How to Buy Stocks – A Quick Guide for Beginners

Disclaimer: This post does not constitute financial advice. Author has no position in any stocks mentioned. Do your own due diligence before making an investment.

Buying stocks is easy. You only need three things.

1. Money

2. Broker

3. Ideas

Number three is the trickiest, and I can’t tell you which specific stocks to buy, but I can point you in the right direction.

#1: The Money

How much do you need to invest? Not much really. In fact, if you’re just starting out, the less you have the better.

If you haven’t watched your stocks plummet by 50% for no good reason, then you haven’t built up any mental fortitude. Being able to remain calm during a market downturn is essential to investing.

Warning: The stock market will, at some point, crash by 50%. This is not your fault. You are not a bad investor if this happens. You are not stupid. Sometimes, Earth just sucks. War, terror, disease, economic turmoil. Maybe one day if we’re really lucky we’ll get hit by a giant meteor.

Losing 50% of $500 is no big deal. Losing 50% of $100,000 can be soul crushing.

When it comes to investing, you should mostly forget about the dollar amount, and focus on the % return.

The return is everything. With a solid rate of return, $1,000 can turn into $5,000 fairly quickly. $5,000 turns into $25,000.

$25,000 turns into $125,000.

So, you see, you don’t need a ton of money to get started. What you need are good stock picks. Great ideas that pay out big time.

#2: The Broker

Since you have some money, you’ll also need a broker. A broker is someone that holds the stock for you in a special account. There are different types of accounts. Regular investment accounts, retirement accounts, tax-advantaged accounts, etc. These vary per country.

If you’re new to investing, tax-advantaged (or tax-free) accounts are great to start. Mainly because you don’t have to worry about capital gains during tax season.

It can be daunting to open your first account at a broker. But they have representatives to help you. Just say you want a basic account. At this point you don’t need margin, options, or short selling.

You’re going to focus on buying great companies and holding them for a long time. This is the easiest and least-stressful way to invest in stocks.

There are lots of different brokers to choose from. Your bank might even be a broker. Most banks will offer you a brokerage account, although the fees will be higher than a specialty or digital broker.

Don’t worry about fees. That’s not what’s going to sink you.

Fees only matter if you’re buying a tiny amount of stock or doing large foreign currency transactions (like in the millions.)

Your broker might charge you $8 to buy some shares in a company. It’s usually a flat rate. If you only buy $100 in stock, that’s an 8% fee. That’s huge. It could take you an entire year to recoup that 8%.

But if you were to buy $1,000 in stock, then it’s only 0.8%. The fee percentage keeps dropping the more stock you buy.

Don’t be afraid of fees. They only start to add up if you’re doing a lot of trading. Which you shouldn’t be. They’ve done some studies on this, and it’s always the same result. The more people trade, the less money they make.

That’s why buying and holding is the best strategy.

Not forever mind you. But we’ll talk about that now.

Your job is to buy low and sell high. Don’t worry about timing this perfectly. It’s almost impossible. Buying a stock at $9 and watching it drop to $7 is annoying, but that’s part of the game.

#3: The Stock

While it’s true you’ll be buying stocks, your job isn’t to focus on great stocks, it’s on great companies. There’s a big difference. Sometimes a stock can jump 100% on rumors. Or manipulation. Or fake news. That’s a great stock, but it might be a bad company.

In the long run, great companies will have great stock prices.

It’s also true that in the long run, bad companies will have bad stock prices.

So how do we evaluate companies?

This is tricky and there is no perfect answer because every company is different. The metrics that are important to fleet of natural gas tankers are different from an emerging tech company.

Companies are like people. They start out as babies, experience growth spurts, turn into adults, and then retire.

Baby -> Teen -> Adult -> Retiree

The largest stock market gains come from buying a company as a Baby and selling it either as a Teen or as an Adult.

There is no real money to be made in buying Adults and selling them as Retirees.

Adult and Retiree companies are usually huge. Stocks like IBM, Apple. Royal Bank. Wal-Mart. McDonald’s.

They’re giants. They have humongous market caps.

Whenever you hear people say, “Tesla is a 750-billion-dollar company,” they’re talking about market cap. It’s a simple calculation. You simply multiply the number of outstanding shares by the current share price.

Example: If Widget Corp has 1000 outstanding shares, and each share is $1. Then Widget Corp has a market cap of $1,000.

Don’t worry about having to calculate this. If you visit a stock on a financial website, then it’ll be in the stats.

Like this:

There are lot of other stats there. Most are irrelevant to the long-term success of the company. They’re just numbers based on current financial information or based on the current demand for the stock.

These numbers are a reflection of the current status of the company, not where it’s going to be in 2-5 years.

Imagine someone said, “Deborah is 5’3, therefore she will go bankrupt at age 32.”

That would make no sense.

Same with, “Deborah is 127 pounds, therefore she will be very successful in life.”

You can’t draw conclusions about a company based on a bunch of (mostly useless) numbers.

Stocks like Wal-Mart are Adults. Stocks like this are safe. They’re comfortable. They aren’t going to drop as much during a market crash.

Wal-Mart currently has a market cap of $392 billion. They have about 4,730 stores. Their revenue is about $559 billion.

Now let’s say you love Wal-Mart and want to buy the stock. The ticker symbol is $WMT. You call your broker and buy $1,000 worth of WMT, which is about 7 shares @ $137/each.

Then you wait. Six months go by and the stock is now $138.50.

Now you’re bored and discouraged.

“I thought you said said I could turn $1,000 into $5,000 fairly quickly!”

True. But not investing in Wal-Mart.

You will never make killer returns buying stocks like Wal-Mart. The people that made killer returns invested in Wal-Mart when it was a baby. (During the 1980s.)

For Wal-Mart to double their revenue next year, they would need to open up a ton more stores. Since it took them nearly than 60 years to get to 4.7k, this is unlikely.

The people who invest in Adult companies are people who don’t want to ever lose their money. They’re fine not seeing big gains. In exchange, they don’t see big losses either.

The chance that Wal-Mart goes bankrupt in the next five years is close to zero.

The chance that some upstart electric vehicle company goes bankrupt in the next five years is much higher.

Say you’re buying bananas that you want to eat today. If it’s brown then it’s too ripe. If it’s green, then is hasn’t ripened enough. Either way you don’t want to eat it.

A Baby company.

Most of our consumer choices are like that. We buy things in the morning that we want to use in the afternoon. To be a successful investor you need to break out of that habit. You need to buy green bananas in the morning, and then eat them five years later.

So, if you want big returns, you need to find Baby stocks. Then you need to buy and hold them for a long time. Long enough for them to transform into Teens and Adults.

Then you can sell them and re-invest the money into new Baby stocks.

Rinse and repeat until you have enough money to do anything you want.

Finding Baby stocks is not too difficult. Just look for exciting, new(ish) companies with a market cap under 5 billion. The lower the market cap the bigger the potential upside.

A company that’s worth 250 million is just one big contract away from doubling or tripling in value. That contract could come at any minute. They could land two of those contacts next year. Four the next.

It’s easier for a tiny company to turn into a medium one than it is for a giant company to turn into a behemoth.

Not that it can’t be done, but it’s rare. Apple did it. So did Amazon. They just keep growing. But eventually this growth will stop and they will transform from Adults into Retirees.

It is a fundamental law of physics that all systems eventually collapse. Companies are not immune to this. At one point Sears was a major retailer and the anchor store in a lot of malls. Now they’re extinct. Gone to dust.

Remember Blockbuster Video? They used to be everywhere.

But they stopped innovating and they started to decline. People started borrowing movies through Netflix. They started downloading them. Streaming them. It was easier. Faster. Cheaper.

Blockbuster had no chance. They never made it to retirement. They died as an Adult company.

That’s one of the dangers investing in Adults or Retirees. It’s possible they’re outdated. These stocks seems safe because the share price has been stable for years. But stability is not good. Stability is not growth. Stability is being marooned on a tropical island and making no attempt to escape. Growth is building a raft and putting out to sea. Yes, you might die. But the upside is tremendous.

That’s the great thing about investing in Baby companies. You get to put a lot of rafts out to sea. Yes, some of them will sink. That’s okay. But the ones that don’t will pay for the ones that do.

$1,000 invested in Amazon in 2010 is worth $24,000 today. If you had invested $1,000 in Amazon, and four other companies that went bankrupt, you’d still be up $19,000.

If video games like World of Warcraft are more your thing, here’s a different analogy.

Buying a company like Wal-Mart is like investing in a Level 57 character and the level cap is 60. It takes way more experience to reach level 58 than it does for a character to go from level 5 to level 10. It takes less time as well.

Going from levels 5 to 10 is an increase of 100%

Going from level 57 to 58 is an increase of 2%.

If you want the big % gains, then you to invest in low-level characters. Baby companies with a small market cap, and lots of potential.

Lucky for you, thousand of these unknown, low-level Baby companies exist today. In fact, there are way more Baby companies than there are Adults.

Investing in companies with a small market cap can be a bit scary. These companies are tiny and relatively unknown. They might be extremely niche or have a small product line. But remember, all companies start out like that.

When McDonald’s got started, all they sold was hamburgers, fries, milkshakes, and soda. Now their menu has about 150 items on it.

Growth can take a while.

It’s good idea to diversify your portfolio if you’re a new investor. Great investing ideas can be rare. You’ll sometimes see stories of people putting all their money into one stock and making millions. This is not a typical result and is closer to buying lottery tickets than investing.

Instead of buying one company, buy five, or 10, or 20. The more companies you buy, the more research you’ll be doing. Research makes you smarter. It’s also easier to sleep when you own more companies.

People who own a single company will check that stock every day. Their mood will change with the stock price. This is not healthy.

On the flip side, it’s almost impossible to track the day-to-day movements of a large basket of stocks. But even if you can manage that, it’s still a bad idea. Do you check your green bananas every 30 minutes to see if they’ve ripened yet? Of course not. You just leave them on the counter and ignore them. Eventually you notice that they’re yellow and ready to eat.

This is the relaxing way to invest.

To recap:

1. Buy cheap, young, good companies with lots of potential.

2. Hold them for a long time.

3. Ignore the day-to-day price movements.

4. Make lots of money. (Hopefully.)

5. If you want to keep going, sell your Babies that have turned into Adult and Retiree companies and buy new Babies.

That’s all there is to it. Good luck.