Investing Simplified: 3 Key Steps To START Making Money
Updated: Jun 9, 2020
The notion of profits and passive income tends to catch the attention of many teenagers: but how do we actually begin earning?
There are a few last steps to pursue before committing to investing, each of which will allow beginners to familiarize themselves with the dynamics of the market, as well as reduce their exposure to risk.
Without further ado, consider TDP's thoughts on the final steps that precede the investing journey.
1. Set Up a Virtual Account
Almost every online trading platform holds the option of opening a virtual account: i.e.real money won’t be at risk and new investors will still be able to experience the dynamics of investing. These demo accounts will generally provide $100,000 and allow you to trade under real market conditions, teasing new users to a taste of what will come, should you choose to finally deposit your money later on.
Figure 1: Virtual Account Interface on Etoro.com
As depicted above, the relevant stocks and markets are displayed along with the money available to invest. With these, potential investors can begin to figuratively “play around” and introduce themselves to the fast-paced yet rewarding notion of financial investing.
Key Point: If you aim to be even more accurate, instead of opening large (i.e. $10,000) trades on the virtual account, use the exact amount of money you plan to deposit later on. I.e. seek to open $100 or $200 trades (despite the availability of $100,000 virtual money), so that you gain a realistic insight into what your profits will look like.
2. Explanations: Can you do it?
The transition between virtual investing and real investing generally comes down to this point: can you explain why you’re either profiting or losing?
Over 74% of traders lose money due to the fact that they are simply putting their capital to work based on intuition: i.e. the hope of luck. In one of our last articles, we said that investing based on luck is a losing strategy, and contrastingly, improving your skill is the one-way ticket to higher profits.
Knowing how to deduce the outcome of your trades is the first step in gaining this required skill set: you need to be able to understand why your investment is losing money and – if you aim to go even further – to figure a way to reverse your losses.
Now, how can beginner investors explain the result of their trades?
Reading short articles on how the market works and then applying those to investments will allow teenagers to build a criterion: one that can be used to analyze each investment thereafter. For example, one of the early tricks/skills that beginners learn is that the macroeconomy almost always outweighs the microeconomy and therefore investing in good stocks doesn’t make a difference if the stock market as a whole is stagnant.
Below, new investors can use the GUM acronym as an initial checklist to explain the result of their trades.
Figure 2: Key Things to Consider When Analyzing the Reason Behind a Trade's Outcome
3. Start Small and Build Up
One of the most prominent mistakes in early investing is putting in too much capital without understanding the risk being taken. The game of investing completely relies on continuous mistakes: this is how we learn, and if Warren Buffet and Ray Dalio are susceptible to errors on a daily basis, so are you. The key here is to ensure that you have back-up capital each time you make a mistake, and this is why you need to start small and build up.
Scenario 1: Jack puts a little bit of money in and his investment works out positively; i.e. he's able to gain a profit and comprehend why this trade turned out in his favor. Hence, starting small has allowed him to gain the initial confidence/understanding without risking too much, and now more capital can be added whenever he deems appropriate. Outcome? Positive.
Scenario 2: Larry also puts a small amount of capital in, but the trade goes significantly wrong this time. He ends up losing over 30%, and there’s a slight worry about his ability to continue. However, since he only started small, he's given himself the opportunity to learn from the mistake and has enough back-up money that he can re-deposit into the account I.e. starting small allowed Larry to not risk all his cash. Losing only a small amount and learning from this mistake would allow Larry to make his money back, either with the capital he has left or after an additional deposit.
A slight bump in the road, yet, the outcome? Positive.
Here, whether the first few real trades were successful or not, starting small gives beginner investors the figurative “backup" or "insurance" to continue, regardless of the result. If new investors project all their money out in the first attempt, it carries extremely high risk and simultaneously hinders the confidence to continue, should the first investment yield poorly. Hence, depositing a small amount first is the safer way to build your investments up.
- Leverage the realistic nature of virtual accounts by opening investment positions in real market conditions. This will give a taste of what the actual endeavor would look like, and will allow new investors to understand how the financial markets work.
- Once your virtual trades yield profits or losses, aim to explain – to yourself – why each outcome happened. Use some of the guidelines mentioned and logically deduce the reason behind the results you get. This will allow you to understand your mistakes, and simultaneously – if you can explain your outcomes – decide whether it's time for the real thing or not.
- If you’re beginning the real deal, start small and build up. Put in a smaller amount of money ($300 or less), so that you reduce your risk initially. If you become familiar with the dynamics quickly, you can proceed to add more later, instead of potentially losing a significant portion of money early on.
Remember that investing is a game of underlying risk, but the potential for reward is unprecedented! Even if you don’t make a significant amount of money now, the lessons and concepts you learn will make you far more equipped to invest later on.
The earlier you learn, the more you earn: take the first step towards investing today!