What To Know Before Diving Into Stocks: A Beginner’s Survival Guide

Listen, I’ve been there – staring at stock charts feeling completely overwhelmed while everyone on TV talks about “bulls” and “bears” like it’s totally normal conversation. If you’re thinking about jumping into the stock market but aren’t sure where to start, you’re in the right place. Let’s break down what you really need to know before putting your hard-earned money into stocks.

Understanding the Basics: What Are Stocks Anyway?

Before you start throwing money at fancy stock tickers, let’s get clear on what stocks actually are.

Stocks are basically little pieces of ownership in a company. When you buy stock, you’re buying a share of that company’s assets and earnings. Companies sell these shares initially through what’s called an Initial Public Offering (IPO) to raise money to grow their business. After that stockholders can buy and sell these shares on stock exchanges.

The price of stocks goes up or down mainly based on:

• How people expect the company to perform financially in the future
• Supply and demand in the market
• Overall economic conditions
• Company news and developments

Types of Stocks You Should Know About

Not all stocks are created equal! Here are the main types you’ll encounter

Common Stock vs. Preferred Stock

• Common Stock: Gives you voting rights at shareholder meetings and potential dividends. Most people invest in common stock.
• Preferred Stock: Usually doesn’t include voting rights BUT you get dividend payments before common stockholders and have priority if the company goes bankrupt.

Based on Investment Strategy

• Growth Stocks: Companies expected to grow faster than average. Think tech startups. They rarely pay dividends cuz they reinvest profits for expansion.
• Income Stocks: These pay consistent dividends. Utility companies often fall into this category.
• Value Stocks: Have a low price-to-earnings (P/E) ratio, meaning they might be undervalued. People buy these hoping the price rebounds.
• Blue-Chip Stocks: Shares in large, well-established companies with solid growth history. These generally pay dividends and are considered less risky.

10 Essential Tips Before You Start Investing

1. Buy the Right Investment (But It’s Harder Than It Sounds)

Finding the right stock is TOUGH. Anyone can look backward and see which stocks performed well, but predicting future performance is a whole different game.

As Dan Keady, former chief financial planning strategist at TIAA points out “When you start looking at statistics you’ve got to remember that the professionals are looking at each and every one of those companies with much more rigor than you can probably do as an individual.”

If you’re determined to pick individual stocks, you’ll need to analyze:

• Earnings per share (EPS)
• Price-earnings ratio (P/E ratio)
• Management team quality
• Competitive advantages
• Balance sheets and income statements

And that’s just the starting point! Don’t just buy stock in a company because you like their products.

2. Consider Avoiding Individual Stocks as a Beginner

We’ve all heard stories about someone making it big on a single stock pick. What they DON’T talk about are all the losses they’ve had too!

“What they forget about is that often they’re not talking about those particular investments that they also own that did very, very poorly over time,” says Keady.

Tony Madsen, founder of NewLeaf Financial Guidance, adds: “There are tons of smart people doing this for a living, and if you’re a novice, the likelihood of you outperforming that is not very good.”

Instead, consider index funds – these are mutual funds or ETFs that hold shares of many companies, giving you instant diversification.

3. Create a Diversified Portfolio

Don’t put all your eggs in one basket! Diversification is key to reducing risk.

With an index fund based on something like the S&P 500, you automatically own stocks in hundreds of companies across various industries. This means if one company tanks, it won’t destroy your entire portfolio.

“It may not be the most exciting, but it’s a great way to start,” Keady notes about index funds. “And again, it gets you out of thinking that you’re gonna be so smart, that you’re going to be able to pick the stocks that are going to go up.”

True diversification means spreading investments across:

• Different companies
• Various industries
• Multiple asset classes (stocks, bonds, etc.)

4. Be Prepared for Downturns (They WILL Happen)

The stock market fluctuates – sometimes dramatically. You NEED to be mentally prepared for losses, or you’ll end up buying high and selling low during a panic (the exact opposite of what you should do).

“Anytime the market changes, we have this propensity to try to pull back or to second guess our willingness to be in,” explains Madsen.

Remember: Short-term volatility is the price you pay for long-term returns. If you want guaranteed returns, look into high-yield CDs or other fixed-income investments instead.

5. Try a Stock Market Simulator Before Risking Real Money

Wanna practice without risk? Use a stock simulator!

“That can be really helpful because it can help people overcome the belief that they’re smarter than the market, that they can always pick the best stocks, always buy and sell in the market at the right time,” Keady suggests.

Many free apps and websites let you practice investing with virtual money. It’s a great way to test your strategies and get comfortable with how everything works.

6. Consider Using an Online Broker or Robo-Advisor

When you’re ready to invest real money, you’ll need a brokerage account. These can be opened quickly online and many are beginner-friendly.

If picking individual stocks feels overwhelming, consider a robo-advisor. These automated services invest your money in ETFs based on your goals and risk tolerance. They’re a great middle ground between DIY investing and hiring a financial advisor.

7. Stay Committed to Your Long-Term Portfolio

Successful investing requires patience. Try to ignore daily financial news and avoid checking your portfolio too frequently – it can lead to emotional decision-making.

“Some of the news cycle, at times it becomes 100 percent negative and it can become overwhelming for people,” Keady points out.

I recommend setting a schedule for when you’ll review your investments – maybe quarterly. This helps prevent panic-selling during market dips.

8. Start Now, Not When the “Time is Right”

Trying to time the market perfectly almost never works. The best time to invest was yesterday; the second best time is today.

“One of the core points with investing is not just to think about it, but to get started,” says Keady. “And start now. Because if you invest now, and often over time, that compounding is the thing that can really drive your results.”

Time in the market beats timing the market almost every time.

9. Avoid Short-Term Trading

Day trading might look exciting, but research shows most short-term traders lose money. You’re competing against professional investors and sophisticated computers.

Also, frequent trading creates taxes and fees that eat into returns, even with “zero commission” brokers.

“When I’m advising clients… anything under a couple of years, even sometimes three years out, I’m hesitant to take too much market risk with those dollars,” Madsen advises.

For short-term needs (under 3-5 years), consider safer options like high-yield savings accounts or CDs.

10. Keep Investing Consistently Over Time

Building wealth happens gradually through consistent investing. The real magic comes from:

• Regular contributions
• Reinvesting dividends
• The power of compound growth

Many brokerages allow you to set up automatic transfers and investments. This removes emotion from the process and ensures you’re continuously building your portfolio.

The Potential Benefits of Stock Investing

When done right, investing in stocks offers several advantages:

• Potential Capital Gains: The value of your stocks can increase significantly over time
• Income Through Dividends: Some companies share profits with shareholders
• Tax Advantages: Long-term capital gains are taxed at lower rates than regular income
• Inflation Protection: Stocks have historically outpaced inflation over long periods

The S&P 500 has generated about 10% annual returns on average over the long term, including dividends.

The Real Risks You Should Be Aware Of

Let’s be real – investing always involves risk. Here’s what could go wrong:

• Share Prices Can Fall: Even to zero in some cases
• Bankruptcy Risk: If a company goes broke, stockholders often get nothing
• Volatility: Stock values fluctuate, sometimes dramatically
• Dividend Uncertainty: Dividends can be reduced or eliminated

How to Actually Buy Stocks

Once you’re ready to invest, here are your main options:

1. Through a Broker: Either discount online brokers or full-service brokers (more expensive but offer advice)

2. Direct Stock Plans: Some companies let you buy shares directly from them without a broker

3. Dividend Reinvestment Plans: Automatically reinvest your dividends to buy more shares

4. Stock Funds: Mutual funds or ETFs that hold many stocks

Do Your Homework Before Investing

Before buying any stock, do your research:

• Read Annual Reports: Learn about the company’s business activities, profits or losses, and future strategy
• Check the Prospectus: This formal document gives details about the investment
• Review Stock Reports: Many websites and services offer analysis of stocks
• Verify Professionals: Make sure anyone selling investments is properly licensed

Questions to ask before investing:

• Is this investment registered?
• Have there been complaints about this investment?
• Is the person selling the investment licensed?
• What fees am I paying?

My Final Thoughts

Getting started in stocks can feel intimidating, but it doesn’t have to be. Start small, focus on learning, and don’t expect to get rich overnight.

I personally think index funds are the smartest place for most beginners to start. They give you instant diversification and remove the pressure of picking individual winners.

Remember that investing is a marathon, not a sprint. The people who succeed are the ones who develop a solid strategy and stick with it through market ups and downs.

Now go forth and invest wisely! Your future self will thank you.

Investing $1,000 a month for 30 years could grow to over $1.4 million with an 8.27% annual return, or around $800,000 with a 5% return. Your total contribution over 30 years would be $360,000 ($1,000 x 12 months x 30 years), and the remaining value would be from compound earnings.

The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.