How to Make Money from the Stock Market (For Beginners)

Warren Buffett, reportedly worth over 100 billion, is one of the richest men in the world, not by inheritance or by innovating technology, he made his fortune primarily through value investing in stocks. 

Warren thoroughly researched companies and bought undervalued stocks of companies with strong fundamentals, holding them long-term. Through his investment company, Berkshire Hathaway, Buffett acquired significant stakes in a diverse range of businesses, including Coca-Cola, American Express, and Apple, generating substantial returns over decades. His disciplined, long-term investment strategy and ability to identify undervalued opportunities have been key to his immense wealth and success.

Understanding the Stock Market

What is A Stock?

A stock in the stock market represents a share of ownership in a company. When you buy a stock, you are purchasing a piece of that company, known as a share. Each share entitles you to a proportion of the company’s assets and earnings, depending on the number of shares you own.

By owning stocks, investors participate in the growth and profits of companies, making it a fundamental way to build wealth over time.

What is A Stock Market?

The stock market is simply a place where anyone can buy and sell shares in businesses who have opted to sell their shares publicly.

Most big companies you can think of are listed on the stock market, Apple, Microsoft, Netflix etc. This means you can pay to own a very tiny fraction of those businesses yourself. The reason you want to own a tiny piece of a company is simply to make money. The idea when you buy shares is because you believe that at some point in the future, the business will be worth more. This means your share will be worth more and then you can sell them at a much higher price than you initially paid.

The difference between the amount you bought them for and the amount you sold them for is your profit. So clearly the goal s to buy when the price is low, and sell when the price is high.

How Is The Price Per Share Calculated?

The simplest answer to this question is supply and demand. The only way you can buy a stock at a certain price, is when someone is willing to sell it at a certain price.

If many people want to buy a share (high demand), its price will go up. If many people want to sell a share (high supply), its price will go down.

Common Factors That Can Influence Supply and Demand of Shares in the Stock Market:

The supply and demand of shares in the stock market are influenced by several key factors:

1. Company Performance: Positive earnings and successful products increase demand (e.g., Apple’s new iPhone), while losses and issues increase supply (e.g., Tesla vehicle recalls).

2. Economic Indicators: Strong economic conditions boost demand, while recessions reduce it (e.g., 2008 financial crisis).

3. Industry Trends: Favorable trends increase demand (e.g., renewable energy), while adverse trends reduce it (e.g., decline in print media).

4. Market Sentiment: Optimistic (bullish) sentiment increases demand, while pessimistic (bearish) sentiment increases supply (e.g., fears of a recession).

5. Interest Rates: Low rates increase demand by making borrowing cheaper, while high rates reduce it (e.g., post-2008 crisis low rates boosted the market).

6. Political Events: Stability boosts demand, while turmoil decreases it (e.g., Brexit caused uncertainty).

7. Global Events: Positive events like trade agreements increase demand, while negative events like pandemics increase supply (e.g., COVID-19 pandemic caused a sell-off).

Understanding these factors helps investors make informed decisions.

How To Make Money in the Stock Market

1. Buy The Right Investments
   Before you start investing in stock you will need a brokerage account. Easy Equities and Brockstock are 2 popular trading platforms in South Africa.
   
   

2. Research and Knowledge:
    -Understand the companies you invest in, including their business models, financial health, and market position.
     -Stay informed about market trends, economic indicators, and industry developments.

3. Long-Term Perspective:
   -Adopt a long-term investment strategy rather than trying to time the market.
   -Focus on the underlying value of companies and hold investments through market fluctuations.

4. Diversification:
   -Avoid individual stocks if you are a beginner. Spread investments across different sectors and asset classes to mitigate risk.
   -Avoid putting all your money into a single stock or industry.

5. Risk Management – Only Invest What You Can Afford To Lose:
   -Assess your risk tolerance and invest accordingly.
   -Use stop-loss orders to limit potential losses.

6. Financial Health of Companies:
   -Analyze key financial metrics such as revenue growth, profit margins, debt levels, and cash flow.
   -Look for companies with strong balance sheets and consistent earnings growth.

7. Reinvesting Dividends:

   • Reinvest dividends to benefit from compounding returns.
   • Choose dividend-paying stocks for a steady income stream.
8. Staying Updated:

• Continuously educate yourself about investing and market trends.
• Follow financial news, read investment books, and consider professional advice if needed.

By adhering to these principles, investors can improve their chances of making money in the stock market while managing risks effectively. 

Best Stocks For Beginners With Little Money

For beginners with limited funds, it’s important to focus on stocks that offer good growth potential, stability, and reasonable prices. Here are some categories and examples of stocks suitable for new investors with little money:

1. Blue-Chip Stocks

• Characteristics: Established companies with a history of reliability and steady growth.
• Examples:
  • Apple (AAPL): Known for innovation and strong financials.
  • Microsoft (MSFT): Consistently growing with a dominant position in tech.
  • Coca-Cola (KO): Stable, with a strong global brand and regular dividends.

2. Dividend Stocks

• Characteristics: Companies that regularly pay dividends, providing a steady income.
• Examples:
  • AT&T (T): High dividend yield and strong market presence.
  • Procter & Gamble (PG): Consistent dividends and a wide range of consumer products.
  • Johnson & Johnson (JNJ): Stable healthcare stock with regular dividends.

3. Exchange-Traded Funds (ETFs)

• Characteristics: Diversified investments that track indexes or sectors, reducing risk.
• Examples:
  • Vanguard Total Stock Market ETF (VTI): Broad exposure to the entire U.S. stock market.
  • SPDR S&P 500 ETF (SPY): Tracks the S&P 500 index, providing exposure to 500 large-cap U.S. stocks.
  • iShares Core MSCI Emerging Markets ETF (IEMG): Exposure to emerging markets.

4. Growth Stocks

• Characteristics: Companies with high growth potential but may come with higher risk.
• Examples:
  • Nvidia (NVDA): Leading in graphics processing units (GPUs) and artificial intelligence.
  • Tesla (TSLA): Innovator in electric vehicles and renewable energy.
  • Square (SQ): Growing rapidly in the digital payments and financial technology space.

5. Value Stocks

• Characteristics: Stocks trading for less than their intrinsic value, often with solid fundamentals.
• Examples:
  • Berkshire Hathaway (BRK.B): Diversified holdings and solid management under Warren Buffett.
  • Bank of America (BAC): Major bank with a strong balance sheet.
  • Pfizer (PFE): Stable pharmaceutical company with growth potential in healthcare.

6. Low-Cost Stocks

• Characteristics: Stocks with low share prices, making them affordable for beginners.
• Examples:
  • Ford Motor Company (F): Affordable price with growth potential in electric vehicles.
  • Sirius XM Holdings (SIRI): Low-cost stock in the media and entertainment sector.
  • Under Armour (UA): Affordable stock in the athletic apparel industry.

7. Tech Stocks

• Characteristics: Often show strong growth and innovation, though may be more volatile.
• Examples:
  • Amazon (AMZN): Leader in e-commerce and cloud computing.
  • Alphabet (GOOGL): Dominates internet search and digital advertising.
  • Adobe (ADBE): Leader in digital media and creative software.

Tips for Beginners:

• Start Small: Invest an amount you can afford to lose.
• Diversify: Spread your investments across different sectors to reduce risk.
• Use Fractional Shares: Some brokerages allow you to buy portions of a share, making it easier to invest in high-priced stocks.
• Invest Regularly: Use dollar-cost averaging by investing a fixed amount regularly to reduce the impact of market volatility.
• Do Your Research: Understand the basics of the companies you invest in and stay informed about market trends.

Starting with a mix of these stocks and strategies can help beginners build a solid, diversified portfolio while managing risk and taking advantage of growth opportunities.