How to Invest in Stocks: A Beginer’s Guide

For the past few months, Mary has been putting money aside.

Every payday, she moves a little money away before she can spend it. Sometimes it is KSh 5,000. Other months, she manages KSh 10,000. It has not been easy, but slowly the amount in her savings account has started to grow.

Then one Saturday afternoon, a friend mentions that she has started buying shares.

Mary listens as her friend talks about companies, share prices, dividends and the Nairobi Stock Exchange. She sounds confident about it all.

Mary, on the other hand, goes quiet.

She has always thought about investing, but the stock market has always seemed like something meant for people who understand finance.

She has no idea which company to choose. She doesn’t know how much she should invest. And the biggest question is still sitting at the back of her mind:

What happens if I put my money in a stock and the price falls?

This is where many beginners find themselves.

They have managed to save some money and now want to make that money work harder. But before they take the next step, they realise that investing is not simply about finding a company whose share price is rising and putting money into it.

There is more to it.

You need to understand what you are buying, know why you are investing, consider the amount of risk you can handle and have a strategy that makes sense for your financial goals.

That is what makes learning how to invest in stocks so important.

The good news is that you don’t have to become an investment expert before you start learning.

You simply need to understand the basics first.

What Does Investing in Stocks Mean?

At its simplest, stock market investing involves buying and selling shares in companies.

Companies issue stocks to raise capital, while investors buy those stocks because they want to participate in the potential growth or income generated by those investments. Stocks can be traded locally or internationally through stock exchanges.

In Kenya, for example, investors can buy shares in companies listed on the Nairobi Stock Exchange.

When you buy shares, you become an owner of a portion of the company.

It may be a very small portion, especially when you are starting with a modest amount of money, but it is still ownership.

There are two main ways stock investors can potentially make money.

The first is through capital gains.

This happens when you buy shares at one price and later sell them at a higher price.

For example, if you buy a share at KSh 20 and later sell it at KSh 30, the difference is a KSh 10 capital gain per share, before considering applicable costs and taxes.

The second way is through dividends.

Some companies distribute part of their profits to shareholders as dividends.

However, this is where you need to be careful.

A company can perform differently from what you expected, and a share price can fall instead of rising. The source specifically warns that stock prices are not guaranteed to maintain an upward trend and that investing in stocks comes with risks.

So, if you are getting into stocks because someone told you it is an easy way to make quick money, take a step back.

The first thing to understand is that stocks are an investment, not a guaranteed income source.

And before you even start looking at which shares to buy, there is a more important question to answer.

Why do you want to invest?

Start With Your Financial Goals

Mary has managed to save KSh 100,000.

She could put all of it into stocks tomorrow.

But should she?

Not necessarily.

The answer depends largely on what that KSh 100,000 is meant to do.

If she is saving the money to pay school fees in six months, she has a very different situation from someone investing money they don’t expect to touch for the next ten years.

This is why your financial goals should come before your investment decisions.

The source recommends setting financial goals before investing because goals define what you want to achieve and help keep your investment plan focused and organised.

Your goal might be to build long-term wealth.

You might want to generate income through dividends.

You could be saving for a future financial milestone.

Or perhaps you simply want to grow the money you have accumulated instead of leaving all of it sitting in a savings account.

Whatever the goal is, write it down.

More importantly, give it a timeline.

Ask yourself:

• How much am I trying to build?
• When will I need the money?
• How much can I afford to invest regularly?
• How much loss can I comfortably withstand?

These questions may not sound exciting when you are eager to buy your first shares.

But they can save you from making decisions you later regret.

Once you know why you are investing, you can start thinking about another important part of the equation.

How much risk can you actually handle?

Understand Your Risk Tolerance

Imagine you invest KSh 100,000 in stocks.

A few months later, the value falls to KSh 80,000.

What would you do?

Would you immediately sell because you are worried about losing more money?

Would you hold the investment and wait?

Or would you be comfortable buying more because you believe the price could recover?

Your answer can tell you something about your risk tolerance.

Risk tolerance refers to the amount of risk you are able and willing to take. The source broadly describes investors as risk takers, risk-averse investors or those who are relatively indifferent to risk.

Knowing this matters because not every investment will suit every person.

Someone who cannot tolerate large fluctuations may struggle with an investment that regularly experiences significant price movements.

At the same time, someone with a higher tolerance for risk still needs to consider their ability to absorb a loss.

There is a difference between being willing to take risk and being able to afford it.

If the money you are investing is needed for rent, school fees or another immediate obligation, putting it into a risky investment may not be appropriate simply because you are comfortable with the idea of risk.

Your financial circumstances matter.

And once you understand that, you can start looking at the different investment choices available.

Stocks Are Not the Only Investment Option

When people talk about investing, stocks often get most of the attention.

But there are other ways of investing your money.

The source covers stocks, exchange-traded funds and mutual funds as different investment avenues.

Understanding these options can help you decide what fits your situation.

Common and Preferred Stocks

There are generally two types of stocks: common and preferred.

Common stocks are the more familiar type. They can give shareholders voting rights and the potential to receive dividends.

Their value can also rise or fall with the market.

Preferred stocks, on the other hand, generally come with fixed dividends and can have a higher claim on company assets if the company is liquidated.

For a beginner, the important thing is not to memorise every technical detail immediately.

Start by understanding what type of investment you are buying and what rights and potential benefits come with it.

Exchange-Traded Funds

An exchange-traded fund, commonly called an ETF, allows you to invest in a collection of assets through one investment.

Instead of buying shares in just one company, an ETF can hold several stocks or bonds.

The source describes ETFs as collections of different stocks or bonds bundled together and traded on an exchange. This structure can provide diversification because your money is spread across several investments.

For someone who is uncomfortable putting all their money into one company, this can be an important concept to understand.

You are not depending entirely on the performance of a single company.

Mutual Funds

Mutual funds work in a slightly different way.

Money from different investors is pooled together and used to buy a mixture of investments such as stocks, bonds or other securities.

The investments are managed by professional fund managers.

This can appeal to people who would rather have professionals manage the investment decisions instead of selecting and monitoring individual shares themselves.

The lesson here is simple.

Don’t assume that buying individual stocks is the only way to participate in the investment market.

But if you do decide to buy individual shares, there are a few terms you should understand first.

Learn the Basic Stock Market Terms

Stock investing comes with its own language.

You will come across terms such as stocks, shares, market capitalisation, dividends and earnings.

Understanding them makes it much easier to follow what is happening with your investments.

Stocks vs Shares

The words “stocks” and “shares” are often used interchangeably, but they have slightly different meanings.

Stocks is the broader term referring to ownership in one or more companies.

Shares are the individual units of that ownership.

So, if you say you own shares in a particular company, you are talking about specific units of ownership in that business.

It may sound like a small distinction, but getting familiar with these terms makes financial information easier to understand.

What Is Market Capitalisation?

You will also come across market capitalisation, often shortened to market cap.

Market capitalisation is the total market value of a company’s outstanding shares.

Companies are commonly classified as large-cap, mid-cap or small-cap based on their market capitalisation.

Market capitalisation can give you an indication of the size of a company and may provide useful information when assessing its stability, growth potential and risk.

But don’t make the mistake of assuming that a larger company is automatically a better investment.

There is more to analysing a company than its size.

Dividends and Earnings

This brings us to two other terms you are likely to hear often.

A dividend is a portion of a company’s profits that may be distributed to shareholders.

Not every company pays dividends.

Some companies choose to retain their profits and reinvest them in the business instead.

Earnings, meanwhile, give you an indication of a company’s profitability.

These figures can help you understand how a company is performing rather than looking only at its share price.

And that distinction is important.

A share price tells you what the market is pricing the company at.

It doesn’t tell you everything happening inside the business.

Research a Company Before Buying Its Shares

This is where investing starts becoming more serious.

Imagine someone tells you that a certain company’s shares are doing very well.

You become interested and immediately want to buy.

But before you put your money in, take some time to understand the company.

The source recommends analysing the company’s historical performance, future growth potential and management before buying its stock.

Look at its past performance.

Try to understand its growth trend.

Consider what could affect its future.

And pay attention to the people managing the company.

A well-managed business may have better prospects, while poor management can create problems even when a company operates in an attractive industry.

The idea is not to predict the future perfectly.

Nobody can.

It is about making an informed decision instead of buying because somebody on social media said, “This one is going up.”

Once you have done your research, you will still need a way to actually buy and sell your investments.

That is where a brokerage account comes in.

Choose the Right Brokerage Account

You cannot simply walk into a company’s office and ask to buy a few shares.

You normally need to use a broker or brokerage platform to access the market.

There are different types of brokerage firms, including online and traditional firms.

Online platforms can offer convenient access, lower fees and various tools that allow investors to manage their investments digitally.

Traditional brokerage firms can offer more personal support and access to financial advisers.

The best option depends on how you prefer to invest and the services available to you.

But don’t choose a broker simply because somebody recommended it.

Look at the details.

Check the Fees

Fees matter.

Every cost attached to buying, selling or managing your investments can reduce your net returns.

Before opening an account, understand what you will be charged.

Also look at the types of investments the broker supports.

Does the platform provide the tools you need?

Is it easy to use?

Can you get help when something goes wrong?

The source recommends considering fees, available investment types, research tools, ease of use and customer support when selecting a brokerage account.

A good platform should make investing easier to understand, not more confusing.

And once you have access to the market, you still need to decide how you will invest.

Develop an Investment Strategy

There is no shortage of opinions about how to invest.

One person will tell you to look for undervalued companies.

Another will tell you to focus on businesses with strong growth potential.

Someone else may tell you to trade frequently.

The important thing is to understand the strategy you are using instead of jumping from one idea to another.

Value Investing

Value investing focuses on looking for strong assets that appear to be undervalued.

The idea is that the market may not currently reflect what the investor believes the investment is worth.

But there is something important to remember.

Finding an investment that appears undervalued does not guarantee that you will make money.

The market may continue valuing it differently for a long time.

So research still matters.

Growth Investing

Growth investing focuses on companies with strong growth potential.

The expectation is that the company can expand its business and increase its value over time.

Again, growth potential is not the same as guaranteed growth.

A company may have ambitious plans and still fail to achieve them.

That is why a beginner should be careful about treating any investment strategy as a guarantee of profit.

Active vs Passive Investing

Another distinction you will encounter is active and passive investing.

Active investing requires the investor to take a more hands-on role.

This can involve studying the market, analysing trends, managing risks and making investment decisions.

The source associates active investing with approaches such as stock and forex trading.

Passive investing involves less active involvement in making investment decisions. The source gives fixed deposits, bonds and real estate as examples.

For a beginner, the important lesson is to understand how much time and attention you are willing to give your investments.

If you are working a full-time job, running a business or managing a family, you may not have the time to constantly follow market movements.

Your investment approach should fit your life.

And whichever approach you choose, you cannot ignore risk.

Understand the Risks of Stock Investing

This is the part many beginners would rather skip.

But it may be the most important part of the entire article.

Stock investments can lose value.

The market can move against you because of inflation, interest-rate changes and other economic factors.

You may buy shares believing that a company will perform well, only for the market to move in the opposite direction.

That is why you should never invest money simply because you believe a particular stock cannot fail.

It can.

The amount of risk you take should match your financial situation, your goals and your ability to withstand losses.

And once you accept that investing involves risk, the next step is to think about how to manage it.

Diversification Can Help Manage Risk

Imagine putting all your investment money into one company.

If that company performs badly, your entire portfolio can be affected.

Now imagine spreading your money across different investments.

One investment may perform poorly while another performs better.

This is the basic idea behind diversification.

Diversification means spreading your money across different assets instead of putting everything into one investment.

The source identifies it as an important risk-management strategy and gives examples such as spreading investments across stocks, bonds and real estate.

Diversification does not eliminate risk.

But it can reduce the extent to which one poor-performing investment affects your entire portfolio.

This is why the question should not always be, “Which is the best stock?”

Sometimes the better question is:

“How should I spread my investments?”

That shift in thinking can make a big difference to how you approach investing.

Keep Learning After You Start

Your investment journey does not end when you buy your first shares.

In fact, that is when the real learning begins.

Companies release financial results.

Markets change.

Economic conditions change.

New developments can affect businesses and their share prices.

You therefore need to keep yourself informed.

The source recommends using reputable financial websites, news sources, podcasts, analyst reports and company earnings information to stay informed about market developments.

But don’t allow information to become noise.

You don’t need to react to every headline.

The goal is to understand what is happening and consider whether it affects your original investment decision.

This is especially important because one of the easiest ways for a beginner to lose focus is to start following every market trend.

Avoid These Common Stock Investing Mistakes

Let’s say you hear that a certain share has suddenly gone up.

Everyone seems to be talking about it.

Your friend has bought it.

Someone on social media is posting screenshots showing how much money they have made.

You feel like you are missing out.

So you buy.

This is chasing a trend, and it can be a costly mistake.

The source warns investors against following market trends without doing their homework.

Another mistake is making emotional decisions.

When prices rise, greed can encourage you to take on more risk than you planned.

When prices fall, fear can make you sell without considering why you invested in the first place.

This is why having a strategy matters.

Your plan gives you something to return to when emotions start taking over.

And finally, don’t expect stock investing to make you rich overnight.

Investing is a long-term process.

It requires patience, learning and discipline.

Final Thoughts

Let’s return to Mary.

She still has her KSh 100,000.

But now she understands that investing is not simply about finding a stock that somebody says will rise.

She knows that she needs a financial goal.

She needs to understand her tolerance for risk.

She needs to research the company before buying its shares.

She needs to understand the costs involved in using a brokerage account.

And she needs to think about diversification rather than putting all her money into one investment.

Most importantly, she understands that the stock market does not come with guarantees.

There will be good days.

There will be difficult days.

The value of an investment can rise, but it can also fall.

That is why the source’s final advice centres on staying informed, remaining disciplined, avoiding emotional decisions and keeping your financial goals in mind.

If you are thinking about investing in stocks for the first time, you don’t need to rush.

Start by learning.

Understand the market.

Know what you are buying.

Set a clear goal.

Invest according to your circumstances.

And don’t let somebody else’s excitement become your investment strategy.

The stock market can be part of a long-term wealth-building plan, but the strongest place to begin is not with the question, “Which stock should I buy?”

Start with a better question:

“What am I trying to achieve with my money?”

Once you know the answer, choosing how to invest becomes much easier.

And that is a far better way to begin your journey into stock investing.