New investors in the stock market can often feel overwhelmed. However, understanding the basics can help you make informed decisions, set you on the path to investing wisely, and generate a healthy return on investment (ROI).

Here are the top fundamentals of investing in the stock market for beginner investors. Whether starting with $25,000, $5,000, or even $500, these are some of the basics everyone should follow.

Get Educated

Before spending your hard-earned cash on investing in stocks or bonds, take some time to educate yourself on the basics of how the markets work and how a publicly traded company operates. One of the most highly recommended books for new investors is “The Intelligent Investor” by Benjamin Graham.

You’ll want to learn some fundamental metrics, including earnings and profits (E&P), earnings per share (EPS), debt-to-equity ratio, price-to-book (P/B) ratio, and many more financial metrics.

An index fund or exchange-traded fund (ETF) provides instant diversification and is ideal for new investors. Beginners should consider broad market index funds like the S&P 500.

Set Clear Investment Goals and Timelines

Determine what you want to achieve with your investments and your timeframe. Are you saving for retirement, a new car, college tuition, a down payment on a house, or medical bills? Your investment goals will ultimately shape your investment strategy.

For example, if you want to purchase a new home within the next six months, you’ll want to save for a downpayment. Because of the short timeline, it wouldn’t make sense for you to invest in volatile or long-term assets. You generally want to invest in savings accounts, money markets, treasury bills, or other short-term securities.

You must also assess your risk tolerance for potential investments. In other words, how much money are you willing to lose? Many investments have the potential to suffer substantial losses or even go to zero, so you should only invest with cash you are willing to lose.

In general, younger investors can afford to take more risks and invest in more speculative assets because they have more time and earning potential than individuals on the verge of retirement.

Purchase Stock in Regular Intervals

Most long-term investors find that their investment returns are larger when they invest a fixed amount of money at regular intervals, regardless of market conditions. This strategy helps reduce the impact of market volatility and removes the pressure of trying to time the market perfectly.

For example, a new investor has $10,000 available to invest on June 30, 2024. The investor does their research and wants to buy an exchange-traded fund (ETF). The investor could purchase $10,000 worth of stock all on the same day or spread out their purchases.

The investor decides to buy $2,000 worth of stock on June 30, 2024, and they will purchase another $2,000 worth of stock every three months until they have invested a total of $10,000 into the ETF. The investor commits to making these purchases regardless of the ETF share price or market conditions.

Stay Informed – Stay Disciplined

It’s essential to keep up with market news and your stock portfolio’s performance but don’t let it consume your life.

Many new and seasoned investors make impulsive decisions based on short-term market movements. This is often called “emotional investing” which can also hurt their overall investment returns.

Many investors make the mistake of tracking their investments’ daily movements, which leads to emotional investing. People are often consumed by the fear of buying or selling at inopportune times, which tempts them to make impulsive investment decisions.  

Invest for the Long Term

The stock market can be incredibly volatile in the short term; however, the markets have historically provided solid positive investment returns over the long term.

When investors adopt a buy-and-hold strategy and purchase stocks at regular intervals, they generally see greater overall returns.

Conclusion

Investing in the stock market is not exclusive to wealthy individuals. With the right investment plan and personal mindset, you can build a solid investment portfolio. Beginners should remember to get educated, set a plan, and be disciplined and patient.