Investing in stocks can be an excellent way to grow wealth but it does come with risks and it ain’t gonna be fast. There are many safer ways to grow your money, such as CDs or money market accounts. But, let’s say you have decided to put some of your hard-earned dough into the stock market, how do you actually start? Follow the steps below to begin your journey.
Select your investing style
There are basically two ways that you can go about investing. Either you are the do-it-yourself type and want to choose stocks or stock funds for yourself, in which case you will need to know a few things about hands-on investing. Or you would like to invest but would also prefer that somebody else manages the whole rigamarole for you. In the latter case you might be a good candidate for what is called “robo-investments.” Robo-investing is a service that offers low-cost investment management and most brokerage firms offer this option nowadays. Of course, there is always a human stockbroker to choose from but that begins to run into money as you have to pay hefty commissions and fees. Robo-investing is a good alternative.
After you have decided if you are more of a DIY-type or a robo-type, it is time to shop for an account.
Opening an account
To invest in stocks you will need an investment account, which means that you will need to open a brokerage account, which allows you to place orders to buy and sell stocks or other investments. An online brokerage account likely offers you the quickest and least expensive path to buying stocks, funds, and a variety of other investments. It will also probably not require a minimum investment. If you chose to use an actual stockbroker, be sure to understand their trading commissions and account fees. They will offer some services that online/discount brokerage accounts will not but it will cost you. Here is a step-by-step guide to opening a brokerage account if you would like a deep dive into that.
You can also open a brokerage account using “the passive approach,” otherwise known as a “robo-advisor.” A robo-advisor offers the benefits of investing in stocks but doesn’t require its owner to do the legwork required to pick individual investments. You will be asked about your investment goals and a portfolio will be built that aims to achieve those investment goals for you. This may sound expensive, but the management fees here are generally a fraction of the cost of what a human investment manager would charge.
Stocks versus stock mutual funds
For most people, investing in the stock market means choosing among these two investment types:
- Stock mutual funds or exchange-traded funds (ETFs): These mutual funds let you purchase small pieces of many different stocks in a single transaction. Whereas ETFs track an index. For example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it.
- Individual stocks: If you’re after a particular company or a particular sector of the economy, you can buy a stock or a few stocks as a way of dipping your feet into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
Stock mutual funds have an upside: They are inherently diversified which lessens your risk. But they’re unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely.
Setting a budget
New investors often have two questions in this step of the process:
- What’s the minimum I need to invest?
The amount of money necessary to buy an individual stock depends entirely on how expensive the shares are. If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds often have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price (potentially $10 or less on the low end).
- How much money should I invest?
The amount of money you should invest in stocks depends on two factors: How much can you afford to lose and, will you need the money you’ve invested in the short run. By and large, the way to make money on stocks is to hold the stocks you buy and to receive dividends that you reinvest. Stocks, as has been said before, go up and down. If you cannot afford to lose the money you should go back to those safer investments. If you are investing through funds, then you should allocate a fairly large portion to stock funds. For example, if you have a long investment horizon such as a 30-year old investing for retirement. The person in that example might have 80 percent of his portfolio in stock funds and the rest in bond-funds. Individual stocks, however, should be kept to 10 percent or less of your investment portfolio in order to minimize your risk.
Stock investing is filled with intricate strategies and approaches, yet some of the most successful investors have done little more than stick with the basics. That generally means using funds for the bulk of your portfolio, buying individual stocks only if you truly believe in the potential of the company at hand, and keeping them to a small percentage of your portfolio.
If individual stocks appeal to you, learning to research stocks is worth your time. If you plan to stick primarily with funds, building a simple portfolio of broad-based, low-cost options should be your goal.
Although it is scary, one of the best ways to earn yourself extra dough (or massive amounts, depending on luck and skill) and of letting your money work for you, is through investing in the stock market. It takes a little bit of decision-making at the start and some serious self-analysis as to your risk tolerance. But, it can bring substantial rewards as long as you don’t expect completely smooth sailing. So, put your investing pants on, and give it a go!
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