Are you planning to invest in stocks? Do you want to invest in the stock market? Well, then this article is right for you.
Stock investments are a great way to build wealth. Long-term stock investors find that investments are still reasonable regardless of how volatile the market. After all, if there is a downturn in the stock market, then there are just more stocks on sale.
If you are a beginner, then the best way to get started on stock market investments is to put some funds in online investment accounts. You can then use this account to buy stock shares or stock mutual funds. Several e-brokers will let you start investing for the small price of one stock share.
So how do you go about investing in stocks? Here are six steps to get you started on your investment journey.
Decide on your method of investing
Stock investments can be made using many methods. You can pick between hands-on techniques or having brokers make your investments for you. Your choice of investment method will represent your investment presence and determine how far you will go in building wealth.
If you are the do-it-yourself kind of person, then this article is for you. It breaks down all the things a DIY investor has to know. Already familiar with the stock market and just need brokerage, then you can check out this list for some of the best brokers available online.
Uncomfortable with managing the entire investment process yourself? No worries, there’s something for you too. You can check out Robo-advisors. These services come at affordable prices and will manage all your investments for you.
Generally, almost all brokers offer Robo-advisor services. They let you specify the goals you have in mind, and your Robo-advisor takes care of all the rest. Here are our picks of the best Robo-advisors available.
Once you decide on how you plan on investing, then it’s time to go shopping for an account.
Open an investment account for your purposes
If you are going to be investing in stocks, then you will need investment accounts. Doing things yourself will usually mean you need a brokerage account. If a Robo-advisor is running things for you, then you can leave it to take care of your account for you.
Let’s break down both options a little more.
1. The DIY method
The quickest and most affordable way to go about purchasing stocks and any other form of investment is to open a brokerage account online. Brokers will let you open an IRA (Individual Retirement Account) if you are investing to save up a retirement fund. If you already have a retirement fund set up, then you can also choose to open taxable brokerage accounts.
You should select your broker based on how they satisfy specific criteria including
The cost of using their services Account fees or levies, commissions on trades, and so on, keep an eye out for things like these.
The kind of selection they have for investments. If you have a soft spot for mutual funds, then choosing a commission-free ETF isn’t a bad idea.
The sort of investment tools and research material they will provide you with. These are tools that will be very useful in your investment journey.
2. The Robo-Advisor Option
This is also considered as the passive option since you don’t have to put in as much effort as the DIY option. Instead, Robo-advisors will provide you with a full investment managing service. You will be asked to provide the goals you have in mind at the early stages of this process, and this information will be used to design your investment portfolio.
While this might seem like the more expensive option, it only costs a little bit more. Usually, any Robo-advisors management fee costs about a fraction of what it could cost to hire a human manager. This is more often calculated to be about 0.25% of whatever you have in your account.
Note that using a Robo-advisor does not rob you of the choice of opening an IRA.
Going with a Robo-advisor might make you see the rest of this article as meaningless, but I find that having the extra knowledge often guides the choice of which Robo-advisors to go with.
Keep in mind that regardless of whichever option you go with, the DIY option or the Passive option, you can keep your account costs low.
Let’s move on to the next step.
Understand that stocks are different from stock mutual funds
Are you doing things yourself? Don’t give yourself too much of a headache. Investing in stocks does not have to be so confusing.
All you have to do is choose between two stock investment options; individual stocks and stock mutual funds.
You can buy shares from a particular company to start your investment journey. This is a smart way to go about investment if you are looking to own a company’s shares. Buying individuals stocks lets you diversify your portfolio as much as possible, but it takes significant efforts on your part in both time and funds.
Stock Mutual Funds:
These are also called exchange-traded funds. You can use these to buy small pieces of all sorts of stocks in one transaction.
ETFs and index funds are mutual funds that are used for tracking indexes. For instance, companies in the Standard & Poor’s 5000 fund have their index replicated since the fund purchases their stocks. Investing in funds lets you own little pieces of the companies present in the fund.
You can take advantage of mutual funds, by buying as many as you can and using it to build your diversified portfolio. You can learn more about mutual funds here.
Another benefit of mutual funds is they are naturally diversified. This pulls down your risk-taking by a lot. Most investors, especially those that are planning for their retirement, use mutual funds for this reason.
You should note that mutual funds don’t have a dramatic increase in value like individual stocks. Also, while individual stocks can increase their values drastically, they are not a guarantee of assured wealth. So while they are great for building wealth, they can drop in value just as well as they can rise.
So what’s next?
Determine what your investment budget will be?
As a new investor, you probably have two questions running through your mind.
How much do I need to start stock investments?
The cost of an individual stock is mainly dependent on how much the shares you want costs/ You can get a share that costs as low a few hundred dollars or as much as tens of thousands of dollars.
If you are buying mutual funds and working with a small amount, then an ETF (exchange-traded fund) is the way to go. While mutual funds might have their set minimum limits (often set at $1000), ETFs can be bought at share prices (about $100) since they trade like stocks.
How much should I actually invest?
For mutual funds, since this is less risky, you can choose to assign a larger percentage of your budget towards them. This is remarkably advisable if you are going to be operating the fund over a long period. You can choose to invest about 80% of your portfolio in mutual funds and keep the rest in the form of bond funds.
On the other hand, it is recommended that you only keep at most 10% of your portfolio in terms of individual stocks. This is simply because of the volatile nature of individual stocks.
Keep your eye on long-term goals
There are a thousand and one strategies for investing. But you will find that the best investors have done nothing more than improving on their basic skills. This usually means keeping most of your investment portfolio in mutual funds and only buying stocks from a company that you see long-term growth potential in.
One of the hardest things to do with stocks is to ignore them once you buy them. It is also one of the best things. If you aren’t trying your hands on day trading, then make sure that you don’t compulsively keep checking on your stocks every moment of every day.
Just buy them and keep your eye on your long term goal.
Manage your stock investment portfolio
It is good practice to avoid checking your portfolio every day. But this doesn’t mean you won’t check up on them once in a while. Proper stock management requires that you check in on all your investments at specific points.
Once you have bought your stock or mutual funds, a few times a year, you should revisit them. This will give you all the information on if your investments are still moving along with the goals you have in mind.
Consider these few things though,
If you are nearing your retirement, then it is a good idea to move some of your stock investments to safer options (fixed-income investments).
If most of your portfolio in one industry or sector, then you should branch out into other sectors. This will diversify your investments even further.
Lastly, you should attempt some form of geographical diversification too. Buy international stocks if possible. Try to keep about 40% of your portfolio on the international scene; this will also give you more market exposure.
Traps to avoid when it comes to investing in stocks
Sales in the stock market are not met with the usual excitement that other sales are satisfied with. Instead, when stocks go on sale, traders become afraid to buy.
Why? Well, it means the market is dipping. Even a few drops in a percentage will yield losses.
On the other hand, when the market goes up, investors tend to buy more. They see this as a foretelling of the stock’s potential. But this could be a recipe for disaster too; buy high, sell low.
To avoid falling into these two extremes, you have to understand the mental traps investors make for themselves.
1. Let’s wait until the market is safe
First of all, don’t wait for the stock market to be safe to invest. Most investors cheat themselves by doing this. They hold back because the stocks declined and are scared to invest in the market.
Waiting for the market to be safe is just another way of saying you are waiting for the prices to climb. This means you are only waiting to buy high and sell low.
This mentality is usually guided by fear, but a more technical name for it is “myopic loss aversion.” This means that investors, rather than make long-term gains, would rather dodge short term loss. And they do this at any cost at all.
Summarily, in order to minimize the hurt of a short term loss, you will refuse to buy at low costs or sell your stocks quickly.
Try to avoid this. Track the potential of your stocks over a long period, rather than the short dip it’s going through.
2. I’ll be back next week
Potential buyers use this excuse while they are waiting for stock values to go down. But data from various surveys show that it is impossible to determine how the stocks will move. The stock market can rise just as well as it can fall.
Intelligent investors know to buy and hold stocks when they are affordable and not just when they are cheap.
This “I’ll be back next week” mentality is usually driven by fear or by greed. The scared investor is worried that the stock may fall before the coming week. Greedy investors are expecting a dip in the market and want to buy at lower prices than the current week’s price.
3. This stock bores me; I’m selling
If you are someone who needs excitement from trading, then you are likely to fall into this trap. Safe and smart investments are actually very boring. Prepare yourself for this mentally.
Truly successful investors sit on stocks for a long time. This earns them interests at compound rates and grows their wealth accordingly. There is no hit and run method that works with investments.
It’s a long battle, and if played right, you will come out on top.
This need for excitement is usually driven by the incorrect idea that daily trading is the path of successful investors. There is no denying that there are investors who make money through this method, but it requires ruthless dedication and impeccable rationality. You will also be needing a very high tolerance for risk.
You should also know that most of these successful day traders are not looking for excitement. They are looking for money. They avoid emotional decisions and trade, using only logic.
Frequently Asked Questions about stock investments
What advice do you have for a beginner like me?
Everything written in this article is advice for beginners in stock investments. Following the steps will help you throughout your period of investments. But perhaps, the most important advice is, investing in stocks isn’t as hard as it might appear to be.
You will be provided with several tools that will help you through your broker.
Also, mutual funds are one of the best investment options. They are affordable and very easy to understand and manage. As a beginner, investing in mutual funds is never a bad idea since you can keep them within multiple kinds of accounts (IRAs, 401Ks or taxable brokerage accounts).
To start with, you can buy stocks in an S&P500 fund. This will give you ownership in one of the largest companies around.
Or you can just leave all these worries in the hands of your Robo-advisor. The service will build a portfolio or portfolios that will match your long term goals for a small cut of your funds.
All in all, beginners have nothing to fear with investments. The system is built to accommodate both beginners and experts at the same time.
Isn’t investments only for the wealthy?
Investments are a way to build wealth. So having little money to start with is not a barrier to stock investments. It might be difficult at first, but give it a little time, and you will find that you will easily surpass this barrier.
So how do you start with little money?
Well, first of all, you need to realize that investments have minimum set limits. This will be your first barrier with limited funds.
The second is the difficulty of diversifying little funds. This usually resorts in you having to place all your hope on one fund.
The easiest way to overcome both these barriers lies in purchasing ETFs and index funds. These two options usually have lower minimum purchase prices than other stocks. You could even find funds with no minimum limits at all.
This means you can buy into these funds with little funds. And since index funds hold many stocks in just one fund, you solve the issue of diversification, pretty easily.
Keep in mind that investments are long term. So avoid investing any money you can’t spare for the long term. This applies to emergency funds too.
Does investing in stock really benefit a beginner?
Yes. Everyone benefits from investing in stocks, it doesn’t matter if you a beginner or a veteran. Once you comfortable with investing for at least five years, then you will benefit from stock investments.
Why is five years the limit? Well, it is very difficult and rare for the stock market to go through a downturn lasting longer than five years.
And instead of trading in individual stocks, consider mutual funds instead. Mutual funds let you buy as many stocks as possible in just one fund.
While it is possible to diversify with individual stocks, it is also more difficult to do so. And it would take a lot of time and research too. ETFs and index funds will do this work naturally.
How do I choose where my investments should go?
The answer to this question is largely dependent on two factors; the duration of your investment and the amount of risk you can and are willing to bear.
Let’s talk about the duration first. If you are trying to go for the long game, maybe planning for retirement, then you should focus mainly on stocks (primary focus should be mutual funds.) Doing this will let your funds grow and even avoid the effects of inflation somewhat.
Once you are nearing your goal, you can cut back on allocating funds to the investment. Instead, you can put your funds in bonds since they are an even safer investment option.
If you are playing a short-term game, which is, investing for less than five years, then perhaps stock investing isn’t for you. It would be best if you considered other options instead.
Now let’s talk about risk tolerance. The stock market will always have its ups and downs. And if you are panicky, then you will not handle the downs very well. It would be best if you considered conservative investments and lesser fund allocation to stocks instead.
Doing this will let your risk remain as low as possible while still earning more. While higher risk means more money don’t take silly risks. This could be a recipe for disaster instead.
What stocks should I buy or invest in?
By this point, you should be tired of hearing this; invest in multiple stocks by taking advantage of the nature of mutual funds. This will help you diversify your portfolio at the most affordable rate while also being much safer than buying individual stocks.
If you are bent on investing in individual stocks, then dedicate at most 10% of your portfolio to that. That way, you can still take advantage of the dramatic nature of these stocks, while keeping your losses limited. Keep in mind that while a few people make money through buying individual stocks, a lot more lose money by trading in it.
As a beginner, the safest option is the best. Buy your stocks, spread across as many portfolios as possible and hold. The long game will eventually payout.
Thanks for reading. Let me know your thoughts and comments below.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.