If you are looking for a way to earn more money, one of the best methods is to invest in stocks, as I have mentioned here. If you learn how to invest in a prudent and patient manner over a long period of time, you can get incredibly profitable returns in due time. It is a great way of setting aside money while you are involved in other activities; in due time, that money will prove to be a valuable asset for you.
Like the famous investor Warren Buffet says, investing is simply “the process of laying out money now to receive more money in the future.”
Even when the market is relatively volatile, stocks are an excellent investment for long-term investors. Newcomers commonly gain investment experience by investing in the stock market.
However, setting out to invest in the stocks for the first time can be a rather overwhelming process. Unlike certificates of deposit, money market funds, or savings accounts, stocks come with the risk of losses; their principal value can both increase or decrease. Unless you have a good knowledge of investing and a great degree of self-control, you could end up losing a large portion of your investment capital, or even all of it. Thus, it is important for you to learn about the basics of investing in stocks before you begin.
In this article, I will take you through the process of getting started as an investor and help you understand how to maximize your returns and minimize your costs.
If you are new to stocks, please read my article on Stock Market for Beginners here.
How to Invest in Stocks?
If you are a newcomer, putting money in an online investment account is a highly recommended way of getting started with investing. You can then use it to buy stock mutual funds or shares of stock. Once you are in possession of multiple brokerage accounts, you will be able to begin investment at the price of a single share.
Given below is the detailed procedure for investing in stocks.
Decide how you want to invest in the stock market
When it comes to stock investing, there are many methods you can go for. You should select one which accurately represents the way you wish to invest, and how practical you want to be in selecting the stocks you invest in.
- If you prefer to select stocks and stock funds on your own, keep reading on. I will elaborate on facts that practical investors like yourself should understand, such as comparing stock investments and choosing an account apt for your requirements.
- If you would rather have an expert handle the process for you, you could use a robo-advisor – a class of financial advisors, that provides a cost-efficient investment management. Most prominent brokerage firms offer such services and, depending on your particular goals, will invest your money on your behalf.
- A lot of beginners like to start investing in their employer’s 401(k). In this way, they get to learn about some of the most reliable investing methods, such as opting for a practical approach and having long-term goals by regularly making small contributions.
After you decide what your preference is, you can proceed to shop for an account.
Select an investing account
You usually require an investment account to start investing in stocks. If you are a more practical investor, this generally refers to a brokerage account. If you would like to have some help with the process, you should consider opening an account through a Robo-advisor. You will be able to open an account with minimal costs with the help of both brokers and Robo-advisors.
Open a brokerage account
You will be able to buy funds, stocks, and various other investments in a cost-effective manner with the help of an online brokerage account. You can also open an individual retirement account (IRA) or a taxable brokerage account (if you’ve saved enough money for retirement) with the help of a broker. The evaluation of brokers should be based on factors like investment selection, investor research and tools, and costs.
Open a Robo-advisor account
With the help of a Robo-advisor, you can get the benefits of stock investing without having to put in the effort needed to choose individual investments. You can get wholesome investment management from Robo-advisor services; after asking you about your investment goals when you sign up, they will put together a portfolio to help you achieve those goals.
Admittedly, that will cost you some money. However, these management fees are much lesser (usually just about 0.25% of your account balance) than what you would have to pay to a human investment manager. If you want, you can also get an IRA at a Robo-advisor. The rest of the process is so straightforward that you won’t even need any additional help for the same.
What is the difference between investing in funds and stocks?
Stock investing is much less complicated that people make it out to be. Basically, it requires you to choose between two kinds of investments given below:
- Stock mutual funds (equity mutual funds) or exchange-traded funds (ETFs) – You can buy many small pieces of various stocks in one transaction with the help of mutual funds. ETFs and index funds are basically types of mutual funds which track an index. When you choose to invest in a fund, you get the ownership of certain small parts of every one of those companies as well. You can then build a diversified portfolio by putting together a number of funds.
- Individual stocks – If you are going for a particular company, you can choose to purchase just one share or a few shares in order to get started in the stock market. Although you technically can put together a diversified portfolio using several individual stocks, it demands a lot of investment on your part. Fortunately, since stock mutual funds have a lot of intrinsic diversity, they are relatively less risky. A portfolio consisting largely of mutual funds is preferred by most investors, especially the ones who have chosen to invest their retirement savings. That said, mutual funds aren’t likely to rise dramatically like certain individual stocks. Although choosing wisely from individual stocks could give you excellent returns, an individual stock is unlikely to make you rich.
Put together a budget for your stock investment
The amount of money you require to purchase an individual stock depends on the price of the shares, which can range from a handful of dollars to several thousand dollars. If your budget is limited and you are seeking mutual funds, you should consider going for an exchange-traded fund (ETF). Although mutual funds generally have a minimum of $1,000 or more, ETFs trade similar to a stock. Thus, you will be able to purchase them for the price of a share – occasionally less than $100.
Beginners also tend to enquire how much money they should invest in stocks. A lot of financial advisors suggest people invest through funds; in that case, you can put aside a major part of your portfolio toward stock funds. This is especially advisable if you have a significantly long time horizon. A relatively young individual investing for retirement could have almost 80% of his or her portfolio in stock funds, and the remaining portion would be in bond funds. However, you should only keep individual stocks to a small part of your investment portfolio.
Have long-term goals in your mind
Although meticulous strategies play an important role in stock investing, several phenomenally successful investors have chosen to simply follow stock market basics. Basically, that means you should use funds for most of your portfolio and go for individual stocks only if you have faith that the company has potential for healthy growth in the long term. Once you start investing in mutual funds or stocks, you should refrain from looking at them obsessively unless you are trying hard to succeed at day trading.
Manage your stock portfolio
Naturally, worrying all the time about daily fluctuation will only negatively your portfolio’s health, and your own health as well. However, at certain times, you must revisit your stocks and other investments. If you have followed the process for buying individual stocks and mutual funds over time that I have mentioned above, you simply need to check in on your portfolio a few times every year, in order to ensure that it is not straying from your investment goals.
If your retirement is near, you should consider moving some of your stock investments to fixed-income investments, which are more conservative in nature. If your portfolio happens to lean heavily towards one industry or sector, you should try purchasing funds or stocks in another sector, in order to have more diversity. You should keep geographic diversification in mind as well. According to Vanguard, up to 40% of the stocks in your portfolio should be international stocks. For this purpose, you can buy international stock mutual funds.
If you are truly interested in investing in stocks, you should try to begin as soon as possible. That will give you a better chance of getting higher overall returns on your investments by the time you withdraw your money from the stock market. The longer you keep your money invested, the more time it will have to grow. By following the steps I have mentioned in this guide, you will have a solid foundation to help you get started with your journey of investing in the stock market.