How To Invest In Stocks: Investing For Beginners
Sarah Sharkey8-minute read
December 01, 2021
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If you’re just starting to get a handle on your personal finances, the idea of investing can seem daunting. Although you’ve been told by countless people that you should invest your money for the future, you aren’t exactly sure why or how to do it. Since this is your hard-earned money on the line, you want to ensure that you’re making all the right choices along the way.
Luckily, the process of investing in stocks is not as difficult or as risky as you might think. Once you learn how to invest in stocks, you may be more comfortable moving forward. With that, let’s dive right in.
What Is A Stock?
First, it’s important to understand exactly what a stock is. After all, if you plan to learn how to invest in stocks, then you’ll want to know exactly what they are.
When you buy a stock, you’re essentially purchasing a small portion of the issuing company. You may also hear the words “equities” or “shares” used interchangeably with stocks. You can buy and sell stocks through brokerage sites or directly from the issuing company.
The goal of buying a stock is to benefit from any potential increase in value in the future without any other inputs from your end. For example, if you buy a stock for a dollar today and it is worth 100 dollars 20 years from now, then you’ll profit 99 dollars without putting any time into the company.
Why Should I Invest In Stocks?
Stocks often have the highest potential for a good return on your investment over other types of assets. If you’re trying to build toward your future over a longer period of time, stocks investments can contribute substantially to the financial stability of that future.
For example, if you want to build a solid retirement fund, stocks present a great opportunity. With a 20- to 30-year investment timeline, you’ll likely be able to build your investment portfolio to a comfortable nest egg. With stocks, you have the potential to build a bigger nest egg than stashing your funds in a savings account that offers no potential growth.
On the flip side, the stock market is considered a volatile investment. That means there will be many ups and downs along the way. If you don’t think you can resist the urge to sell off your investments when the stock market inevitably dips, then you may want to consider less volatile investments. The future success of your stock portfolio depends on your ability to ride the waves of the market without panicking at every dip.
Things To Do Before Investing
If you feel like you’re ready to invest, that’s an exciting feeling! However, it’s important to make sure you have the basics of your personal finances squared away first.
Investing in the stock market comes with inherent risks. It’s important to educate yourself on these risks and the potential opportunities that stocks can create.
Instead of jumping in blind, you should start by building a strong understanding of your investment options.
Look for resources from investment experts such as Warren Buffett and Jack Bogle. Seek out books and articles that help you expand your knowledge base so you can invest confidently in the future.
If you have questions to ask, find an expert who is willing to help. Consider talking to an experienced friend or financial advisor to gain a better understanding of stocks.
Set Your Goals
It’s critical to determine your goals for the money you invest. Think about what you hope to achieve with this investment because it will alter your investment strategy.
Are you hoping to build your retirement fund for the future? Are you planning to cover a large expense, such as your child’s college tuition, with this investment? Or are you simply searching for a way to diversify your wealth?
There is no wrong answer. However, clarity around your future financial goals will help you refine your investment strategy appropriately.
Determine Your Investment Budget
Committing to your investment strategy is a big step. You’ll need to determine exactly not only how much you can afford to invest but also how much you’re comfortable investing.
First, you need to determine how much you spend on annual expenses with a hard look at your budget. You have to prioritize your basic spending over investing, so make sure to be realistic about the amount you can invest.
In addition to your mandatory expenses, you’ll need to consider your other savings goals. If you’re building an emergency fund or contributing to a savings account to fund a specific goal, you may decide to prioritize these over investing.
Finally, you need to consider your risk tolerance. If you have a low risk tolerance, you may want to save more and invest less. Investing is a personal decision, so make sure you take your personal tolerance into account.
Once you’ve taken a good look at your budget, overall financial picture and risk tolerance, you can determine how much you feel comfortable investing in the stock market.
Pay Off Outstanding Debt
Debt can be a drain on your financial resources. The longer you keep it around, the bigger toll it may have on your financial future.
Instead of prioritizing stocks, you should start building a better financial future by paying down your debt. If you allow your debts to linger, there might be big consequences. For example, your credit score might suffer and lead to a new set of financial woes.
How To Invest In Stocks
Once you’ve taken steps to ensure you’ve built a solid financial foundation, it’s time to learn how to start investing in stocks.
When you’re ready to get started, here are a few things you can do.
Open An Investment Account
The first thing you’ll need to do to learn how to start investing in stocks is to open an investment account. There are several different options.
The best choice of investment account will depend on your goals. For example, if you want to save money for retirement in a tax efficient way, then a traditional or Roth IRA might be the appropriate investment account.
If you want to save for other goals, a taxable brokerage account would be a better fit. Through your brokerage account, you can purchase stocks. The level of guidance you receive with brokerage accounts will vary based on the firm you choose to work with. If you want to take a hands-off approach to investing with an algorithm guiding the way, an investment account with a robo-advisor might be a better option.
Remember, there are different investment account options for a reason. You can choose vastly different experiences for your investment needs. Make sure to find the option that works for you.
Map Out An Investment Management Strategy
Once you’ve placed your money into the stock market, you shouldn’t leave the funds unmonitored. While your investment portfolio grows over time, your needs should change with time.
If you’re starting your investment journey at a young age, you may be more tolerant of risks. As you age, you might find that you want to review your investment mix and adjust according to your new needs. That’s OK! You should be prepared to adapt over time.
With that, you’ll need to create an investment management strategy that works for your lifestyle. You can take an active approach in which you may work with an investment advisor to pick stocks. The hope is that you’ll outperform the market over time. However, this approach is usually laden with fees. Alternatively, you can take a passive approach in which you try to keep pace with the market instead of outperforming it.
You’ll need to find a strategy to suit your lifestyle. You may even choose to work with a financial advisor to help you monitor your progress.
Take The Leap
You can search for the best ways to invest in stocks. The information available to you is seemingly endless. Although research is important, at some point, you’ll need to take the leap and put what you’ve learned into practice.
It might feel scary at first, but after your initial moves, it’ll be easier to continue investing.
How Much Money Should I Invest?
It can be easy to get caught up in the excitement of investing. Once you get started, it can be tempting to pour everything you have into these accounts. However, there’s no need to rush into anything.
Think back to the investment budget you created for yourself. Try to stick to that budget instead of rushing off to pour your entire life savings into your newly opened brokerage account.
As you continue to invest, your returns will grow over time. It can be a worthwhile venture, but you have to stay the course.
Best Stocks To Invest In
The stock market is known for its volatility. After all, some companies seem to live and die by the closing bell on Wall Street. However, there are countless investment opportunities beyond the name brand companies you already know.
So, which are the best stocks to invest in? Here are a few places to start your search.
An exchange-traded fund is a type of security that encompasses multiple securities. As opposed to an individual stock, an ETF can provide diversified exposure to an industry or sector. You can consider this asan investment option to diversify your portfolio.
Index funds are type of mutual fund. These are designed to include the components of market indexes. For example, the S&P 500 is a popular index fund that provides broad exposure to the market.
Although they may not seem as glamorous as a “hot stock,” they are a popular investment vehicle for beginners. In fact, Warren Buffet once said, “By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals.”
Other Low-Cost Mutual Funds
A mutual fund is essentially pooled money between multiple investors. So, when you buy a share of the fund, you are buying a mix of many companies. In contrast to stocks, you won’t receive voting rights for the purchase of your share. Generally, the funds are managed by a designated portfolio manager.
Other Ways To Start Investing
In addition to your investments in the stock market, you should also consider other investment opportunities. Find a way to build a robust investment portfolio that suits your needs.
A bond is a long-term investment opportunity for investors. As the investor, you buy a bond that essentially acts as a loan for the issuing organizations. When the bond matures in a set number of years, the organization will pay you back the full amount. Plus, you will receive interest payments along the way.
Depending on your risk tolerance, bonds could be a good addition to your portfolio.
Real estate is one type of investment that many shy away from. However, it can be a lucrative opportunity if you do your homework. If you’re uncomfortable being a landlord, considering hiring a property manager. You may be able to build a stream of somewhat passive income through real estate investments.
Precious metals are assets that can be treated as investment opportunities, particularly the high-value metals such as gold, silver and platinum.
If you want to diversify your portfolio into physical assets, precious metals might be a good option.
How Long Does It Take To Make Money From Stock Investments?
Building a valuable investment portfolio is a long-term endeavor. You shouldn’t expect to become an overnight financial success by investing in stocks. You should plan to leave your money invested for at least 5 – 10 years for a decent return. In fact, a longer investment horizon might be more successful.
However, careful planning and a long-term commitment can lead to a lucrative investment portfolio. Now that you’ve learned how to invest in the stock market, it’s time to take action. Start building your long-term wealth today.
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