Welcome to the complete guide to learn how to invest in the stock market. I am going to show you all the main concepts to understand what is the stock market and how you can make money investing in stocks.
Before reading this article I recommend you to read my initial guide about stocks, where I lay out the foundations on the stock market.
In this guide you are going to learn everything you need to start investing in the stock market today.
Even if you know nothing about the stock market, when you finish reading this guide you will be able to start earning money with it.
You don’t believe me? Read the whole guide, and if you finish it and you are still not sure how you can get yourself started on the stock market, ask me your doubts in the comments section.
Few years ago I knew nothing about the stock market, it was a stranger to me. I remember reading news about people earning millions in the stock market and thinking “that must be very difficult, only very smart people after years of study can earn money with stocks”.
I used to think stocks were too risky, and I had to stay away from them.
Funny enough, now I just want to have them as close as possible 🙂
- Ending Myths about Investing in the Stock Market
- Initial concepts about the Stock Market
- How to Start Investing in the Stock Market
- Why the stock market is the best option to invest your money?
- More about investing in stocks
Ending Myths about Investing in the Stock Market
Let’s start this guide by talking about some myths we have all heard on the stock market, and how they are not true:
- You don’t need to have a PHD in Quantum Mechanics (be a genius) to invest successfully in stocks
- Anyone can earn money in the stock market
- Stocks are not so risky. When you invest for long term periods, you will most likely earn money
- You will not become rich overnight. It will take many years
Well, needless to say that I am not a genius, and I definitively don’t have a PHD in Quantum Mechanics. I am just a regular guy like you. The only difference between you and me (now) is that I have seen the wonders that the stock market can do, and in this guide I am going to share all of them with you.
As I explained in my stock market journey post, I started investing in the stock market by chance. You can read all the details here, but it took me some years to understand the stock market. I am not going to lie to you, it wasn’t easy. The huge amount of contradictory information that you can find on internet didn’t help me.
But I got here, and now I can honestly say that the stock market is the best vehicle to accumulate wealth. Stocks are my main investment on my journey to financial freedom.
If you want to invest in something, invest in stocks.
In this guide I am going to show you how to invest in the stock market, even if you currently know nothing about it. Even if you don’t know what the stock market is, when you finish this guide you will know what you need to do in order to earn money with the stock market.
Initial concepts about the Stock Market
The first step of the way is to learn the basics about investing in stocks. The first question that comes to mind is “what is the stock market?”.
Let’s find out!
What is the Stock Market?
On the Wikipedia we can find the following definition:
It is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses
Yeah, I know, you still don’t understand what the Stock Market is. Let me give you an example that will clear your doubts.
Gonzalo is the proud owner of a burger restaurant called “Burgalo“. His restaurant is a profitable business, and its revenue has been growing for several years. So, he values his business in 400,000€. He decides to open a second restaurant, and for that he needs 200,000€. Where can he get such a big amount of money?
That’s the first option that comes to Gonzalo’s mind. But the bank is not sure if his business will flourish, so it categorises the loan as “high risk”, and sets an annual interest rate of 15%.
Gonzalo doesn’t want to have a debt of 200,000€ with a 15% annual interest rate. That would put him in a risky situation. If his second restaurant does not work, he will have a big debt, risking his entire company.
Due to this, he decides to search for an alternative.
Find a partner
That’s it! He will find someone who can lend him the money, in return for a part of the company or a percentage of the earnings. The debt of his company will be 0, so there is no risk, the idea is perfect!
After some months he realises that sometimes perfect ideas are not so. He doesn’t know many people who have 200,000€, and the few he knows are not willing to invest so much money on his company.
Find many partners -> Create shares
He realises that he can divide his company into many small shares. As a result, each partner will only have to pay a small price. He sells 1000 shares of his company at 200€ each.
200€ is a much more affordable amount, and in a matter of days all the shares are sold out. Now we are talking business!
Because he is going to invest the 200,000€ he has obtained selling the sahres in the company, the total value of the company is now 600,000€ (400,000€ + 200,000€).
After selling the shares and investing the 200,000€ in the new restaurant, Gonzalo has the same net worth, 400,000€. The difference is that this amount now represents 67% of the company, while the new investors own 33%.
Gonzalo is very happy with the deal. He still has full control over the company’s fate (owns more than 50% of the shares), he has money to open the second restaurant, and he has no debt. Horray!!!
The stock market is a place where company owners can sell part of the companies so they can get money to fund new ventures in the company.
This allows anyone to buy a small portion of those companies, hoping that they will grow, and their share price will grow as well.
As you can see, there is nothing scary in the stock market. It’s a place where people buy and sell small parts of companies.
What is a Stock?
A stock is a small part of a company. Stocks are also known as shares. In the previous example, the 1000 shares that were created are stocks.
Each of the new 1000 share holders owns a 0.033% of Burgalo, holding all of them a total of 33%, being each share worth 200€. They now own a part of the company, and hope that the new restaurant will work as well as the first one, so the company increases its value and their shares increase as well.
When you own a part of a company, you expect the company to perform well. In summary, you expect the company to increase its sales (also known as revenue) and to reduce the costs, so the earnings can grow year after year.
When you own a share, you have a part of a company. That’s why it’s important to own shares of companies that you know, and that you expect to increase their earnings over time
The number of a company publicly traded stocks are also known as outstanding shares.
Once a company enters in the stock market, the number of outstanding shares does not usually change significantly. I will talk about that in the advanced guide of the stock market. For the time being, you don’t need to worry about it.
Why the price of a stock goes up or down?
One important part of this stock market guide is to understand how the price of a share behaves. The only sure thing about the price of a share is that it will either go up or down 🙂 (I hope you like silly jokes…)
As I have explained before, the stock market is a place where many people buy and sell small parts of companies, also known as shares. The price of each share depends on the offer and the demand. It works in the same way as with any other good.
If there are many people who want to buy one company, there will be an unbalance between offer and demand, and as a result, the shares of that company will go up.
If there are many people who want to sell one company, there will be shortage of demand, and the price will go down.
Of course there are many more variables and it is more complex than that, but I believe that it’s a good way to give an initial idea of it.
Since the shares represent a part of a company, the price should follow the performance of the company. And that’s what will happen in the long term.
However, in the short term the stock market is volatile, so the price will fluctuate, going up and down. These fluctuations are mainly driven by people’s mood, which depends on the financial news they hear on TV and read on newspapers.
Stock Price Example
In order to make it clear, let me grab one great definition from Benjamin Graham:
In the short run, the market is a voting machine, but in the long run it is a weighing machine
This means that in the short term, people will drive the price of the stock market depending on their mood. But, in the long term, it will be the performance of the company what will determine the price of the share.
The lesson to learn is that you should not pay attention to the fluctuations of the price.
Above graph illustrates perfectly how the mood of the people can influence the price. In 2018, between October and December, people were scared of a new recession. Consequently, the price of the stocks went down. The Bank of America share price reduced 30% (from 32$ to 23$).
Was there any reason for that? Did the company announced a reduction in revenue or earnings?
No. The company had been growing steadily for several years, but people didn’t take that into account. They were scared of a potential recession, so they pushed the price down.
This is a good example of erratic and irrational behaviour of the stock market. You should not pay attention to these short term fluctuations, but rather believe in the long term performance.
Can you earn money investing in the Stock Market?
Well, if you have reached to this point of the stock market guide, congratulations. You deserve a pat in the back. Go ahead and give it to you. Horray!!!
Once you have learned not to be scared by the price fluctuations, you are one step closer to invest successfully in stocks.
Yes, you can earn money in the stock market. You, and anyone can earn money in the stock market.
As I said at the beginning, you don’t need to understand Quantum Mechanics to earn money with shares.
To point this out, I am going to focus on the S&P500 Index. This index aggregates the 500 biggest US companies. When you invest in the S&P500 Index, you are investing in the whole economy of the United States of America.
The S&P500 Index has averaged a 9% annual return over the past 150 years. So, if you invest in this index periodically, in the long run you will obtain a 9% annual return. That’s amazing!
I will talk more about this in the index funds section (section 3.1) down below.
What are the Dividends?
I am sure you have heard many times the word dividend, but you never fully understood what it mean.
The dividends are the earnings of the company that are paid to the shareholders
Many companies reward the shareholders by giving them part of the annual earnings of the company.
Dividends are a good and reliable source of income
Some companies pay them and other companies don’t. It depends on if the company believes that it can find a better use for the earnings. For example, to invest in projects that will increase the value of the company, which will in turn increase in the share price.
Not paying dividends doesn’t mean that the company is not a good investment. But, I prefer companies that pay dividends, since you receive income periodically, earning money with the shares since the day one.
If you want to learn more about the dividends, just wait a little bit for my advanced guide of the stock market to be ready!
How can you buy and sell shares?
In order to buy and sell stocks you need a broker. A broker is a company that allows you to buy and sell shares of any company that is publicly traded.
Many years ago you had to go to the Stock Exchanges in order to be able to buy and sell shares. Fortunately for us, nowadays it’s much easier. Thanks to internet you can find a broker online, where you can buy shares with just one click!
There are many brokers that let you operate in the stock market. Most of the banks provide this service. I do not recommend to use your bank since the commissions they will charge you will be very high.
The fees that you will pay will depend on the type of investment that you will do. On Section 3 I explain the different types of investment that you can do in the stock market.
When selecting a broker, it is very important that it is regulated by a financial authority.
Unfortunately there are many scams on internet, so you need to make sure that your money is on “safe hands”.
One of the most important Financial Authorities is the Financial Conduct Authority, which is based in United Kingdom, also known as FCA. They have a register where you can check if the broker you are interested in is regulated or not.
The importance of the fees
Another important aspect is the fees that your broker charges you for buying/selling shares/funds. These fees are money that you are not earning, and over time, they can have a huge impact on your portfolio. Due to this, it’s important to pick a broker that has low fees.
It’s very important to review the fees that the broker charges and pick one broker that offers the cheapest fees for the investment products that you are going to use.
To invest in the stock market I use the broker DEGIRO, which has very low fees.
Start to invest in the stock market with this great broker. Register with DEGIRO in the banner above or with the link here!
This broker is fully regulated. It is a authorised by the Financial Conduct Authority (FCA) and the Netherlands Authority for the Financial Markets.
You can learn more about this broker with my super guide of DEGIRO.
Do you need a lot of money to start investing?
The answer is no. You can invest in the stock market with any amount of money.
It’s important to highlight that your returns (percentage wise) on the stock market are not linked to the amount of money that you invest. This is key. You don’t need 1 million€ to earn a 10% annual return.
Your returns will not change if you invest more money. You will get the same return (%) investing 1000 pounds than investing 1 million pounds.
Depending on the investment product you decide to go for, you will require a little bit more or a little bit less.
For the types of investments that I will cover, you can start with as little as £100. Since some of the fees are fixed, I would recommend you not to start with a lower amount. But it will depend on the type of investment you buy.
Can you invest regardless of the country where you live?
Yes, you can invest in any stock/company regardless of your country of residence (as long as your country allows you to do so, which 99% of countries do). For example, I live in United Kingdom, and I have shares from United States of America, Europe, Japan… And also from United Kingdom 🙂
When you invest in a foreign currency you need to take into account the impact of the exchange rate.
The exchange rate is the rate at which one currency is exchanged by another.
For instance, right now 1£ equals to 1.16€ . As a result, if I exchange 1000£, I get 1160€.
The dangerous part of investing in a foreign currency is that the exchange rate is not fixed, it changes over time. This will impact the value of your investment in your local currency.
On the graph above you can see that in the past 3 years, the £ to € exchange rate has varied a lot. The maximum value was 1.45, and the minimum was 1.05. That’s a difference of 28%.
Currency Exchange Impact Example
Let’s suppose that I live in Spain and I want to invest 1000€s in an United Kingdom company.
Firstly, I exchange my 1000€, obtaining 690£s, since it’s October 2015 and the exchange rate is 1£ = 1.45€.
After 4 years, on August 2019, I decide to sell my investment, since it has accumulated a 30% total gain. Consequently, my initial 690£s are now 897£s (690 * 1.30 = 897£s).
The exchange rate now is 1£ = 1.05€. I convert from pounds to euros, and I obtain 942€.
After 4 years and obtaining a 30% return on my investments I have lost money. Why?
Because the pound has devalued a lot against the euro, and my euros are now worth less pounds.
This illustrates the risks of investing in a foreign currency.
On the other hand, it can also happen the other way around, and you can earn money thanks to the exchange rate variation.
If you invest periodically, in the long run the effect of the exchange rate should be compensated, since it fluctuates. But there is no guarantee, so you need to monitor it and adjust your strategy accordingly.
How to Start Investing in the Stock Market
We have now covered all the basic concepts of the stock market. Now, this stock market guide is going to get more interesting! Let’s talk about how you actually invest in the stock market.
There are many ways for you to invest in stocks. I am going to cover the three ones that I have used more and I consider the best ones:
- Index Funds
- Equity Funds
- Pick your own shares
They are sorted in order of complexity, meaning that the investor should spend enough time learning and investing on each category before consider investing on the next one.
I believe this should be the first stop for anyone who starts investing in the stock market.
What are Index Funds?
I believe this should be the first stop for anyone who starts investing in the stock market.
What is an index fund? If we take a look at our friend Wikipedia
An index fund (also index tracker) is designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. Those rules may include tracking prominent indexes like the S&P500 or the Dow Jones Industrial Average.
In summary, an index fund mirrors one specific investment portfolio.
The main advantage of index funds for investors is they don’t require time to manage, since you don’t have to spend time analysing various stocks or stock portfolios.
Another clear advantage is that the index funds have very low fees, compared to other investments in the stock market. As a result, your capital increases more thanks to the reduced costs and the help of your best friend the compound interest.
In order to illustrate the performance of the index funds, I am going to focus on the S&P500 index. As I explained before, this Index aggregates the 500 biggest US companies. It measures the stock performance of these 500 companies.
S&P500 Index Fund Performance
I pointed out before that the S&P500 index has averaged a 9% annual return over the past 150 years.
I did my own research on the performance of this index, and I found out that if you pick a period of 10 years or more, it usually gives you an annual return of 10%. You can look at it yourself on this S&P500 return calculator.
Let me show you the powerful performance of the S&P500 index with a visual example
Above graph shows the evolution of the S&P500 index for the past 10 years. We started on 2009, at the end of the 2008 financial crisis, on 750. Ten years later, on 2019, we are at 3000. The value has multiplied by 4 in 10 years, which equals to a 15% annual growth.
This is the increase due to the growth of the price. If we take into account the dividends that the companies of this index give, we would have achieved a total 17% annual return.
If you had invested in the S&P500 for the past 10 years, you would have obtained a 17% annual growth.
This remarkable growth is way above the average 9% annual return. It happened thanks to the value was very depressed on 2009 due to the financial crisis. But it does help to highlight the returns the stock market can give.
So, if you invest in this index periodically, in the long run you should obtain a 9% annual return.
How to select an Index Fund
Firstly you need to decide which is the index that you want to track. There are all sorts of indexes (US Industry, US technology, US Economy, any other country, whole continents, etc). I would recommend you to look for indexes with:
- Long Track Record: the longer they have been operating the safer and more predictable they are
- High Returns: the higher the returns the quicker your portfolio will grow
- Low Fees: fees can eat a significant portion of your profits. Try to keep them as low as possible
After some investigations, I decided to invest in the S&P500 index. It has 150 years of history, it has averaged a 9% annual return during that period, and you can find index funds that mirror it with just 0.1% annual fee.
If you want to start investing in the stock market, I recommend you to open an account on Degiro, and put money regularly on a index fund that tracks the S&P500.
Degiro is a broker with very low fees and a great investing platform.
As I detail on my portfolio, the index fund I use is Vanguard S&P500 UCITS ETF (ISIN IE00B3XXRP09).
Just by doing that you should be able to obtain a 10% annual return on your investments if you invest for long term.
Does it sound too easy? Yes, because it is. 🙂
On this chapter of my stock market guide, I am going to explain you what mutual funds are. Also known as investment funds, they are the most popular type of stock investment. That does not mean that they are the best one 🙂
What are Mutual Funds?
Mutual funds require you to have knowledge of the stock market, and also to put effort into selecting the right one.
Let’ start by the Wikipedia definition, as usual (I know, I am a bit lazy…)
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities
In summary, your money is added to a pool of money from other investors, and a team of professionals decide which are the best stocks to buy. An equity fund is a mutual fund that invests in stocks.
The mutual fund managers try to pick the stocks that are going to increase its value over the coming years. Their aim is to outperform the market.
This is something that very few equity funds do, since several studies have shown that in the long run index investing is much more profitable than investing in mutual funds.
On the table above we can see how, after 15 years 93% of the US equity funds are outperformed by the S&P500 index.
Only 7% of all the US mutual funds have a higher return than the S&P500 over a period of 15 years
If the goal of the mutual funds is to obtain better returns than the market, it looks like they are not doing very well their job.
You can read more about this topic on this article.
I will analyse it more in detail in my advanced guide of the stock market.
Disadvantages of mutual funds
One main disadvantage of the mutual funds is their high cost. Because they are actively managed by a team of professional investors, they charge a high fee in order to cover their cost.
I would strongly advise against buying funds that have an annual cost higher than 1%.
It’s important to highlight that you will also have to pay the broker fee. The brokers that allow you to invest in equity funds have higher fees than the brokers that only provide index funds.
These fees will accumulate over time, generating a big impact on your portfolio value. Furthermore, it’s very likely that your investment fund gives you a lower return than the S&P500 index.
Another disadvantage is that it requires monitoring and decision making. You need to review the performance of your mutual fund, compare it with a reference index (for example the S&P500) and assess how your fund is performing.
After a prudential period (1-2 years), if your fund is not performing better than the reference index, it’s time to pick a different fund.
Selecting an investment fund is not an easy task, and even if you do everything right you might end up being outperformed by the S&P500, overall when taking into account the high costs.
Therefore, I highly recommend to start investing on index funds for the first 1-2 years.
Equity Fund Example
Having that in mind, it’s possible to beat the market. After all, 7% of equity funds do it. Due to this, I decided to embark myself on the difficult mission of finding those few lucky funds.
I did a research, based on the funds that had had the best performance on the previous 5 years, prioritising the ones that had low fees. I found a few that had outperformed the S&P500, and I started investing in them.
The top performer so far is Lindsell Train Global Equity Class D – Income (ISIN IE00BJSPMJ28).
On the graph below you can see that it achieved an astonishing 160% return on the past 5 years. That’s a 21% annual return.
The S&P500 obtained on the same period a 100% return, which equals to 15% annual return.
Lindsell fund outperformed the S&P500 by 60%, a 5% annual return
These results have only been obtained on a 5 years period, maybe when I reach 15 years the S&P500 index fund will outperform the Lindsell fund. It’s something that can happen, and I keep it in mind.
I review the performance periodically, and adjust my investment strategy according to the results achieved by my equity funds and the S&P500 index.
How to select a mutual fund
The criteria is not so different from the one used to pick an index fund:
- Long Track Record: The longer the mutual fund has been operating, the safer it is to assume it will carry on working properly in the future
- High Returns: The higher the returns, the quicker your portfolio will grow
- Outperform the Reference Index: it needs to have better results than the reference index (I use the S&P500) over a long period of time (I use 5 years).
- Low Fees: both the broker fee and the fund annual cost should be kept at a minimum
My research pointed me to Lindsell fund, which had been operating for 9 years, it had a 20% annual return during the previous 5 years, it had outperformed the S&P500 by 60%, and its fees were low.
If you want to start investing in equity funds, a great way would be to open an account on Hargreaves Lansdown, and put money periodically on Lindsell Train Global Equity Class D – Income (ISIN IE00BJSPMJ28).
Please bear in mind that equity funds represent more risk than index funds, require a better knowledge of the stock market, and also time and effort to monitor and assess them.
Due to above reasons, you should always start by investing in index funds to gain experience and knowledge.
Pick your own Stocks
We have arrived to my third recommended type of investment, horray!!
Once you have gained experience with index funds and you have spent some time investing on equity funds, you might want to consider selecting your own shares.
What means to pick your own stocks?
Picking your own stocks means that you will analyse many companies, and select the ones that you believe are more likely to increase its value.
Consequently, you need a considerable amount of knowledge and experience in investing with stocks to do it. Let’s put it this way: you are going to be responsible for selecting the companies that will outperform the market in the next years.
You are acting like an equity fund manager, but you are not getting paid for that 🙂
By picking your own stocks, you are telling yourself that you can obtain better returns than the index funds and the equity funds.
Your target should be to beat the reference index, which for me is the S&P500.
Disadvantages of picking your own stocks
The main disadvantages of picking your own companies are the high risk and the time consumption, let me explain them properly.
I think this is by far the biggest challenge when you are picking your own shares.
When you invest in an index fund, you are reducing your risk since you are investing in a broad selection of equities. Investing in the S&P500 means you are putting your money on the 500 biggest US companies. If one or two go bankrupt there is no problem, because it will be compensated by the growth of the other 498.
When you invest in an equity fund, you are assuming more risk than on the index fund, but you know that the fund managers have been operating for many years, and they have consistently outperformed the reference index. That means their strategy to pick stocks is robust, and it is likely that it will carry on giving good results in the future.
When you pick your own stocks, you are the sole responsible for the return of your investments. If you invest in two companies and one of them goes bankrupt, you will lose 50% of your capital. Seeing your portfolio drop 50% is not something easy to swallow… 🙂
In order to reduce the risk, it’s very important that you spend as much time as possible educating yourself about the stock market, which takes us to the next point.
If you want to pick the right stocks, you cannot just open your online platform and select a company “because you like it”. You need to have a criteria for picking your stock.
As Peter Lynch said:
Understand the nature of the companies you own and the specific reasons for holding the stock. “It is really going up!” doesn’t count
So, what do you need to create your own criteria? You need time, lots of time. Time to educate yourself, to learn everything you need about the stock market.
You will have to put a lot of effort, so be ready for it.
How to pick your own stocks
If you want to select your own companies, the most important thing is to have a specific set of rules. This will be known as your strategy.
Everything is so much easier when you have defined rules, you just need to follow them. It takes the emotion out of the equation, and that is a huge step. Believe me when I say
Emotion and investing should never be on the same sentence. Following your feelings will only lead to disaster
In order to define your strategy, I recommend you to be taught by the best investors of all times. One of the most important things I have learned in my life is that, when you want to do something, you just need to look for someone who is already doing what you want to do. Then learn from him/her.
If you want to invest successfully in stocks, you just need to learn from the people who have already done it.
I have compiled a list of three books that will help you get a very good understanding of the stock market:
- The Intelligent Investor – Benjamin Graham
- One up on Wall Street – Peter Lynch
- Beating the street – Peter Lynch
I recommend you to read the summaries of the books on the links above. You will find the main takeaways, and you will be able to buy them if you want.
I read them, created my strategy based on their criteria, and started to buy shares following that strategy.
If you want to pick your own companies, DEGIRO has very low fees to buy stocks.
Don’t miss out this opportunity to start investing in stocks, register with DEGIRO here or on the banner above.
Why you should pick your own stocks
I know what you must be thinking right now. Why the heck should I bother trying to pick my own stocks, if it’s so risky and complicated?
Well, you should not pick your own companies when you have just started investing in the stock market. I hope that’s clear by now. But once you have gained experience, you might want to go a step further and see if you can find the right companies. The rewards that you can obtain are very big!
If you find a company that is extremely undervalued, you can get huge returns on it. Peter Lynch always talks about the “ten baggers“. These are companies whose price has multiplied by 10. Can you imagine multiplying your investment by 10? Wouldn’t that be wonderful?
The main reason to pick your own stocks are the huge potential rewards you can achieve.
On a personal note, my own picked shares are performing well. I have only hold them for a few months, so I need to wait more time to evaluate the results.
If you want to find out how I invest my own portfolio, take a look at my portfolio analysis in April 2020.
Why the stock market is the best option to invest your money?
We are approaching the end of the stock market guide, if you have reached here, congratulations! You are very close to start earning money investing in stocks.
There are many investing options out there, for example:
- Real Estate
- Bitcoin (Cryptocurrencies)
I could mention several more, but I believe those are the main ones. Why is the stock market superior to them? What makes stocks the best investment option?
Let me give you some reasons.
The stock market has been operating for many years. For example, the S&P500 has been running for 150 years. It is not something new. As a result, we can consider it a consolidated investment approach.
The more time an investment method has stand the test of time, the more likely it is to carry on existing in the future.
Besides, the stock market represents companies all around the world. Due to that, in my opinion, it represents the economy. If the economy of a country/industry/company goes well, the price will increase.
The fact that the stock market is based on all the companies of the world tells you that it will not disappear from one day to another. Therefore, it is reliable.
Bitcoin and Crowdfunding are very recent, only have a few years, so this poses a higher risk.
As I have mentioned before, the S&P500 index has averaged a 9% annual return over the past 150 years. So, if you invest in this index periodically, in the long run you should obtain a 9% annual return.
This is a tested method that during 150 years has given an astonishing annual return.
10 years US Bonds have an historic annual return of 4.5%. Gold has obtained a very similar return over the past 85 years.
Why would you want to invest in bonds/gold that give you 4.5%, when stocks can give you 9%, the double?
Besides, I like the fact that stocks represent companies, which provide goods and services.
A Stock is what Warren Buffet call a productive asset.
Gold does not produce anything. You can buy all the gold in the world, and you will only have a huge cube of gold sitting on your backyard. Not very useful if you ask me.
No Time Required
You don’t need to spend time every day to be a successful investor. You can run your investments spending just 30 minutes per month.
Once you finish this guide, you will have all the required knowledge to earn money with the stock market. You can then set the autopilot and forget about it.
You can always spend more time expanding your knowledge, if you are interested. But if you are not, you don’t need to spend more than 30 minutes per month. Guaranteed.
Owning stocks does not generate you any extra work. Your stocks can be sitting in your portfolio for years, and you will have to do nothing about it.
If you invest in Real Estate, let’s assume that you will buy a house and rent it. This will generate a lot of work, such as:
- Finding the right tenants
- Fixing all the appliances of the house (which has a cost)
- Taking care of all the paperwork that involves buying and owning a house
- Paying yearly taxes for owning a house
- Making sure the tenants take care of the house
And that’s if you are lucky enough not to run into tenants who will stop paying the rent and barricade in your house for a year before they are evicted.
When you buy a share at a price, you make profit when you sell it for a higher price. Like with any other income, you will be liable for tax payment.
The amount of tax that you pay will depend on the country you live and your financial circumstances.
The beauty of the stocks is that you only pay taxes when you sell. That helps the Compound Interest to carry on generating wealth for you. You are delaying the payment of tax, which makes you accumulate more money.
There is a big difference between paying taxes every year on the gains that you have, and paying them at the end. Let me clarify it with one example.
Example of the tax benefits
Jorge and Flavio have 100,000€. They both invest in the S&P500, which gives them a 10% annual return.
There is one difference, Jorge likes to sell his S&P500 fund on 31st December of each year, in order to pay taxes on the gains. Then, he uses the remaining money to buy the same S&P500 fund again on 1st January.
Let’s assume they both have to pay 20% tax on capital gains.
After 30 years Jorge has accumulated 1 million€. On the other hand, Flavio has accumulated 1.4 millions€.
Flavio has 400,000€ more than Jorge thanks to being able to delay the payment of taxes. That’s 40% more!
Congratulations on finishing the guide to start investing in the stock market. I hope you enjoyed it, and it can help you to realise that earning money with shares is possible.
You are now ready to start earning money with stocks!
More about investing in stocks
If you want to know more about investing in stocks and making money, check out the following items:
- Index fund guide
- Portfolio analysis in April 2020
- The intelligent investor, best book about investing ever written
- Beginner guide to learn about stocks
If you have any question, please use the comments section I will be happy to help.
I’m not associated with any of the investment platforms/products mentioned in this stock market guide. Everything described here reflects my experience and my own opinion.
Investing involves risk of loss.