How to Invest in the Stock Market: Instructions for Surviving (and Making Money)
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Investing allows people to save money on the side while you are doing other things in your life. With investments, your money works for you day and night, and eventually, you have a nest egg for globe-trotting trips, healthy retirement, entrepreneurial aspirations, or anything else you have in mind.
Warren Buffett once defined investing as, “the process of laying out money now to receive more money in the future.”
That’s a pretty simple concept, but if you remember this throughout your first 90 days of investing, you will save for the long-term and avoid some of the consequences when you play with risk.
Investment is also about how you understand risk. If you put your money in a single investment, there is risk that you miss out on other more lucrative investments. If you spread your money around, you may not make as much money when one of your stock increases sharply. However, you should always set goals before you start investing. If you get in too deep, you can always remind yourself of your goal and cut your losses.
So where do you start? First of all, how much do you have to invest? If you have at least $500, you can start investing, but you may want to start with more. There are a number of ways to get into investing, and it can work even if you only have $50 extra per month to put back into your nest egg. The whole point is that you grow this $50 into $500,000 over weeks, months, and years of solid investments.
Quick Tips on Investing
- Investing means that you dedicate money aka “capital” to an endeavor with the goal of obtaining additional profits.
- Investing is the opposite of consuming as you set aside money for the future and grow it over time, rather than spending what you earn.
- There are risks and losses with investing. However, this guide should help you minimize your risks as you get started.
- The most common way for beginners to get into investing is through the stock market.
How to Get Started with Investing
Before you decide to start investing in your favorite tech brand or head over to Charles Schwab, you should answer this:
What kind of investor do you want to be?
The internet has changed the way that people invest. You can now comfortably sit at home and monitor your stocks on your computer, or you can even just check your stocks apps on the subway. It’s easier than ever to find an online broker who will guide you towards the right investments, but is that how you want to invest?
Here are some of the investor archetypes, revealing how to invest in stocks:
- Active investors: These investors are constantly checking their stocks’ performance, and they keep up with the daily finance happenings on Wall Street. They follow the Dow Jones, and they have mobile investment apps to help with stock research and portfolio spread. While they aren’t into day trading necessarily, they do follow trends and pick up stocks when they see interesting news. They probably invest in tech brands and look for promising IPOs so they can see big gains in the short-term. These investors typically do not hold an investment long-term if it does not perform as expected.
- Passive investors: This stock market investor is not so much of a player but a watcher. They don’t really care about big gains, but they do want to see profits at the end of each year. They likely have mutual funds, which allows a funds manager to buy and sell based on their portfolio and goals. While these investors may have a few favorite stocks that they follow, they are not quick to make selling decisions. Instead, they allow apps and robo-investments to match their goals based on data trends, thus removing the daily stress out of investing.
- Speculators: Perhaps you are looking to make money fast, and you want to see big gains. Like an active investor, a speculator is always following the trends, but they are actively looking for single stocks that will make them rich. This is an investor who is okay with a lot of risk and who likes to sell stocks immediately after they turn a profit. If you are into buying and selling frequently, then you may want to get into speculation. However, this isn’t a beginner’s best choice.
- Retirement investors: When you’re young and have some money, you may have been an active investor. You took some losses and had some gains, and overall, you came out with a little bit more money. However, retirement investors tend to slow down on buying risky stocks and stock to low-to-moderate risk stocks that will continue to grow as they have grown for the past 20 to 50 years. These are old faithful stock portfolios that incrementally add to your retirement fund each year. While you may experience some bigger gains with fluctuations in the market, you won’t be selling any time soon.
In addition to these archetypes, there are other technical forms of investors thanks to apps and online brokerage firms like Charles Schwab, Fidelity, and E-Trade.
With an online brokerage, you can invest in stocks, exchange traded funds (ETFs), bonds, index funds, and mutual funds. You can be an active or passive investor with this type of brokerage, and there are a lot of helpful tips and stock trends that you can easily pick up with mobile apps.
When you sign up with an online broker, you either have a full-service account or a discount account. With a full-service brokerage, you get all of the services available, such as financial advisors for retirement or advice on healthcare. Full-service brokers typically only deal with higher net worth investors because they have substantial fees and even require a percentage of the transactions to be paid to them. In addition, you’ll pay a percentage of the assets that they manage.
Typically, a full-service brokerage needs an investment of $25,000 or more to get these services. However, they are at your beck and call since it is a full service brokerage. They provide sound advice on investments, and they are invested in you doing well, which means their advice generally pans out.
However, discount brokers are more popular now. Along with the rise of the internet, online brokers had to adapt to get more business and make the entry into investing easier for beginners. This led to discount online brokerage firms that you give you some tools and allow you to make your own purchase and sell decisions. While some of these brokerage firms allow you to “set it and forget it” with their tools, you won’t have an advisor to speak with. You typically get data-fed trend news, tips, and probability or chance ratings on certain stocks with some of these mobile apps.
If you have a small amount to invest, then you can use a discount broker since they generally have very low or no requirements on deposits. However, they may charge more fees for not depositing a higher amount. As you review different mobile apps and online brokerage tools, you should look at their fees and what it costs to invest through their tools.
With technology comes new tools for streamlining stock tips and advise without an actual person. Roboadvisors are just that. These are algorithms that help you make investment decisions. They can also make decisions for you based on parameters that you set, such as tax-loss harvesting or rebalancing.
For long-term wealth investment, a roboadvisor is actually a good idea according to clients who use these tools today. You can set it up and include parameters to manage how the algorithm invests for you. Once set, you can log in to check your daily gains and losses, but in general, the roboadvisor does all the work for you.
Employer Investment Accounts
If you do not have a big budget, you may want to choose investing with your employer. You can choose to invest a small percent of your salary into a retirement plan. While you can determine what percentage you invest, 1 percent retirement plans are typical for work-based retirement investments.
You probably won’t even miss a small contribution into your retirement fund. Most people simply forget that they have a 401k, and after years of investing, this portfolio can grow into quite a nest egg.
With an employer-based investment plan, you’ll deduct the contributions from your paycheck before taxes are taken out. This actually means that you get more of your money back, but you have to wait to withdraw.
Opening Your First Stock Investment Account
To open your first brokerage account, you simply need to understand the following:
- Choose what type of brokerage account you want.
- Compare fees, incentives, services and other costs.
- Set a budget for your stock investments.
- Select the right brokerage for the type of investor you want to be.
- Sign up for a new account with all the necessary information.
- Fund your new brokerage account with a minimum investment.
- Conduct research on investments you’d like or work with an advisor to select the best investments to start.
Define Investment Goals, then Pick a Brokerage Account
What would be the best result in your mind if you invested money into the stock market? Do you want to invest for the short-term or long-term? Do you want your money tied up in a retirement account? If you are looking to grow your cash on-hand, then you need a traditional brokerage account. While these accounts lack tax advantages, you are free to withdraw your money whenever you want. You will have to pay taxes on your profits and dividends, however.
If you want to go with a cash account, your brokerage will ask if you need “margin privileges,” which allows you to borrow money to invest in stocks. The stocks in your portfolio become collateral and pay back what you borrowed over time. You also pay interest on this money, and there are some risks if you invest on margin, especially if you don’t have the money to pay back after a stock fails.
For those who are in it for the long-term plan and want to retire on their investments, then it’s best to use an IRA. A traditional IRA is also tax deductible, but you won’t be able to access this money until you’re over the age of 59. You can also contribute to Roth IRAs, but these won’t give you any tax benefits. However, you can make qualified withdrawals without paying taxes if you need to.
If you are self-employed and looking for retirement options, then you may want to check out the following: an individual 401(k), SIMPLE IRA, or SEP-IRA.
If all of this seems confusing, you may want to get started on a stock trading app that explains the basics to you and sets up an account based on preferences that you select. Some of the best stock trading apps for beginners include:
- E-Trade Mobile
- TradeHero (Not real, but you can test out the market with fake money and learn about investing through practice)
- TD Ameritrade Mobile
In addition, you should also consider what type of investments you want to make. Do you want to invest in individual stocks or mutual funds? Here is a quick breakdown:
- Stock mutual funds aka exchange-traded funds (ETFs): You can purchase a small portion of many different stocks in one transaction. These are also called index funds or ETFs, and they are based on the performance of an index. For example, if you look at an S&P 500 fund acts like an index by small pieces of stocks of all the companies in it. When you invest in this fund, you will own a small portion of each company. You can add several funds together, which creates a diverse portfolio. Sometimes stock mutual funds are also known as equity mutual funds.
- Individual stocks: If you want to invest in a particular company, then you can buy shares in that company alone. This can be risky especially if it’s a new stock. However, you can pick and choose individual stocks to build a diverse portfolio.
The goal here is to determine whether you want a diversified portfolio that makes you money gradually, or do you want to invest in a risky stock that could have a huge pay off? Some new stocks may have a meteoric rise to profits in their first six months, but they could drop if the company does not grow or meet its investment milestones.
Compare Fee Structures and Costs with Incentives and Services
Every brokerage charges a commission on what you make. Some brokers also offer discounts. One example is the brokerage firm Ally. With Ally, you can invest and pay a commission as low as $3.95 if you are a high-volume trader. There are also brokerages that link up to banks, and you’ll typically receive a discount for maintaining this relationship with your brokerage and checking account.
There are all “pricing schedules” for every brokerage that you need to review. If you plan on trading anything like options, funds, or bonds, then you’ll find a cost structure applies. One example involves a small fee per options contract that is charged on top of a commission rate.
As you research different brokerage firms, you can search for “brand name” + “incentives” to get a sense of which brokerage offers the best deal and fee structure. Some incentives include a $0 online stock trade fee, $0 ETF trade fee, and no minimum deposit requirement. Other brokerages may even offer a small cash incentive based on your deposit amount.
Picking Brokerages Based on Services
In general, you want a stock market that is your oyster. An ideal brokerage firm may offer:
- Commission-free trades for certain stocks like US stocks, ETFs, and options.
- Retail brokerage or retirement accounts
- Decision-making tecnology or robo-advisors
- Broad choice of investments: stocks, options, ETFs, mutual funds, CDs, IPOs, and precious metals
- Trading strategy tips, insights and education courses
- Full-service brokerage options with your own personal account advisor or manager
Fees and How Trading Works
When you make a trade, you are purchasing a share in one company. Even if you purchase six different stocks at once, you are still making six different trades, and you will incur charges and fees for each one. Some brokerages handle bulk trades differently though.
For example, if you decide to buy stocks in five different companies with a $1,000 investment to start. This means that you will be charged $50 in trading costs based on a $10 trading fee or 5% of your total $1,000 investment. If you invested all of the $1,000, your account would only have $950 in it after paying those fees. This means that you have a 5% loss even before you earn.
If you sell these five stocks, you also have more costs. It would be another $50 to sell. This means that to buy and sell five stocks, you’ll pay $100, which is also equal to 10 percent of your first deposit of $1,000. If you do not earn or grow your investments to cover your costs, then you have lost money just by starting to trade.
Set a Budget for Investing
There are two questions that new investors typically ask when getting started with investing in stocks.
How much money do I need to start investing in stocks?
The amount of money needed to buy an individual stock depends on the share price. Share prices can be a small amount, such as a few dollars, or they could be a few thousand dollars. This depends on the quality of the stock as it is currently being traded. You may want to invest in mutual funds if you have a small budget. You can easily invest in ETFs. Mutual funds typically require a budget of $1,000 to start with. However, you can purchase an ETF for a share price, which means you can invest for less than $100 sometimes.
How much money should I invest in a stock?
If you are investing through a fund, then you can set aside a large portion of your portfolio towards stock investing. For example, a 20-year-old investing for retirement might place 70 percent of his or portfolio in stock funds. The rest of the portfolio may go to bond funds to play it safe. Individual stocks should be kept to 10% or less of your entire investment portfolio.
Finally, you can invest with as little as $100, $500, or more. While you can do more with a larger investment account, you can start off small or even use a stock market simulator app like TradeHero to learn more about investing before spending actual dollars.
How to Diversify and Minimize Your Risk
When you invest in a variety of stocks, you reduce the risk that one stock will perform badly and severely tank your portfolio’s return. You want to grow your overall ROI or return on investment.
While you can’t get large returns from investing $1,000 and diversification, you can grow your money over a long period. Stock trading apps like Acorn are making it easy for people to invest with small amounts and earn some money back.
In general, you should start by investing in one to three companies to start. Mutual funds and ETFs are stronger because they provide some security by investing in several companies at once.
Stock Trends: Understanding Fundamental Analysis vs Technical Analysis
There are a few different ways to analyze and project how a stock will perform.
One method is called fundamental analysis. Through this method, you can determine a stock’s real “fair market” value. By looking at the fundamentals, you can see what stocks are trading high above or lower than their real value. Strategically thinking, if the fair market value of a stock is higher than its trading price, then the stock is undervalued. You would typically be advised to purchase an undervalued stock.
However, those who follow the technical analysis do not pay attention to fundamentals. Instead, they look at the historical price and volume trends. Technical analysts like to forecast what a stock will do based on its entire history.
These methods are used by different traders. Long-term investors will look at a fundamentals because they want to see the quality of a stock. A technical analysis is used mostly in short-term trading by active traders. Investors may also use quantitative analysis to understand the financial stability of a stock in relation to the company’s historical performance.
Understanding how to invest in stocks takes practice and experience. It helps to have a great mentor who already trades regularly. While some investors use mobile stock trading apps, you can also look at a more traditional brokerage firm such as Charles Schwab. It’s also important to set your budget limits and diversify as you grow your profits. With the help of stock analysis, you can trade smarter and venture into different types of investments, such as mutual funds, bonds, securities, options, and more.