How To Invest in Stocks: A Beginner’s Guide
Investing in the stock market is one of the best ways to create wealth over time. If you’ve never invested, all the names and numbers you hear in the news about stocks might seem like gibberish.
With some research, you can unlock the meaning behind confusing stock terms and learn just how important — and easy — it is to begin investing, regardless of how much money you have. Here’s how to get started:
Your investments should be separate from your savings or emergency accounts. Reserve the latter for short-term goals and unexpected debt. On the other hand, your investments should be for long-term goals, such as retirement.
To help you build up your investment funds fast, stick to the old investment axiom to “pay yourself first.” Before you spend money on discretionary expenses, divert some of your income toward your investments. This ensures that you still have the necessary funds to pay your bills.
1. Decide What Kind of Investor You Are
Your investing goals and risk tolerance will help you decide which stocks to buy and at what price. Consider what you want to do with your money: purchase real estate, produce income, maximize capital appreciation, etc. Then, figure out how much time you have to meet your goals.
Risk tolerance refers to how much money you’re willing to lose on an investment in exchange for the potential of greater gains. The stock market is unpredictable, so your risk tolerance decreases with time. Someone who plans to retire in 35 years has more time to recover from a dip in stock prices than someone who has five years until retirement.
Once you’ve considered your financial situation, risk tolerance and amount of money you’re willing to invest, decide how you want to invest.
There are two primary categories of investors: hands-on and passive.
Hands-On Investor
A hands-on investor builds a portfolio by choosing investments either alone or with a financial advisor’s help. This option offers more control over the portfolio’s structure and appeals to individuals looking to maximize gains. It is also more time-consuming for the person who has to research the available investment choices.
Passive Investor
Passive investors don’t choose individual stocks. Instead, they match the performance of specific market indexes like the S&P 500 or Dow Jones Industrial Average. This approach tends to lessen volatility and provide a more stable return over time, but it comes with less growth potential.
2. Decide Where To Open a Brokerage Account
Investors can open a brokerage account in several places, including traditional and online brokerage firms such as Charles Schwab, Fidelity and Robinhood.
Online investing is easy, efficient and inexpensive, but there aren’t as many safeguards to prevent you from making bad trades. Some online brokerage firms, like Robinhood, are fully automated robo-advisors, while others, such as Fidelity, offer hybrid services that include robo-advising and financial coaching.
On the other hand, full-service brokers provide a wider range of services and more professional hand-holding for nervous or inexperienced investors. But these services come at a higher cost.
3. Open a Brokerage Account
Opening a brokerage account is just as easy as opening a checking or savings account.
To open an account with a broker, you can schedule an appointment to speak with an advisor in person. The advisor can help walk you through the different account options available to decide what’s best for you.
To open a brokerage account online, visit the brokerage’s website and complete the online application.
You’ll have to provide the following personal information:
Name
Social Security number
Driver’s license or passport information
Employment status
Contact person
Additional financial information, such as your bank name and account number
In addition to providing personal information, you will also need to answer questions about the type of account you want and how you plan to manage it.
4. Decide What Types of Stocks To Invest In
Purchasing stock directly from a company isn’t the only way to invest in stocks. Investors can also choose between mutual funds, index funds and exchange-traded funds.
5. Manage and Diversify Your Portfolio for Long-Term Success
The key to success as an investor also depends on your ability to lessen the risk by researching the investments that best meet your needs, diversifying your portfolio and keeping track of its performance.
Here’s how:
Choose a mixture of stocks, bonds and other short-term investments that match your investment goals and risk tolerance.
Meet with a financial advisor regularly, such as every six to 12 months, to review and evaluate your investments’ performance.
Rebalance your portfolio as needed by selling investments in overweighted categories and buying investments in under-weighted categories.
Change your asset allocation as you get closer to retirement if you’re falling short of your financial goal.
Stock prices will rise and fall in reaction to factors you cannot control. But taking steps to manage your portfolio — either on your own or with assistance — can help you reach your financial goals.
6. Consider Your Finances Over the Long Term
Even if you seek a financial planner’s advice, you make the ultimate decisions about your investments. Avoid making rapid investment decisions without considering how they fit into your bigger plans. Here’s what you can do to get started:
Set a budget. Set limits for your investing budget and make it a line item on your regular budget. Remember that you should only invest money you’ve earmarked for investments, which is separate from your essential income.
Discuss plans with a financial advisor. A financial advisor can discuss investment options with you and help you determine what’s best for your situation.
Focus on long-term growth instead of short-term gains. Keeping an investment for an extended period of time can save you money in transaction fees and capital gains taxes. As long as you’re investing in a solid company, the investment will likely increase in value over time.
Investing In Stocks: Frequently Asked Questions
For the new investor, investing in the stock market can be an overwhelming experience. Here are some frequently asked questions tailored to new investors.
What Should You Consider Before Investing In Stocks?
Before you decide to invest in stocks, it’s helpful to have a basic financial education, including understanding the following broad topics:
Banking and budgeting
Credit and debt
Income planning
Risk management
You may want to wait until you have paid off your debt and have an emergency fund in place before investing in stocks. Using disposable income or income you’ve specifically dedicated for investing can help you avoid financial ruin if the stocks don’t perform how you expected.
Can You Lose Money If You Invest In Stocks?
Yes, you can lose money if you invest in stocks. This can happen if you sell the stock for a lower price than you paid for it. Stock prices fluctuate depending on factors like market conditions, political events and company performance. The company may also go bankrupt and liquidate assets to pay back debtors.
All investments — including stocks — carry a degree of risk. There’s always a chance that you can lose the money you invested, so it’s important to only invest funds you can afford to lose.
When Should You Sell a Stock?
Generally, stocks are a long-term investment, but there are times when you should consider selling them.
Here are a few:
The stock doesn’t fit your goals. When the stock no longer meets your financial needs, it may be time to let it go.
You find better alternatives. A change in the fundamentals of an investment can make other investment options more attractive.
It’s time to rebalance your portfolio. Reviewing and rebalancing your portfolio ensures that your asset mix matches your risk tolerance.
You need a tax break. You can use a loss in an investment to offset capital gains in another.
Can You Make a Living Investing In Stocks?
Yes. If your goal is to make a living investing in stocks, a good time to invest in stocks is as soon as possible. The younger you are, the more time you have to let stock prices increase before you cash in.
Even so, no one expects you to know how to invest in stocks without knowledge. You’ll need to learn how to invest in stocks and make money. To get started, take steps like setting an investing budget, understanding key terms and concepts — like stock type orders and limits — and seeking solid investment advice before diving in.
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Last updated: May 6, 2021
This article originally appeared on GOBankingRates.com: How To Invest in Stocks: A Beginner’s Guide
