In the most simple terms, investing is the process of putting away money now, and then letting it grow so that you will gain more money over time. But first, you will need to establish an investment plan. How much risk are you willing to take on? What kind of investment vehicles are you interested in? How much capital do you have to get started? These are all essential questions for a solid investment strategy.
>>Looking To Trade instead of Invest? Check out our guide on trading stocks
Many new investors choose to put their money into stocks. If you're wondering how to start, then follow our complete guide below for all the steps you need to take. Also, visit PFI for all our guides.
Understanding the Stock Market
First, you need to understand the stock market. This is a marketplace where buyers and sellers come together to trade shares, which are a type of ownership claim on a business.
Stocks can be listed on the public stock exchange, and are also known as securities. The other option is to trade in private stocks which include shares of private companies. Stocks belong to the country in which the company is based, with each country having its own market.
Stock trading is most commonly done through a stock brokerage or on an electronic trading platform.
Deciding on an Investment Style
The first thing you need to know when investing in stocks is to have an understanding of your investment style. There are many different ways to invest, and having a strategy in place is essential for success.
When opening any type of investment account, your broker will ask you about your investment goals, and the amount of risk that you are comfortable with. There are three basic approaches to choose from. This depends on your personality.
- Hands-on investment: This is when you choose what stocks you want to buy and sell. Hands-on investors are in complete control of their portfolios. This involves more work and involvement in your investments. It also requires the investor to have a good knowledge of the markets. A hands-on investing style is great for those who want to be in control. This is a very rewarding style of investment for the right person.
- Professionally-managed investments: Most beginners choose to rather get an expert to manage their portfolio for them. This “set it and forget it” approach allows you to invest in stocks without having to constantly stay up to date with your portfolio and the markets. Most major brokerages offer a Robo-advisor service which gives you a low-cost option for investment management, This is a great choice for beginners.
- Investing in your employers 401(k): This is the approach that most investors start with. Investing in your employer’s 401(k) offers a good level of safety. This approach is focused on setting aside a small bit of money each month and investing it for long-term growth. This helps new stock investors to get into the right mindset.
Invest in Stocks: Choosing an Account
If you want to start investing, you will need an investment account. The type of account that you choose depends on your investment style, which we outlined above.
Generally speaking, a brokerage account is suitable for hands-on investors. A Robo-advisor is best for those who are after a higher level of help. You can also choose to invest through your employer. We have outlined each of these options below.
When choosing a broker, you have two options. These are full-service brokers or discount brokers. Full-service brokers offer clients a full range of brokerage services. These types of brokers are generally preferred by higher net worth individuals.
The appeal of a full-service broker is that they offer a greater level of advice. You can go to them for help in planning retirement, healthcare, and all other money matters. The downside with this type of broker is that the fees are a lot higher, and you will have to deal with a high account minimum. That being said, you get a much greater level of expert advice and customer service.
Discount brokers are more common. These brokers offer all of the tools that you need for investing in stocks. You can either use this account for investing by yourself, or you can get help from a Robo-advisor.
Discount brokers vary quite a bit. Different brokers offer different types of tools and resources. They have unique trading platforms and restrictions. Any investor must have a good understanding of their discount broker and what they offer before opening an account.
Robo-advisors appeared after the 2008 financial crisis. These advisors use algorithms to help with investment decisions. You don't get the same level of human involvement that a typical brokerage account offers. However, Robo-advisors are still known to offer excellent results to the right investor. The big advantage is that Robo-advisors offer much lower management fees.
This type of account is ideal for stock traders that don't want to do all of the work of choosing investments themselves. You outline your investment goals and are then assigned a fully managed portfolio based on your goals. This is a brilliant passive option for easy stock investing.
Investing Through Your Employer
The easiest option would be through your employer. If you have a 401(k), you will most likely already be investing in stocks. This approach takes a minimal part of your monthly salary and puts it away for retirement. The contributions are small, but they are easy to manage.
Now that you have an understanding of your investment style, and you know what type of account is best for you, it's time to open that account and start trading.
Before you go ahead with this, there are some important considerations to make to ensure you open the right account for your needs.
Commissions and Fees
No matter what broker you go through, you will have to pay them in some way. The commission and fee structures of your account will vary depending on the broker you choose and the type of account. This needs to be chosen with your investment strategy in mind.
Most brokers will charge a small commission each time you trade a stock. If you see a broker that offers no-commission trading, be aware that they will make up these fees in other ways. If you plan on being a frequent trader, then these fees will add up.
If you take a much slower approach to investing, then the fees will not be as intensive. This is why you have to understand your approach to stock trading first, and then choose a broker that offers a suitable fee structure.
Your broker will require a minimum amount of capital to open an account with them. This varies greatly, so it’s important to compare brokers and see what different options they offer.
Some brokers don't require a minimum amount, making it much easier to get started. Others may require thousands of dollars deposited for your application to be successful.
Be aware that account minimums and fees and commissions differ with brokers. Often they are also related to each other. You need to consider both of these aspects together for a well-rounded understanding of which broker will be best for your strategy.
Understand Stocks and Funds
When learning how to invest in stocks, you need to know the difference between stocks and funds. Individual stocks offer a single share of a business. Traders build up their diversified portfolios of individual stocks for more control over their portfolios. This may be a more expensive route to take.
Mutual funds let investors buy a single portion of a larger group of stocks. These offer an approach that is already diversified. Mutual funds are great for long-term savings because they offer slow but consistent growth. This is a safer, but effective, way to trade.
You also get index funds and ETFs. These funds are a type of mutual fund, but they are tracked along an index. Traders buy a variety of different funds to build up a large and diverse portfolio.
Investing in stocks is a wise choice, and the sooner you start the more potential your investments will offer over time. Make sure to consistently keep an eye out on your portfolio, and manage it when you need to.
Whatever approach you take and however much you choose to invest, the same essential concept applies: it’s all about time in the market.
The longer you spend investing in stocks, the more your capital will grow. Follow the steps above, stick it out, and you will soon build up a healthy financial portfolio.