This is the second in our new series of blog posts where we survey our data customers for insights and advice on the financial markets.  For this article, we surveyed our wealth management for their advice on getting started with investing in stocks.

1. Educate Yourself

Before investing in the stock market, it's crucial to build a solid baseline of knowledge and understanding of the investing process, including : 

• Types of securities:  ordinary shares,  preference shares, ADRs, and warrants all trade on stock exchanges and have very different risk/return profiles. It is essential to understand the differences between the securities and the nature the asset that is being invested in.
• Fundamental and technical analysis: stock recommendations are often made using very different types of analysis. For example, recommendations based on technical analysis are usually targeted at investors with very short-term investing horizons.
• Risk management: effective risk management is an essential element of successful investing, especially for actively managed portfolios. Investors will need to understand fundamental concepts such as risk metrics, stop loss levels, and dollar cost averaging.

2. Define Your Investment Goals

Clearly outline your financial objectives, considering both short-term and long-term goals as this is the starting point for an investment plan.
Investors looking at a long-term horizon (for example a retirement lump sum in 20 years) will have a very different investment process from an investor with a one or two-year investment horizon. 

3. Assess Your Risk Tolerance

Understand your comfort level with market volatility and potential losses. Your investing style is crucial in how you approach stock investments. Whether you prefer a hands-on approach or a more passive strategy, understanding your style helps you choose the right investment methods and tools.

This requires a lot of self-reflection as the strategy is often tied to an individual’s personal interests and skills. Very quantitative individuals that enjoy diving deep into a company’s fuandamentals or stock price dynamics may prefer a more active management strategy, selecting specific stocks to hold or trade. Otherwise, a passive approach would be more appropriate, with the investor offloading the asset selection to a fund manager via an ETF or fund structure. 

4. Selecting an Investment Account

This is a step that many new investors neglect to fully research, although it has major implications on returns (primarily due to the wide variation of tax treatments across different account types). 

Broadly there are the following types of accounts that are generally accessible to individual investors:

5. Select A Broker

Brokers broadly break down into three catagories

6. Fund Your Account

This sounds an extremely straightforward process, however, it is important to note that most successful investing programs require consistent investments over time so the optimal funding plan is automated recurring funding such as a recurring direct deposit from a bank account.

7. Select Your Stocks

In general, new investors should focus on selecting stocks with strong stability, a good track record, and the potential for solid continued growth. This runs counter to the stocks which typically garner the most press attention such as meme stocks (GME or AMC), or stocks with phenomenal growth (such as NVDA).  As such the broad categories of stocks the new investors should focus on are:

Blue chips: There is no hard definition for a blue chip stock but generally, they are very large, well-established, and most importantly financially sound companies with a long history and usually not in the technology space. Examples would include Johnson&Johnson (JNJ), JP Morgan (JPM) or Pfizer (PFE).

Dividend stocks: These companies often overlap with blue chips as they are reliable dividend payers that have rarely cut their dividends and usually increase the dividend over time. It should be noted that high-dividend stocks will not suit every investment profile as many investors do not require the yield from the stock and will only have to reinvest the cash dividend. Examples of dividend stocks include JNJ which offers over 3% yield and 3M (MMM) which offers over 6% yield.

Growth stocks: Growth stocks is an extremely broad and generic category, but for new investors, it should be defined as stocks of companies with very high earnings growth (as opposed to some definitions of growth stocks being how stock price growth stocks which is much more risky).

Defensive stocks: These are stocks of companies in industries which are relatively immune to economic trends. These stocks can be used in combination with more risky stocks to protect an investor’s portfolio from the risk of a recession. Examples of defensive stocks would be utilities such as Atmos Energy (ATO) or healthcare companies such as Merck (MRK).

ETFs:  ETFs are vehicles that aggregate multiple stocks into a single stock ticker. There are a wide variety of ETF styles such as highly risky leverage ETFs, and actively managed ETFs. We would recommend new investors focus on ETFs which aggregate a large number of stocks in a single sector such as Invesco QQQ which aggregates the Nasdaq 100 stocks or the Health Care Select Sector SPDR Fund (XLV).

8. Monitor and Analyze Your Trades

Finally, it is important to regularly review your performance to monitor your portfolio performance and ensure it is tracking with your financial goals. Most brokerages provide online portfolio tracking tools, however, it is an important discipline to regularly review the performance of each asset in the portfolio to ensure it is still a productive part of the portfolio. Typical problems that can arise in a portfolio are a single stock appreciating and thus accounting for a very high proportion of the portfolio and concentrating the portfolio risk. Also a stock which becomes distressed and exhibits high volatility would need to be managed and monitored to avoid large portfolio swings.