How to get started with investing in the stock market in 2020?

Do you feel overwhelmed with investing? And you do not know where to start with investing? Do you want a simple guide on how to get started with investing?
Then, this guide is exactly what you need! It will guide you through the steps of starting to invest.
I have written many articles about investing on this blog. But I have recently been reminded that I did not have an article on how to get started! I should have started with this article.
First, I am going to cover the things you should know before you start investing. And then, I am going to cover how you could get started with investing.
And what better time to start investing than with the start of a new year?

Know why you want to invest

First of all, you need to understand why you want to start investing. Your reasons to invest will matter a lot on how you are going to invest.
There are many reasons to invest in the stock market. But they can be grouped into two categories:

1. Investing in the short-term to buy something. It could be to buy a new house, for instance.
2. Investing in the long-term for your future. It could be to pay for your retirement. Or you could invest in the long-term for the education of your child.

Now, it is essential to know that investing is a long-term game. If you want to buy a house in the next year, it is probably not a good idea to invest now. Why is that? As we will see in the next section, the stock market is volatile. It will provide good returns, but only on average. If you invest now and the market goes down 20%, what are you going to do?
So, I would only recommend investing if you are investing for the medium or long-term. You need to answer a simple question: Can you wait until the market recovers if it goes down?
For instance, if the market went down 20% next year, will you be able to wait one year or more until it recovers?
If you cannot answer yes to this question, you are probably better off investing. There will be some negative years in your investing journey. And you will need to wait until it recovers. Selling in a downturn is the worst thing you can do!

Know why you should invest

You already know why you want to invest. But do you know why you should invest? Could you not save money and let it rest in a savings account and achieve the same goals?
There is one big problem with cash: inflation! The value of your money will decrease over time. Inflation increases the prices of goods over time. On average, inflation goes up.
Inflation means that the money you acquired through hard work will have less value in the future. With the same amount of money, you will be able to afford fewer goods.
And the problem with bank accounts is that they do not follow inflation. By leaving money on your bank account, it is losing value over time.
On the other hand, investing in the stock market has higher historical returns than inflation. Investing means that you will generate more value from your money. And inflation will not eat up all your gains.
And since the returns will be higher, your money will grow without you having to do anything. You want your hard-earned money to work for you!

Know the stock market

Then, you also need to know the stock market. Do not worry. You do not need to know everything about it! You do not even need to know the details!
But there are several things you need to know before you even consider to invest in the stock market.
First of all, there is no such thing as an investment without risk! All investments have some risks. It is up to you to decide on how much risks you are willing to take.
Even low-risk investments will have negative returns some time! If you pick a low-risk instrument such as government bonds, you will still experience some downturns. There have been some years were bonds had performed very poorly. We are talking minus 20% in a single year!
You only lose money if you sell in a downturn. You should mix up paper losses and realized losses. If you check your account one day and see you are ten percent down, this is only a paper loss. If you sell, it will become a realized loss. It is essential to understand this.
Finally, you should not time the market. Timing the market means that you buy or sell at a particular time in the hope of making a profit. For many people, this means waiting to buy or selling early. But on average, you will lose this bet with the market. People are not able to beat or time the market.

Know the difference between stocks and bonds

In the stock market, there are two main instruments: bonds and stocks. There are others as well. But these two are more than enough to get started.
A bond is a debt that is issued by an entity. This entity could be a government, a municipality, or a corporation. To keep it simple, you should only focus on government bonds. They are the safest and most straightforward. A bond has a duration and interest rate.
When it needs money, the government will issue bonds that people can buy. In return for their money, the issuer will receive interests regularly. Once the bond reached its duration, the issuer will receive its money back.
The stock of a company is the set of all the shares of this company. You do not buy stocks directly, but you buy shares of stocks. By purchasing a share of a company’s stock, you will own a part of the company.
People investing in stocks are expecting the share price to grow. Generally, as the company grows, so does its share price. Another advantage of some shares is that the company pays a dividend to its shareowners.
Once a company has some money, it has several choices. It can invest it in itself to grow. Or it can give it back to the shareowners in the form of a dividend. This dividend will be given in cash to you into your broker account.
In practice, there is one significant difference between these two instruments: bonds have smaller risks and smaller returns, while stocks have higher risks and more profits.
In short, it means that stocks are great for the long-term. And bonds are better for the shorter terms. But bonds will reduce the volatility of a portfolio. They are good for your risk tolerance.