Although investing in stocks can be a great way to build wealth, it can also be a bit confusing — or maybe just a tad bit overwhelming — when starting out. There are several ways to approach investing in stocks. First, you will want to determine how you want to buy your stocks. After that, you choose the stocks or stock funds you want to buy. Then you calculate your budget. Then you buy your stocks and hopefully watch them grow. Here is how to do all of that.
Select your broker
Remember when I said that you most likely are going to just want to select a stockbroker? That is both true and somewhat untrue at the same time. Your basic choices are what’s called a ‘full-service broker” who charges a commission to buy or sell stock. The full-service broker will make recommendations and will watch your portfolio. Then there is the discount brokerage where you will make all your own decisions and pay a small, standard commission when you buy or sell. You sometimes also can buy stock directly from a company.
Choose stocks or stock funds
You can buy individual stock in one company. Individual stocks are all about going big with one particular company. By buying individual stocks, however, it is harder to diversify your portfolio — it is possible, but it requires a significant investment. You also can buy stock mutual funds, which are funds that allow you to buy a small piece of many different stocks through just one transaction. Then there are ETFs or Exchange-Traded Funds, which are investment funds traded on stock exchanges that track indexes.
This means that they aim to match the market instead of to beat the market by solely seeking to “replicate indexes.” Replicating indexes usually means buying the stocks of the companies within the index that is being tracked. Investing in funds means that you own not only small pieces of each stock but also small pieces of each company. Owning multiple funds is a good way of diversifying your portfolio.
Set a budget
There are generally two questions involved in this step of the process and they are: How much money do I want to risk, holding aside my rainy-day or emergency fund? and How much can I afford to lose? You also should think about not putting all your eggs in one basket — diversifying is the name of the game. If you have a small budget, you might want to buy a mutual fund or an exchange-traded fund.
Investing in funds is a good way to invest a fairly large amount of your portfolio in diverse kinds of investments. A young person investing for retirement could have up to 80 percent in stock funds (the rest would be in bond funds, which is a fund invested primarily in bonds and other debt instruments.)
Open an account
Once you decide what kind of broker you want, you will have to open an account. You can either get a face-to-face broker, an online broker to buy stocks or funds, or invest through your 401(k) at work (you might already be invested through mutual funds as we speak thanks to your 401(k)). Your broker also can help you set up an individual retirement fund (IRA). Here’s a step-by-step guide from Nerdwallet on opening a brokerage account if you need a little bit more information.
There will be a few factors to consider when deciding which type of broker and which type of account, including costs like fees and commission, your investment selections (like commission-free ETFs if you favor funds) and what type of investor research you will expect from your broker.
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