Grab a good snack and settle in because today we are going to make the ultimate stock market
crash course for beginners in 2022 including types of investments how to invest where to
invest calculating risk picking stocks choosing a brokerage, tax implications, and everything
that you need to know to get started with investing today.
Alright let's jump right into it.
What is going on everyone I hope you are all having a fantastic day.
So what we're about to cover is probably 50% of what I learned over the course of several
years when earning my bachelors degree in finance.
But we're going to be moving fairly quickly so be sure to use the chapter cards in the
timeline if you need to go back to a certain section or want to skip ahead and of course
if you have any questions leave those in the comments and be sure to check out some of
my favorite investing platforms using the links down below the like button but we'll
talk more about that later in the video.
So let's start off with the basic question of should you invest and I'll tell you right
now the easy answer is yes without a doubt.
Now if you're 10 years old or drowning in hundreds of thousands of dollars in debt then
right now might not be the best time to start investing but as a general statement yes you
should be thinking and planning to invest at some point in your life and you want to
get started as soon as you can because time is a huge variable here.
For example if you invested $5,000 per year at an 8% annual return that would be worth
over $700,000 in 30 years.
But if you waited even just five years and only had that money invested for 25 years
instead of 30 that exact same investment at the exact same return would now only be worth
$450,000.
But the good news is that the best time to get started with investing is yesterday but
the second best time is right now not only because there is more information available
to all of this than ever before although there is a lot of crap out there just a warning
but it's now more affordable and accessible to get started with investing than ever before.
Even just a few short years ago when I started investing, I paid $6.95 per trade for TD Ameritrade
but now thanks to platforms like Robinhood and M1 Finance, the entire industry has moved
in the direction of no fee trading meaning you can literally get started with investing
for free in a lot of cases.
So should you invest?
Absolutely but what are the different types of investments you want to focus on and how
in the world do you make sense of so many different options and choose the best one
for you?
Well there's a million different types of investments but let's cover the five core
ones that you really want to focus on.
First of all and most importantly we have a stock which is sometimes also referred to
as an equity and this is simply a security that represents your ownership of a fraction
of a company.
so if you think of Tesla for example as the giant pie of electric vehicles and innovation
by purchasing a Tesla stock you were getting a small slice of that pie.
now how small is that slice well that depends on the company and how many outstanding shares
they have meaning how many ways have they divided up that pie.
In the case of Tesla there are currently over a billion outstanding shares and if you take
a company's outstanding shares and multiply it by the price per share that is how you
get what's called the market capitalization also known as market cap.
And that term market cap is important because oftentimes stocks are categorized into large
cap midcap, and small cap.
large cap is usually $10 billion or more midcap is $2 billion to $10 billion and small cap
is $300 million to 2 billion.
Beyond being categorized by their market capitalization stocks can also be categorized in two sectors
and currently there are eleven major stock sectors on the US stock market including things
like energy financials technology and that sort of stuff.
but lastly stocks can also be categorized into growth stocks or income stocks or value
stocks in this really just has to do with the trajectory that that particular company
and therefore that investment is headed on.
A growth stock for example is a company that has a ton of potential growth…very confusing
I know…while an income stock maybe one that pays a regular dividend or produces some other
form of consistent income.
A dividend for example is essentially a direct cash payment that a company is paying you
as the shareholder as a thank you for investing in their company and this dividend payouts
can go really high like 6% or 7% or more in some cases while other companies pay no dividend
at all.
Outside of stocks which are the most common form of investment you've also got bonds which
is another type of fixed income instruments that is really just a loan made by you as
the investor to a borrower who is typically a corporation or even a governmental body.
Essentially just like you would go to the bank to get a mortgage for your house, a company
or government can issue a bond if they want to build a new highway or construct the new
building and you then have the option to lend that money and earned a fixed return essentially
making you a lender.
Bonds aren't always the most exciting form of investment but lastly we have my three
favorite forms of investment which would be mutual funds, ETF's or index funds, and the
new kid on the block, cryptocurrencies.
Mutual funds, ETF's, and index funds are all very similar in that they are a financial
vehicle that is going to pull together different assets such as deep assets we just talked
about like stocks and bonds.
So instead of buying 1000 different hand picked stocks which would take forever, you can invest
in a mutual fund or an index fund or an ETF that is investing in that asset class or stock
sector on your behalf.
now the key difference here is that a mutual fund is operated by a professional and is
typically actively managed by that individual.
An ETF or index fund however it's usually just tracking a particular index or sector
or commodity but is purchased and sold directly on the Stock Exchange just like a regular
stock there's usually no one actively managing in it for index fund.
Which one is better is a total different conversation but I'll tell you honestly that I do not invest
in mutual funds and that's because over long periods of times ETF's and index funds typically
do just as well if not better and charge much lower fees whereas a mutual fund is going
to charge a significantly higher fee because that individual or team of financial gurus
who is managing the mutual fund have to get paid their fat salaries every year.
So about 90% of my personal investments across my entire portfolio are in ETF's and index
funds because they have low fees they're easy to pick out which we'll talk about in a second
and perform really well over long periods of time by protecting you from market volatility.
But of course lastly we have cryptocurrencies which you all probably know quite well but
a cryptocurrency is simply a digital form of currency that is secured by a block chain
in most cases at least.
that's not always the case but many cryptocurrencies are on what's called a decentralized network
built on that blockchain and all that really means is software.
At the core these cryptocurrencies are just software with a common ledger that helps verify
the transactions happening within that software.
I personally keep it simple and invest in a cryptocurrency ETF but as you all probably
know you can go out and buy individual Bitcoin or ethereum or even dogecoin if you want to
go nuts.
So those are the five core types of investments that I focus on but obviously there are tons
of others to choose from that can get much more complex and confusing like options contracts,
annuities, commodity trading, and even something like real estate is absolutely a form of investment.
but again with an index fund or ETF you can purchase a fund that is investing in real
estate or investing in certain commodities without having to deal with all of those complexities
yourself.
Alright so I mentioned earlier that the reason I love index funds and mutual funds and ETF
so much is because they help minimize your risk and while risk management might not sound
like the most exciting thing in the world, if you're going to have success with investing
you absolutely must understand the risk versus reward of certain investments.
This is not always the case but the general rule of thumb with investing and life in general
I guess is that the higher the risk the higher the potential return and that word potential
is very important.
When it comes to investing you have a million different types of risk but some of these
would include your standard market risk meaning the price of your investment could be subject
to market volatility and fluctuations.
You also have business risk where the stock price can fall dramatically due to the business
not doing well.
And depending on where you are investing and the sector that that particular company is
in you can also face liquidity risk regulatory risks inflationary risks and the list goes
on.
You absolutely do not need to understand every single type of risk and how it applies to
every investment but this one is fairly common sense so if Bitcoin is going up or down 10%
in a day then that would be a high risk high potential return whereas something like a
bond that's offering you a consistent 3% interest rate is a much lower risk but a much lower
potential return.
So it's easier said than done but obviously you want to look for those investments that
offer the highest potential return while still minimizing your risk as much as possible which
again is often where many ETFs and index funds would fall.
Alright so we've talked about the types of investments, how to manage your risk and gotten
some of the boring stuff out of the way so now let's answer the two big questions that
you really came here wondering and that is how do you pick your investments and how do
you actually go about making your first investment.
Well if you decide to go down the path of choosing individual stocks then the strategy
that I always stick to personally is invest in what you know.
I know that that is really boring and a lot of people might disagree with that but if
you're just getting started then investing in companies that you are somewhat familiar
with is probably your best bet.
But of course you also want to look at a company's balance sheet, Look at their income statement
which would be their revenue minus any expenses operating costs taxes and all of that stuff
to understand their net income.
And you can even look at their cash flow statements which includes their operating cash flow for
business activity, there invest in cash flow for there property and other assets and their
CapEx which is capital expenditure.
And then lastly you have their financing cash flow which just means how much money is changing
hands from the business to their different creditors if they have taken on debt.
I know that all of that is incredibly boring and sounds very confusing and time-consuming
but if you were looking to make investments in individual stocks then that is what you're
signing up for.
But if you're like me and you're lazy and you don't want to do any of that then honestly
don't make it more complicated than it has to be.
Remember that an index fund or ETF is already diversifying your money across hundreds of
different companies in most cases so that means you don't need to own 100 different
index funds in order to diversify your money.
I know a lot of people myself included who own one index fund for different types of
investments or asset classes and that's it.
And major companies like vanguard and fidelity make it really easy because they offer index
funds and ETF's four specific market sectors or entire markets that you can literally do
an easy Google search for best vanguard U.S. stock market index funds learn a little bit
more about them and then make your decision.
But you can actually remove yourself even further from the process if you're really
lazy like me and that brings us to the final section of today's video which is how do you
actually make your first investment.
Well like I said at the beginning of the video it is easier and cheaper now than it ever
has been so the first thing you want to do is choose a brokerage and nowadays there are
plenty to choose from.
when I started I used TD Ameritrade but I've since left them behind and use several of
the more modern options like WeBull, Robinhood, M1 finance, and Wealthfront.
Today’s video is not to figure out what the best brokerages but I have made tons of
videos talking about that very topic in the past so I will link to some of those down
below the like button.
But in general platforms like TD Ameritrade, vanguard, and fidelity are going to give you
that more robust desktop based experience what platforms like Robin Hood, M1 finance
and SoFi invest are mostly going to be done from your smartphone.
That's not to say that you can't pull up the information on a computer but if you're like
me and you'd rather have everything on your phone then one of those more modern apps is
probably your best bet.
Most of the apps work in a pretty similar way but when it comes time to actually buy
a stock, a market order is when you buy at whatever the current market price is so if
Tesla is trading at $600 per share then you could place a market order to buy one share
and that would likely strike somewhere around that $600 range depending on what the ask
and buy currently is.
but you can also place a limit order which is basically a direction given to your broker
to buy or sell a particular stock at a very specific price or better.
If you're just getting started I would just stick with market orders because this can
get really confusing with stop losses and all of that stuff and honestly if you're investing
for 10 or 20 years then wether you get in at $600 or you get in at $599 it really doesn't
matter.
If you're wondering what platform I used, like I said I'm really lazy and I actually
use a platform called wealthfront which I've talked about at length here on the channel
but this is a fully automated investing platform meaning you literally just transfer money
into your wealthfront accounts, answer a few questions so that they understand what your
risk tolerance is and what your investing goals are and then they are literally going
to buy stocks in index funds and real estate investment trusts and bonds and all of that
stuff on your behalf without you having to do anything.
This video and this channel have never been sponsored by wealthfront as cool as that would
be but I'm really lazy and I like this platform so if you do want to sign up I will leave
a link for that down below the like button along with some of my other favorite more
traditional brokerages.
Now the last thing I want to mention before we wrap this up is the difference between
short term capital gains and long term capital gains.
now just wait I know that sounds like the most boring thing on earth but you do really
want to understand this'cause it could cost you a lot of money.
So in a nutshell, short term capital gains or losses for that matter is if you were to
buy and sell an investment in under a year.
So if you bought 10 shares of Tesla and you sold those 10 shares not answered now then
you would be taxed as short term capital gain which is just your regular taxable income.
But the US wants to incentivize you to invest for longer periods of time so long term capital
gains tax meaning if you hold that investment for more than a year is either 0%, 15%, or
25% at the time of recording this video depending on your filing status and income but in pretty
much every possible scenario you were going to have a significantly lower tax on your
long term capital gains then if you were taxed at your regular taxable income rate so just
another reason that you probably want to hold onto your investments for a long time.
Alright I know we moved really fast through all of that and I threw a lot of information
at you and I hate to break it to you but we really just scratched the surface in this
video so if you have any questions at all feel free to leave those down in the comments
section below and I'd also love to hear your investing story and what brokerage you are
either looking to get started with or used as your first brokerage when you got started
yourself.
Be sure to check out some of my favorite financial tools using those links down below the like
button many of which will give you some free cash when you sign up which we always love.
Of course thank you so much for your time I really do appreciate it so much take it
easy and I'll see you in the next one!