Beginner Investing – Stock Market For Beginners
Beginner Stock Market Investing, Stock Market Investing Advice
Beginner Investing
- Stock Market For Beginners -
Investing in the stock market is most commonly envisioned as the process of buying shares of a company and holding onto those shares for appreciation as the demand for those shares increase as the business prospers. This would be known as the ‘buy and hold’ strategy. For beginner investing, this is when investing in the stock market you will identify a company you think will do well for a long period of time and then you will give them your money and get shares as a receipt. As times goes by, the company either excels or declines and impacts the money you gave accordingly. For the average beginner investing their money, the buy and hold strategy will average out to a 3-5% yearly compounded gain.
Meaning, as time goes by, your money will increase by roughly 5% every year (on average). Consider that inflation tends to increase by an amount very close to that number and the idea of buy and hold does not seem all that appealing even to a beginner investing for the first time. Here is why: If inflation is 3% this year, and your investments increase by 5%, then you have a whopping 5 – 3 = 2% increase in capital.
Since you are a beginner investing for one of your first times and this is Stock Market for beginners, let’s put this into numbers that make sense. Assume that the average American makes 40k per year in salary and requires that much to live every year. To survive without working, an individual would need to have $40,000 worth of capital gain (money earned from investments) each year to continue living comfortably. Assume that the average person is a stock market for beginners reader, how much would need to be invested (after adjusted for inflation) to live comfortably on 2%?
x*.02 = 40000 => 2000000 (2 million)
So with a typical buy and hold strategy, a beginner investing 2 million dollars would be able to retire and enjoy 40k a year in returns. How close are you to that figure? If you’re a beginner investing for the first few times, the answer is probably ‘not very close’.
I know what you’re thinking, buy and hold is not the only method of stock investing. You’re right, but if you’re saying that then why are you reading Stock Market for Beginners? Regardless, there ARE other methods like DRPs.
A DRP is a dividend reinvestment plan. What this means is that some companies offer a dividend to those who hold stock. A dividend is basically a bonus amount of money to those who have purchased shares. Dividends range dramatically in amount offered between different companies. A 3-5% dividend is highly common and should be relatively easy for the Stock Market For Beginners to find. With a dividend reinvestment plan all dividends awarded to the share holder are instantly reinvested. The net affect of a dividend reinvestment is to combine the dividend percentage with that of the appreciation of the share.
So, assume your a beginner investing in a company with an average of 5% gain per year and a 5% dividend on a dividend reinvestment plan. You are now looking at a 10% yearly capital gain. Minus inflation and you get a respectable 7%. How much would you need to maintain 40k per year using a 7% return on investment?
x*.07 = 40000 => 571428.57
A rough 600k compared to two million is a vastly more achievable number. Now let’s say your considering retiring, then you want to invest an amount into dividend reinvestment that will relate to that 600k by the time you retire. Well to all the Stock Market for beginners out there, here is how you would figure out how much you would need to invest if you are going to retire in ‘y’ years (note that 1.07 is like saying 107% or 100%+7% and the ^ is the character for exponent, so t^r is ‘t’ to the ‘r’ power):
x*(1.07^y) = 600000
Let’s say you plan to retire in 1 year, then you have:
x*(1.07^1) = 600000 => 560747.66
5 years: x*(1.07^5) = 600000 => 427791.70
10 years: x*(1.07^10) = 600000 => 305009.57
30 years: x*(1.07^30) = 600000 => 78820.27
Not a huge amount to guarantee a lot of money when you factor in time. And this little exercise is a simple example of why so many tout the invest early motto. As a beginner investing, I am sure you may be able to tell that this is easily not the fastest way to make your money grow, despite being the most common and most highly advocated. But I will explore other avenues later.
Conclusion
Hopefully all the Stock Market for Beginners readers out there learned a bit about the market and can now see exactly why as a beginner investing your money into a dividend reinvestment plan is exponentially better than just buying some random old stock and sitting on it while it grows.
Until next time.
Tags: beginner investing, Beginner Stock Market Investing, dividend reinvestment, investing in the stock market, Stock Market
