How to Invest in Stocks: Learn How to Buy Stocks, Make Money, and Avoid Mistakes
We covered a lot in Level 1, including exploring why you should invest in stocks, how much money you can make with stocks, and the potential profits from stocks vs. real estate and other investments.
Let’s walk through a brief summary of the major takeaways from each lesson.
NOTE: You can click on any section title to read the full lesson:
We start with the hard fact-based reasons to invest in stocks, and transition into some less discussed (but still important) personal and professional reason to invest:
- Grow your money
- Historically stocks have gone up
- The power of compounding can make your wealth grow
- Money sitting in cash will lose its value
- You’ll make more in stocks than with other investments
- Stocks are easy to invest in
- Some accounts allow you to invest for tax-free profits
- Save for retirement
- Dividend stocks can provide steady income during retirement
- Stocks can provide diversification
- Own part of a company you love
- Vote on company issues you care about
- Profit from industries you know well
- Have fun
We think the stock market is one of the greatest ways to grow your wealth. And when done right, it can require relatively little effort on your part.
When it comes to investing in stocks, there are two simple ways you can make money:
- Collect dividends
- Sell a stock whose price has gone up from where you bought it
Combining these two strategies (buying a stock with high dividends whose price will appreciate) can create incredibly powerful results.
Learn how much the stock market usually returns, the critical role of dividends, how much mistakes can cost you, and the astounding magic of compounding.
- Stocks generally return 7-10% per year over long periods of time.
- In any given year, they could do far better or far worse than that.
- Over longer stretches of time (10-15+ years), the market almost always makes money.
- Pay attention to dividend stocks, because roughly 40% of the stock market’s gains tend to come from dividends (although it varies over time).
- Individual investors may do far better or (more commonly) far worse than the market, depending how good they are at investing and whether they avoid common mistakes.
- The longer you’re invested in the market, the more your money will grow.
- The higher your annual investing returns, the more your money will grow.
- Small improvements in your investing returns can make a HUGE difference in your wealth over time.
- The more you can avoid paying taxes on your investing gains, the more your money will grow.
- Solid stock investment returns compounded over long periods of time create almost magical amounts of wealth.
If you start early, save steadily, and invest intelligently, you can make a LOT of money in the stock market.
Take our “crash course” orientation on the most important basic concepts you need to get started investing
- A shareholder is someone who holds a share of the company and is therefore considered a partial owner.
- Common stock is the normal stock that we all think about when we discuss Apple (AAPL), Amazon (AMZN), or Coca-Cola (KO).
- A stock exchange is a platform on which shares are traded back and forth. It’s a market that connects buyers and sellers.
- An index is a list of stocks meant to capture a common theme.
- An initial public offering (usually just called an “IPO”) is the first time a company makes its shares available for purchase on the open market.
- When people discuss a “stockbroker,” sometimes they mean a person who provides you with trading advice, helps you manage your money, and invests on your behalf in exchange for a fee. Or, they’re simply referring to the brokerage company that places their trades.
- When investors talk about “market caps,” they’re simply referring to how big or small a company is.
- Sector and industry are simply ways of classifying a stock based on what type of business it operates.
- An investing style is a strategy you pursue to try and make money in the market.
- A dividend is a cash payment from a company to its shareholders. You’re handing over some amount of money to buy a tiny portion of a company, and in return, the company will pay you a tiny portion of their profits (since you’re now an owner).
- When it comes to stocks vs. bonds, ETFs, mutual funds, real estate, robo-advisors, etc., stocks generally offer higher returns over time but are also higher risk.
- A bull market is when stocks are going up and a bear market is when stocks are going down. A bear market is defined as a 20%+ decline in market prices over a two-month period.
- A “stock market crash” is a broad term that basically means a violent selloff and a significant decline in stock market prices over a short period of time. Crashes tend to be driven by panic and often draw the attention (and participation) of common investors.
- Research suggests timing the market is extremely difficult for the average investor to do and will likely cause you more harm than good.
- To “beat the market” means your investing gain this year (in percent) was greater than the gain of a common stock market index such as the S&P 500 or the Dow Jones Industrial Average.
- If you buy stocks, it’s extremely likely that you will lose some money on some positions. That’s a standard part of the game. Even the best investors lose money on some of their investments. Sometimes even 30% – 50% of their stocks end up sold for a loss. That said, if you do it right you will make money overall.
- There’s a famous saying in finance, “It’s not what you make, it’s what you keep.” There are taxes on short-term and long-term capital gains as well as dividends. Harvesting losses allows you to avoid paying taxes on capital gains.
Dig into the pros and cons of stocks vs other investment types; plus answer five major questions to decide which is best for you.
- Stocks have had excellent returns over time, making them one of the best long-term investments to maximize your profit (real estate is close behind).
- In the short term, stocks can have volatile drawdowns, so it’s critical you invest for the long term.
- Bonds offer great stability and steady income, but their long-term returns lag stocks by a ton. Buying bonds leaves a ton of potential wealth on the table over time.
- Actively managed mutual funds are a dying breed as their high fees tend to erode their often mediocre performance.
- Passively managed mutual funds (basically index funds) and ETFs can provide an easy and diversified way to invest in stocks for the passive do-it-for-me investor.
- Fees charged by mutual funds, ETFs, and robo-advisors can eat into your long-term returns in a big way.
- There are no long-term fees for investing in stocks, except for trading costs which are often less than $8 per trade or free at some brokerages.
- Buying dividend stocks can provide steady bond-like returns in the form of dividends with the upside of price gains if the stock goes up.
- Stocks, mutual funds, ETFs, and robo-advisors can all decline painfully during crashes, bear markets, or corrections. But over the long term, they have tended to perform very well. Since 1926, there’s never been a 15-year period where the S&P 500 didn’t earn a profit.
- Investing in stocks doesn’t have to take up a lot of your time. Using the right tools and strategy you can earn fantastic profit trading your own stocks by investing as little as 1-2 hours per month.
Understand “market cap” and the six main stock sizes, plus why small stocks have outperformed large stocks by such a huge amount.
- There are many more small stocks on the market than large stocks.
- Nearly 75% of all the stocks on the market are small-cap stocks, micro-cap stocks, or nano-cap stocks. Investors often refer to all three of these groups together simply as “small cap stocks.”
- Historically, small stocks have performed better than large stocks (but they have also been more volatile and erratic in their returns).
- Part of the reason small stocks outperform large stocks is due to less analyst coverage, more mergers and acquisitions, and greater insider ownership.
- Proven investing strategies focused on finding undervalued, high quality, and strong momentum companies have performed better on small stocks than large stocks.
- Small stocks aren’t automatically better than large stocks and come with their own unique risks.
- Smart investors can profit from any size stock if they have a good investing strategy.
Learn how stocks are grouped into sectors and industries, how each sector delivers profit to shareholders, and which sectors are best given the current economy.
- Sector and industry are ways of grouping companies based on what type of business they operate.
- The 11 sectors are Financials, Utilities, Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Information Technology, Communications, Materials, and Real Estate.
- Cyclical sectors are closely tied to the strength or weakness of the broader economic backdrop. If the economy is thriving, companies in cyclical sectors tend to thrive as well. And if the economy is struggling, cyclical sectors and companies also tend to struggle.
- Defensive sectors are not as closely tied to what’s happening in the broader economy. Companies within these sectors tend to perform pretty steadily, regardless of what’s happening in the economy.
Level 2: How to Make (and Keep) Stock Profits
Next, it’s time to take what you’ve learned and put it into action by developing your own personal stock investing plan.
Jump right into the first lesson in Level 2: Lesson 8: Investing Styles & Strategies: 17 Ways Investors Make Money in Stocks