How to Invest in Stocks
If you are ready to start investing in the stock market, there's quite a bit you should know as a beginner before you invest.
A $10,000 investment in the S&P 500 index 50 years ago would be worth nearly $1.2 million today.
Stock investing, is one of the most effective ways to build wealth in the long-term.
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Steps to start investing money in the stock market
1. Determine your approach to investing
Some investors choose to buy individual stocks, while others take a less active approach.
The good news is that regardless of your experience, you can still become a stock market investor.
Ways to invest in the stock market
You can invest in individual stocks if you have the time and desire to thoroughly research and evaluate stocks on a continuously.
It is possible for a smart and patient investor to beat the market over time.
If quarterly earnings reports and moderate mathematical calculations don't sound appealing, there's absolutely nothing wrong with taking a more passive investment approach.
You can choose to invest in index funds, which track a stock index like the S&P 500.
Index funds have lower costs and are guaranteed to match the long-term performance of their underlying indexes.
Over time, the S&P 500 has produced total returns of about 10% annualized, and performances like this can build great wealth over the long-term.
A robo-advisor is a brokerage that invests your money in a portfolio of index funds that is appropriate for your age, risk tolerance, and investing goals.
It can select your investments, optimize your tax efficiency and make changes over time automatically.
If you are a risk taker or are planning to work past a typical retirement age, you may want to shift this ratio in favor of stocks.
And if you don't like big fluctuations in your portfolio, you may want to modify it in the other direction.
2. Decide the amount to invest in stocks
The stock market is no place for money you may need within the next five years such as an emergency fund.
While the stock market will rise over the long run, there is too much uncertainty in stock prices in the short term.
Your age is a major consideration, and so are your particular risk tolerance and investment objectives.
As you get older, stocks gradually become a less desirable place to keep your money if you're retired and reliant on your investment income.
Take your age and subtract it from 110. This is the approximate percentage of your investable money that should be in stocks including mutual funds and ETFs that are stock based.
The remainder should be in fixed-income investments like bonds or high-yield CDs. Adjust this ratio up or down depending on your particular risk tolerance.
For instance, for a 40 years old. This rule suggests that 70% of your investable money should be in stocks, with the other 30% in fixed income.
3. Consider opening an investment account
Investing in stocks is good if you can actually buy stocks. You'll need a specialized type of account called a brokerage account.
These accounts are offered by companies such as TD Ameritrade, E*Trade, Charles Schwab, and many others. Opening a brokerage account is a quick and painless process that takes only minutes.
You can easily fund your brokerage account via EFT transfer, by mailing a check, or by wiring money. Opening a brokerage account is easy, but you should consider a few things before choosing a particular broker:
Type of account
Determine the type of brokerage account you need. This means choosing between a standard brokerage account and an individual retirement account (IRA).
Both account types will allow you to buy stocks, mutual funds, and ETFs. Consider why you're investing in stocks and how easily you want to be able to access your money.
If you want easy access to the money, or want to invest more than the annual IRA contribution limit, you'll probably want a standard brokerage account.
Alternatively, if your goal is to build up a retirement nest egg, an IRA is a great way to go.
There are traditional and Roth IRAs. There are also some specialized types of IRAs for self-employed individuals and small business owners, including the SEP IRA and SIMPLE IRA.
IRAs are very tax-advantaged places to buy stocks, but the downside is that it can be difficult to withdraw your money until you get much older.
Compare costs and features
The majority of online stock brokers have removed trading commissions, and most are on a level playing field as far as costs are concerned.
Some brokers offer customers a variety of educational tools, access to investment research, and other features that are useful for new investors.
Other brokers offer the ability to trade on foreign stock exchanges.
And some have physical branch networks, for face-to-face investment guidance.
There is also the user-friendliness and functionality of the broker's trading platform.
Many will let you try a demo account before committing any money, and I highly recommend it.
If you want to invest in individual stocks, familiarize yourself with some of the basic ways to evaluate them.
4. Choose your stocks
Diversify your portfolio.
Invest only in businesses you understand and avoid high-volatility stocks until you get the hang of investing.
Always avoid penny stocks
Learn the basic metrics and concepts for evaluating stocks. You should have a variety of different types of companies in your portfolio.
Avoid too much diversification. Stick with businesses you understand.
Buying flashy high-growth stocks may seem like a great way to build wealth, but I'd caution you to hold off on these until you're a little more experienced.
Create a "base" to your portfolio with rock-solid, and established businesses.
5. Always continue investing
According to Warren Buffett, you do not need to do extraordinary things to get extraordinary results.
Warren Buffett is the most successful long-term investor of all time.
The most certain way to make money in the stock market is to buy shares of great businesses at reasonable prices, and hold on to the shares for as long as the businesses remain great, or until you need the money.
You will experience some volatility along the way, but over time you will gain excellent investment returns.