We all have heard that investing in stocks is a financially sound investment. But, how do you actually get started to guarantee the most success?
A common misconception is that you need thousands of dollars before you start investing in stocks. That is simply not true! All it takes to start is a good sense of your investing goals and budget.
What do you need to get started? A good first step to take is determining your “investor type” in buying stocks.
There are two main paths you can take as an investor in stocks. The first is the DIY process. You feel confident enough in choosing the stocks and funds that you wish to invest in. You may still seek an online brokerage to facilitate the process.
The second step is to let someone else do the job in buying stocks for you. This is the easiest way to get into investing if you want to start right away without a vast amount of knowledge. There are several robo-advisors, who, for a low cost for investment management, will take care of the process for you after you answer a few questions about your investment goals.
The second step is choosing between stocks and stock mutual funds.
There are pros and cons to both stocks and stock mutual funds. Determining your investment goals will largely determine your choice.
Stock, a.k.a. equity mutual funds or exchange-traded funds, allows you to invest small amounts in many different individual stocks in a single transaction. When you invest in a fund, you end up owning small pieces of each company you invest in. By buying several funds, you can build a diversified portfolio which is a sign of a healthy investment situation.
The second route you can take is selecting individual stocks. If you know you want to invest in one particular company, this is the way to go. It is harder on a tighter investment budget to build a diversified portfolio this way as you are singling out one company over buying small amounts in many different companies through the mutual funds.
If you do decide to invest in individual stocks, Investopedia suggests a portfolio of 12 to 20 well-chosen options to build a well-diversified portfolio.
The plus of having individual stocks is that they can rise more dramatically in value over mutual funds; but, the down side is that they can just as dramatically fall in value. When choosing mutual funds, your investment wealth is spread widely so that you don’t end up losing all your investment if an individual stock were to hit rock bottom. It’s less risky, but, it takes a longer period of time to build wealth.
Determining your budget is another crucial step to take when starting out in buying stocks. If you have more to invest, individual stocks are more available. If you have less, ETFs or mutual funds will be more the way to go.
Chances are most of us have a low budget starting out. ETFs allow you to purchase similar to a share price rather than a mutual fund minimum which can be as much as 1000. ETFs can range from the low end of $10 to the higher end of $100.
You might be asking how much money you should actually invest. If you are investing for the long term, it is recommend to take the mutual fund route over individual stocks.
Nerd Wallet suggests, in the case of a 30-year-old investing for retirement, to invest 80% of his or her portfolio in stock funds; allocating the rest to bond funds.
For the same scenario, the 30 year old would invest 10% or less in individual stocks as these are inherently more risky with no diversification and more hands-on effort. You can take a look at the everyday NASDAQ stock ticker to see how much of a roller coaster an individual stock value experiences on a daily basis.
After determining the investment type, process, and budget, the last step is to open your account to start buying stocks.
You might already have a 401(K) set up through your work, but, with the rise of entrepreneurs, the necessity of empowering one’s self with the knowledge of personal investing for one’s future is more in demand than ever.
A good way to go as an entrepreneur is to contact an online broker. Check out Nerd Wallet’s top picks for IRA accounts to get a good sense of solid choices to start with.
Nerd Wallet also suggests considering brokers with low fees and low account minimums. Check out their list of best brokers for beginners.
Before choosing an online broker, first research the resources. Does your potential broker offer resources to educate yourself on top stock-buying and leading companies?
Does your potential broker have a solid platform of customer support? It’s essential to be able to have a clear link to your broker. Make sure they can get all your questions answered!
Does your potential broker have a trading platform? If so, is it user-friendly? Again, customer support is essential for this as well.
Does your potential broker offer easy to follow education resources? An example would include tutorial guides for beginners. Do they offer continuing education through their platform to empower you in your investment knowledge?
Be prepared for the ups and downs of buying stocks.
Investing is very much a learning process of riding through the highs and lows for a long-term build of financial success.
Being knowledgeable of your risk tolerance levels and only investing within a healthy realm of those levels will ensure a smoother emotional ride for your investing career.