Investing in the stock market can often seem like a strange, mysterious process that’s impossible to learn. Good news! It doesn’t take a genius to learn investment basics and that’s exactly what we’re going to teach you – welcome to investing 101. Have you ever watched an old movie and seen someone calling their stock broker? While you can still do that, there really isn’t any reason to. With today’s growing popularity of online stock market investing, you get to be your own stock broker. It is surprisingly easy to learn about investing. Now everyone has the ability to start investing in various low-cost investment options like penny stocks and other, online micro investment options. Below, we’re sharing our 5 investing basics – including tips on the best investments for beginners and details on how to start investing with little money.
How to Learn Investing
An important thing to note is that you aren’t going to learn investing overnight. Becoming a successful investor is a process. It will take some time to understand all of the ins and outs of financial investing 101, but by reading this guide, you’ll be on your way.
1. Setting Up Your Account
Open An Online Investing Account
This can be either an IRA, brokerage account, micro investing service, or other investment account type. You may want to consider the tax implications for the type of investing account you set up. For example, IRA accounts may be best for retirement while a taxable brokerage account is generally more flexible and may provide more investment options. You will also want to look into which investment products (stocks, mutual funds or ETFs) can be purchased with the type of account you open. Plus, as you build your wealth, a taxable brokerage with Ally Invest (formerly Trade King) can be used for investing more than your maximum yearly contribution. Alternatively, Betterment is a great option that can manage it for you.
Set Up Auto Deposit
When you open your investment account, consider setting up regular automatic deposits. Many employers offer automatic transfers from your paycheck to your investment account. Check with your employer to see if it is offered at your company. It is certainly worth checking it out. The reason it is effective is that it teaches you to automatically save. You don’t have to even think about it, and you’ll be consistently investing – that’s a stock investing 101 key to success. Alternatively, you can set up automatic withdrawals from your checking account after each paycheck. This performs the same function in case it is not offered by your employer.
Smart Investments for Beginners: Mutual Funds & ETFs
An important tip for investing for beginners with little money is to always keep an eye on costs! There can be costs associated when you buy or sell as well as annual costs from mutual funds or ETFs (Electronic Traded Funds). You will want to look at the expense ratio charged, which are the annual fees funds’ and ETFs charge. The lower the better! Also, only purchase mutual funds that do not have a purchase fee (load fee) when you buy a fund. Lastly, remember that some of the brokerage companies offer their own ETFs at very low or at transaction free costs. Check out Betterment or Future Advisor.
1) Check fees (Buying, Selling, and Annual fees)
2) Confirm the index of the mutual fund / ETF is the right for your investment (Start with simple indexes such as S&P500 or Total Stock Market)
2. Investing 101 Essential Tip: Diversify Your Investments
What does it mean to be diversified? It means to not have all your eggs in one basket but also to make sure you are in the right baskets.
You will want to build a solid foundation for your investments. This includes having a large base of stocks. One of the easiest places to start if you only have enough for one investment is to purchase a mutual fund or ETF in the S&P500. This provides access to the largest 500 companies in the United States. Then, you can branch out into other investments such as the Total US Stock Market Index and the Total International Stock Market Index. However, diversification is not only within stocks but also though different asset classes such as Bonds and international stocks/bonds. Always, consult a professional to create an investment portfolio tailored to your needs.
In addition to stock and bonds, you may want to consider alternative types of investments. The power of investing in alternative investments provides additional diversification to your portfolio. Stocks and bonds are becoming more correlated (linked) which increase the volatility of your investments. Alternatives such as real estate investment trusts, currencies and gold and other investments provide.
Now that you have a grip on investment basics and have decided to invest, how do you build the right portfolio? Let’s consider an all equity investment portfolio where you put 100% of your portfolio in stocks. Is this a good idea? Not exactly. Why? Because diversification allows you to avoid large losses and build long-term wealth. Consider starting with a portfolio that is 80% stocks (equities) and 20% bonds. One of the easiest ways to start your portfolio is to buy 80% of your portfolio in the Total Stock Market Index ETF (VTI) and 20% Total Bond Market Index (BND). Both ETFs are from Vanguard and offer low expense fees and ease of purchasing through any brokerage account.
Don’t neglect your allocation within each asset type (i.e., stock, bonds, etc). For example, there are different ways to diversify stocks by asset class (ex. S&P 500) and also by International allocation. A good place to start with international allocation is the Total International Stock ETF (VXUS) by Vanguard.
Setup Automatic Yearly Increases To Your Investing Account
One of the keys to investing money to build wealth is by saving more money to invest. By increasing your amount invested on an automatic and yearly basis you will create discipline and consistency without having to remember on your own. It is a great strategy to use when starting out, when you have limited knowledge about how to add to your investments. In the long term, you will wake up one day and be surprised how much money you have in your account. A fundamental truth of Investing 101 is to start as early as possible and keep increasing how much you invest every year. Then you will be on your way to creating lasting wealth. Start today and open an account!
Monitor your progress using Personal Capital or Mint.
Making Smart Investments
Making investments is one of the smartest things you can do with your money. You can take your savings and invest them in something that will grow in value over time. So, when it’s time to retire, you can sell your investments and have a huge retirement fund available.
Speaking of which, the stock market is well-known for being one of the best places to invest your money. However, many beginners will have absolutely no idea where to start. From the outside, the stock market can seem incredibly scary. Most people only come into contact with it through films or when something bad happens in the news. As a result, you can have a very warped view that the stock market is full of price crashes and billionaires throwing around loads of money.
It’s actually nothing like this for a regular person like yourself. You don’t have to spend a lot of money and start buying and selling like crazy. You can invest easily, and see a much better return than you would if you put your money in a little savings account.
If you’re wondering how do you invest in stocks, then you’ve come to the right place. Throughout the course of this guide, you will be shown everything you need to know about investing in stocks for beginners. By the time you’ve finished reading you’ll be able to go out and make your first investment in the stock market.
All the information you could possibly need to know is presented down below:
3. What Is The Stock Market?
We’ll start things off at the beginning and take a look at the stock market itself. What is it?
Simply put, the stock market refers to a stock exchange where stocks are bought and sold constantly. There are different stock exchanges all over the world, the one you invest in will largely depend on where you live, purely because it’s easier to buy and sell on a ‘local’ stock exchange.
What Is A Stock?
Now you know what the stock market is, we need to discuss stocks themselves. What is a stock? And why are they being bought and sold by people all over the globe?
In the simplest of definitions, a stock is simply a piece of a company. If you invest in stock, you have a share of the company you invested in. A lot of the time, people will use the term ‘shares’ when referring to stocks. Either term is fine, they both represent the same thing; a piece of a company.
The stock market exists because companies all over the world are selling shares. They need money, so they sell shares for people to purchase. Sometimes, they sell loads of shares all to one person who becomes a majority shareholder. But, most big corporations will sell shares that anyone can purchase for a price.
Stock prices are determined by how well a business is doing, and they can rise or fall depending on many factors. If a company is turning over huge profits every quarter, their stock will rise.
4. How To Get Into The Stock Market
One of the first things you’ll be thinking is how do you invest in stocks on the stock market? How do you get into the stock market and start spending money?
This is where the fun begins, but you need to think things through carefully before you take the plunge. Firstly, you have to take a look at your personal finances and see if this is the right decision for you. Do you have savings set aside that you want to start earning money from? Are you in a comfortable financial position that doesn’t rely on the success of your stock marketing investments? If you want to invest in stocks purely as a source of primary income, then you’re going about things in the wrong way. This isn’t the article for you, this is about investing in stocks for beginners that are already financially stable and don’t depend on their investments.
When you’ve assessed your situation and concluded that investing in stocks is right for you, it’s time to get into the stock market once and for all.
Strictly speaking, there are two different ways in which you can get into the stock market and start investing. You can either do this directly or indirectly.
Direct Stock Market Investments
Taking a direct approach means that you invest on your own. You use your money, make your own decisions, and everything goes through you. Granted, it’s still recommended that you use a broker service to make your investments. Ally Invest former known as Trade King is great for beginners and has best low cost fees.
What is a broker? A broker is someone that helps you make your stock market investments. You sign up for a service and get to listen to the advice of a seasoned stock market veteran. Brokers spend their life monitoring stocks and figuring out what makes a good investment and what makes a bad one. They can point you in the right direction and also inform you of any investment opportunities. They’re your middleman between you and the stock market, but everything ends with you. They can only invest when you give them the go ahead, so you still remain in control.
You may think that investing through a broker doesn’t seem like a direct approach, but it is. It’s mainly categorized in this way due to the fact that you are your own entity. Sure, you have someone helping you, but the final decisions come down to you.
If you’re wondering how to get into the stock market using direct investments, then you have a couple of options. Naturally, you can find a broker, and they will set everything up and help you get started. It makes sense to look around and try to find the best broker for you and your budget. Look at their track record and try to find previous client reviews. If they’re well-known for guiding clients to profitable investments, then they’re well worth your time.
The second option is literally to go at it alone. The easiest way of doing this is an online trading platform. Here, you can register an account, and start investing in stocks and shares that you can buy or sell as and when you please.
Now, there is a benefit to the second option in that you don’t have to pay a broker. However, this article is all about investing in stocks for beginners. And, as a beginner, it’s unwise to go at it alone right from the start. If you want to approach the stock market directly, it’s best to do so with a broker.
Indirect Stock Market Investments
The second way you can get into the stock market is through indirect investments. This differs from direct investments in that you aren’t acting alone. Instead of directly using your money to invest in stocks that you’ve chosen, you invest in something else, and someone else invests your money in stocks and shares.
That may sound confusing, but hang on. Many people choose to open an investment savings account and gain access to the stock market through there. This is where you open an account, invest your money in the account – as you would any other savings account. The difference is, your money won’t just sit still and gain interest. Instead, someone working for the investment division of the bank will invest your money in different stocks and shares from all over the world. You’ll get a breakdown of what they invest in when you open your account.
Another way you can indirectly invest in stocks is through your employer’s. As part of your employee benefits program, they may give you shares in the company. This way, you’ve got some shares under your belt without having to do anything.
So, to summarize, you can either invest in stocks directly or indirectly. The choice is yours, you get more freedom with the direct approach, but less risk with the indirect one.
5. How Do You Find The Best Stocks To Invest In?
By far and away the biggest question every beginner wants to know the answer to is what stocks are best for investing in? If you’re hoping this is where you find a list of stocks to invest in, then you’re about to be let down! There is no magic list of stocks that everyone should invest their money in. Instead, there are a few things you can look for in stocks and shares that make them worth your money.
Businesses With A Strong Track Record
Investing in stocks for beginners is all about finding stable stocks that have a high chance of gaining value and low chance of dropping. To do this, you should look for businesses with a strong track record. Companies that show their stocks have increased in value over time, and are continuing to do so. This shows you there’s some stability there, and that you won’t be investing in stocks from a business that’s been up and down for years.
Instability leads to loss, while stability leads to future profits, remember that!
Businesses In A Commanding Market Position
Another thing to look for is businesses in a commanding position within their market. What this means is that they’re at the top of their pile, and their rivals can’t find a way to knock them off their perch. A good example of this is Google. They’re easily the number one search engine in the world and have the most-used web browser, advertising platforms, etc. It’s hard for competitors to unseat them at the top, which means their stock will more likely grow than drop.
It’s really quite simple, invest in successful businesses instead of ones that are trying to fight it out with all their rivals. If their position at the top of the market is always changing, then their stocks will fluctuate more, and that’s not what a beginner wants!
How Do You Make Money Investing In Stocks?
Now, we move onto another big question; how do you make money. Well, the idea for beginners is to invest in long-term goals. Invest small amounts of money in stable stocks, and watch your shares grow in value over a long period of time.
This is the safe way to make money, particularly if you’re a beginner wondering how do you invest in stocks. Don’t get caught up in what you’ve seen on TV where people invest lots of money in volatile stocks that increase quickly so they can sell them for a profit before they drop back down. Only the best stock market brokers in the business have success doing this. Stick to the long-term plan, it’s a much safer option.
Also, if you want to make money, you should try and diversify your stock market investments. If you’ve got a certain amount you want to invest, don’t put all your eggs in one basket. Spread it out and invest in multiple stocks instead of just one.
Finally, you need to pay attention to your stocks. You should always stay updated with the stock market and see how things are going. This is why you need a broker if you’re directly investing, as they can do all of this for you. The main reason you need to stay updated is because things could happen that cause your shares to drop and you need to be on the ball and ready to sell to minimize any losses. With steady shares, this isn’t that likely to happen, but it’s still something to be aware of just in case.
Why Invest In The Stock Market
We’ll end things by talking about why you should invest in the stock market. Mainly, it’s a brilliant alternative to just letting your money wallow away in a savings account with low-interest rates. When done correctly, and safely, you can earn a lot of money when compared to other investments over a similar period.
Hopefully, you’ve found this guide useful and now know how to get into the stock market and start investing. Be safe, stay informed, and never bite off more than you can chew. Now that you have the answer to ‘What is Investing?‘, it’s time to take your newfound knowledge, go forth, and invest.
Latest posts by The Fortunate Investor (see all)
- How To Start A WordPress Blog With Bluehost - June 16, 2017
- Top 10 Ways To Make Money Online - June 3, 2017
- Investing 101: Investing in the Stock Market in 5 Steps - May 31, 2017