Wondering how to invest in stocks? Many beginner investors purchase shares in either exchange-traded funds or mutual funds. I recommend this approach for beginners. Exchange-traded funds (ETFs)allow you to invest in a basket of securities, without having to put all your eggs in one basket so to speak. This means that you can still invest in the stock market, even if you are not sure what you are doing.
If you continue to invest, eventually you will want to trade in individual stocks in order to build a more diverse portfolio of stock shares. Index funds will not provide the same level of excitement as stock trading.
For further reading in the “How To” Series, make sure to check out the following articles:
But how do you pick growth stocks? How do you know whose investment advice to listen to when there are so many people giving their opinion? How do you become a stock trading expert?
Investing for Beginners
What is investing?
Investing is about trying to make your money grow.
In other words, investing is saving money now so that it will be worth more in the future.
Why Should You Invest?
While keeping your cash in the bank is one way to save, it is not the best option if you are looking to grow your savings.
The value of money changes over time. You can buy different things with money at different times.
The prices of most goods and services will usually go up over time. This is not an issue in the immediate future – £1,000 GBP now will be approximately the same value £1,000 GBP tomorrow or even next month.
If you have money that you will need to use soon, cash is a good option. Cash that is not invested will gradually lose value over time.
What Are Stocks and Why Invest in Them?
When you buy a share in a company, you become entitled to a part of that company’s assets and profits. As an owner of stocks, you will experience the fluctuations in value that are caused by the business’s successes and failures.
In addition to salaries and wages, some businesses also give a portion of their profits to investors in the form of dividends. This allows investors to share in the success of the business.
In return for agreeing to take on the financial risks associated with owning a business, investors have been able to earn a higher rate of return on their investment and grow their savings.
What About the Stock Market?
Stock markets are the places where we buy and sell shares. They provide us with the means to invest in stocks.
It’s beneficial to invest in the stock market because your savings can grow over time.
Over the long term, economies tend to grow. The population growth in most places leads to an increase in the demand for goods and services, so businesses grow to meet this demand. Productivity also increases as businesses find ways to produce more with the same amount of resources. A growing economy generally indicates an increase in company profits.
Stock prices are usually related to how much profit a company makes. A stock market will typically rise over the long term.
Do they rise all the time? Stock markets are designed to constantly change as new information is introduced. This information can be good, bad, or just okay.
1. Set Your Investment Goals
It is important to decide what you want to get out of investing before you start investing.
Some people invest to save for their retirement. Some people want to save money so that they can buy something specific in the future, while others just want to make sure their money is worth more than it isnow.
It is important to understand your goals so that you can set investment foundations accordingly, such as how much to invest and what to invest in.
2. Understand How You Feel About the Risks That Come with Investing
Your attitude towards risk is crucial to consider before investing in stocks.
How much money you are willing to lose in order to see it increase in value is the simplest way to think about risk. If you’re willing to take on more risk, you often have the potential to lose or gain more.
How comfortable you are with risk and in turn how much you’re willing to take will depend on your own circumstances and things like:
- How much money you have leftover after essentials each month.
- How you feel about the value of your money falling as well as rising.
- How long you plan to stay invested.
If you have a long-term investment horizon, you can afford to take on more risk than someone with a shorter investment timeline.
If you have a limited amount of money to invest or in savings, you will likely want to take on less risk than someone who has a lot of money.
3. Pick Your Investments
As we have discussed, owning stocks in a company means that you own a part of that company and are entitled to a share of the company’s current or future success.
Many big-name firms have stocks that you can buy. This could include large tech companies, banks, well-known fashion brands, and car companies.
Small companies can also have shares. Smaller companies appeal to investors who are willing to take risks, as they are usually newer businesses with more to prove.
Some company stocks can be pricey. This may have meant that they were out of reach for many people in the past.
Nowadays, some stockbrokers let investors buy fractional shares. Each component of a share that can be bought is called a fraction. If a share costs $1,000, you could buy $500-worth of that share.
Fractional shares are an investing method that allows an investor to purchase a portion of a single share, allowing for smaller investments with less money required upfront. This can be a great way for beginning investors to get started in the market without having to commit a large sum of money.
If you don’t want to, you don’t have to choose each individual stock. An ETF is a type of investment that allows you to invest in a collection of stocks or other assets in one go.
The majority of ETFs follow an index, such as the S&P 500 or NASDAQ.
In the financial world, an index refers to a group of stocks or other assets that are combined and used for analytical purposes in order to gain an understanding of how a market is performing as a whole.
The S&P 500 is an index made up of the 500 largest companies trading on the US stock market.
An ETF that tracks the S&P 500 allows investors to simply invest in the companies that make up the index.
This is cheaper and faster than buying shares in each company separately. An additional benefit of investing in a mutual fund is that it offers investors greater diversity in their portfolio, which in turn decreases the likelihood that they will lose a large sum of money.
Although ETFs have many benefits, one downside is that you cannot make as much money as you could if you invested in individual stocks. Even if you diversify your investment portfolio, you may still experience market crashes that could have a negative impact on your overall returns.
4. Make a Commitment to the Long Game of Stock Trades
Investing in the stock market is a long-term endeavor. To be a successful investor, you must be willing to stick it out for the long haul. You need to be dedicated to investing for many years to come.
To be successful in the stock market, you need to be committed and okay with weathering the inevitable ups and downs.
Decide how much money you’re going to invest upfront. It is just as important to be ready to commit to a regular plan to save money for future investments as it is to have a plan for investments.
When it comes to investing, you need to do more than just buying a couple of growth stocks and wait for them to take off. You should not trade stocks randomly or impulsively, even if there are no commissions. A better investment strategy is to invest gradually over time.
So while you might start investing with $1000, you’ll want to add a monthly contribution of $250 or whatever number works for your budget.
5. Extend Your Commitment to Learning About Stock Trading
If you want to learn how to buy individual stocks, don’t expect to become an expert overnight. Be patient and give yourself time to learn.
Once you gain and lose on stocks, you will begin to understand what you are doing. And you start to learn your own risk tolerance. Although this may take a few years, it is much more likely to happen than it happening in just a few months.
You don’t have to put a lot of money into the Dow Jones Industrial in order to learn about it. You can open a brokerage account with no money at most investment firms today. You often only need $100, or less to begin investing.
6. Work With a Full-Service Broker
As a new investor, it’s best to work with the biggest investment brokers. Investment platforms like eToro offer a variety of investment tools and resources, as well as customer support and educational content. This makes them a popular choice for investors looking to get the most out of their investment.
This is critical for a new investor who is ready to open a brokerage account.
As a new investor, you will need a lot of support from your broker. Although there may be some discount brokers that have interesting specialties, they may not be able to provide you with the level of support you need.
The two best investment brokers are Charles Schwab and Fidelity Investments.
As you get more experienced with investing and figure out what kind of investor you are, you can look into other platforms that fit your style better. There are apps like Robinhood and TradeStation that allow you to invest in stocks and get a connection to the stock market.
You will need the resources, tools and support that are most easily available from the most well-known brokers.
The ironic thing is that full-service brokers now only charge commissions or fees if you work with a specific broker or financial advisor.
7. Build Your Stock Portfolio Using Dollar-Cost Averaging
Dollar cost averaging is a process where you gradually increase your portfolio. You will build a portfolio of stocks and then buy more shares every month.
If you had $1,000 and spread it out over ten different stocks, each stock would have $100. You can invest $250 per month into your portfolio by buying $25 worth of each of the ten stocks you own each month.
Dollar cost averaging is when you spread out your buys into different investments over a period of time. This technique is used to avoid big positions to reduce the overall risk. You won’t buy all the shares you want of a stock at once. You’ll buy them over time. The stock price becomes relatively unimportant when you invest in this manner.
For example, if you spread out your purchase of stock over 12 months, you won’t be as affected by changes in the stock price. The price of the stock will not be based on one day, but rather the average price over the course of an entire year. Even if the stock price falls, you will still be buying subsequent shares at a lower price. This strategy minimizes the impact of any price declines.
8. Keep Diversifying Your Investment Accounts
As a new investor, you should have a portfolio with a minimum of 10 different stocks. The ideal amount to invest in any one company should not be more than 10% of your portfolio. If any one company experiences a significant price decline, that will be limited to the downside.
To get started with investing, divide your money into ten equal shares and spread them across ten different companies. As your portfolio expands, you have the option to invest in more companies.
But be careful not to add too many. If you have 20 or more stocks in your portfolio, you could consider investing in a mutual fund or exchange-traded fund (ETF) instead. It can be tedious to keep track of a portfolio that consists of too many stocks.
Stock Trading Doesn’t Have To Be Complicated
There’s nothing complicated about investing in stocks. If you want to be successful, you need to know the process and follow all the steps.
If you implement the strategies outlined in this guide, you will be able to start growing your stock portfolio gradually. Although you’ll be earning less money, you’ll be growing in safety by diversifying your stock holdings and having an emergency fund.
If you slowly build up your position and take your time, you will eventually become an expert in investing in stocks.
Do not forget that every prosperous investor started out somewhere. Most people took several years before they became good at it.
Therefore, it is important that you educate yourself on investing techniques as you are constructing your investment portfolio. If you supplement your education with some real-world experience, you will quickly become a pro.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.