How to buy your first stock
I have met people who take many courses on different investment methods who have yet to invest themselves.
How do you jump into it and get started?
The answer is simple. You do not jump into it.
Think about it. You would not ask a child who has never swum before to jump off the high dive. You would instead take them to the shallow water to splash around with floaties on.
First, they must get comfortable in the water and learn how to swim. Learn how to hold their breath underwater. Learn the rules of the swimming pool. Then, they can start venturing out into the deep-end and even jump off the diving board.
Read also: How To Invest For Your Children's Future
Get comfortable in the shallow end
Of course, you are not a child and you will not drown by buying stocks.
Nevertheless, investing in stocks can be a very intense emotional affair.
I’ve met beginners who invested all their liquid cash during 2018 and have been on a roller coaster ride as stocks fell during the fall of 2018.
I’ve met people who, instead of watching Netflix in the evening, stare at the red numbers on their trading platform, and who sleep worse at night because they feel they have seen their savings evaporate over many years.
I’ve met people who’ve experienced their relationships suffer because market downtown creates insecurity about the future.
You do not lose money when a stock decreases in value. You only lose money when you sell the stock. But the brain does not understand that at all. It sees the red numbers and responds by activating all fear mechanisms. It believes that there is danger ahead.
When you buy your first stock, you should start by buying a little. You need to dip your toe in the water. It should be an amount that you would be okay with losing.
If you buy shares in a solid company with growth and healthy numbers, then you won’t lose money.
But when stock prices plunge, it feels like you're losing money and you need to learn to deal with that feeling and not react to it.
There's one more reason why you should start with a little.
It is only once you put money into a business that your research on it really gets underway. A whole process happens when you buy shares in a new company.
Whereas it once was a little boring to read the company's accounts, it suddenly becomes very exciting because your finances depend on the company's development.
The funny thing is that you do not have to buy shares of a high value to set this process in motion. The brain does not quite understand whether you have a lot or a little money in a company. It just knows that something is at stake.
For instance, if you’ve bought some shares in Nike, then you suddenly will pay more attention to the clothes a runner is wearing on the street. You can't watch tennis or football without watching clothes and reading the commercials in the background. It is not the runners who cross the finish line, but the shoes.
Read also: Why Invest? The New "Self Love"
Where is the shallow end?
How much is a little?
How much do you need to invest in order to dip your toe in the water?
It is individual. You have to figure out what a little means to you. What is your limit? You need to keep sleeping peacefully at night even if the entire amount disappears.
No, the whole amount will not disappear if you have done your research, but the brain sometimes thinks so - especially in the beginning - if the stock price falls.
An investor's most important trait is temperament, not intellect. Warren Buffett himself says that it's about being able to take it easy when stocks move up or down.
Can you learn to have the right temperament? Yes, since a big part of it is habit and experience.
But you do not learn to take it easy as a beginner from the 10 meter diving board. If the stock price falls, it can become such a stressful experience that you may be selling in a panic at the wrong time.
If you sell your first stock at a large loss, then there is a risk that you will close your laptop and give up. And then you can probably say goodbye to your dream of becoming financially independent.
So start small. Dip your toe in the water first. You must get comfortable in the shallow end before diving in head first.
Have you read my book Free Yourself? It's a great place to start. It tells you what to look for when investing. You can download it here.
Published October 2020.