Everyone is looking for ways to get rich and accumulate wealth quickly. Some people buy lottery tickets or engage in networking. However, a lot of them tend to overlook one of the best tools for wealth accumulation: the stock market.
If you are just getting started with stock market investing, you can get easily overwhelmed by the potential income that you can generate from the stock market. But how do you begin to make money from stocks? Here are some steps on how you can invest in the stock market.
Decide how you want to invest in stocks
There are several ways you get started with stock investing. When deciding on which stocks to invest in, you need to choose an option that best represents your preferred investing method, and how hands-on you would like to be in picking and choosing the stocks you will invest in.
Are you the DIY type who likes to choose the stocks yourself? Do you like to be hands-on when investing in stocks? Or you like someone to manage your stocks for you. Once you have decided on your preferred option, you are ready to proceed to the next step.
Open an investing account
In order to be able to invest in stocks, you need to create an investment account. If you are the DIY type, this means working with a broker. If you are the type requiring assistance, a Robo-advisor account is highly recommended.
With a brokerage account, you are likely to get the quickest and most affordable way of investing in stocks, funds, and other investments. A broker involves opening an individual retirement account (IRA) or a taxable brokerage account if your desire to save up for retirement.
When choosing a broker, you need to evaluate several factors like costs, investment selection, and investor research and tools.
With a Robo-advisor account, you get the benefits of stock investing but manages your investment based on your investment goals. You may think that it’s expensive, but the fees are actually just a fraction of what a human investment manager would charge from you. Most Robo-advisors would charge around 0.25% of your account balance and gives you an option to add IRA.
Know the difference between stocks and mutual funds
Investing in stocks doesn’t have to be that complicated. Most people would usually choose between mutual or exchange-traded funds and individual stocks.
In mutual funds, you purchase small pieces of different stocks in a single transaction. Investing in mutual funds means you become an owner of small pieces of each company you invest in. By putting several funds together, you create a diversified portfolio. The upside of mutual funds is that they are inherently diversified which reduces your risk.
Mutual funds provide an easy and low-cost way to get started on stock investing. They are easily accessible within 401(k), IRA, or any taxable brokerage account. A good place to start investing is the S&P 500 fund, which allows you to buy stocks in one of the 500 largest US companies.
If you want to invest in a specific company, you can buy a single share or a few shares of stocks in order to test the stock-trading waters. While creating a diversified portfolio from several individual stocks is possible, it would take a significant investment on your part. While a wise pick can deliver a handsome amount of money, individual stocks will not make you rich.
For most investors, a portfolio composed of mutual funds is the clear winner.
Set a budget for your stock investment
If you are just starting out with investing, you may have two issues that need to be addressed:
Amount of money needed to start stock investing
The amount of money you need to invest in individual stocks depends on how expensive the shares are. If you want mutual funds but only have a small budget, an exchange-traded fund maybe your best option. ETFs trade like a stock, which means you buy them for a share price.
Amount of money required for investing in funds
If you want to take the funds route, you can allocate a considerable portion of your portfolio towards stock funds, especially if you have a long time window. A 30-year old saving up for their retirement might invest 80% of their portfolio in stock funds and the remaining in bond funds.
For a newbie in stock investing, it can be a little bit complicated because of different approaches and strategies. However, some of the most successful investors have done little than stick to the basics. This means using funds for the bulk of your portfolio. If you prefer individual stocks, you need to research about it. If you plan to stick with funds, your goal should be to build a simple portfolio.
When deciding how to invest in stocks, there are two factors you need to consider: the time horizon for your goals and risk tolerance.
For the time horizon, if your investment is for a far-off goal, such as retirement, your main focus should be on stocks. This will allow you to grow your money and outpace inflation over time. As you get closer to your goal, slowly dial back your stock allocation and add more bonds, which is the safer investment.
On the other hand, if your investment is for a short-term goal, say less than five years, investing in stocks is not highly recommended at all. You can consider them as short-term investments.
The other factor you need to consider when investing in stocks is risk tolerance. The stock market is very volatile, consistently going up and down. If you are someone who is prone to panicking when the latter happens, you are better off investing slightly more conservatively with a lighter allocation to stocks.
Stock market investing is not for everyone. Before deciding to plunge into stocks, do some research. Fortunately, you have a lot of online resources available at your disposal. You are also better off getting some guidance from the experts.