You may have decided to invest in the stock market after reading all the heart-warming stories of how Warren Buffet made his first million and eventually became the world’s richest man through stocks investment. However, it was no walk in the park as it took him years of studying, analysis, and dedication to get where he is today.
That said, you will be pleased to learn that there is a place for everyone in stocks investment, from the hands-on type to the busy professional who has no time to analyze the stock market.
This guide is essential for those who are just starting out and are looking for guidance on what to do before investing in stocks.
Investment Approach
Before you begin the stock investment journey, consider how you intend to invest. Are you going to be active and trade individual stocks? Do you enjoy doing the work, crunching numbers for hours on end, reading, and analyzing stock market trends to gain valuable insight on the next big stock investment, or will you be more laid back?
Whatever your situation, there are several ways you can invest, including:
Individual stocks are the most tedious way of going about it since it requires commitment. It takes plenty of research, calculation, and consistent evaluation if you are to succeed. Therefore, it is more suited to the active participant as it is the riskiest form of investment, but offers the best chance of striking it rich in a shorter period.
Index funds are a type of mutual fund that involves tracking a stock index like S&P 500 or Dow Jones Industrial Average, matching their indexes’ long-term returns. For instance, the S&P 500 has led to returns in the region of 10% per annum. It is a great way to invest since it is a passive way of investing, possesses lower risks, and has lower costs.
Robo-advisors are another passive form of investing that has gained traction of late. It is a complete investment management where the company invests your money in a portfolio of
index funds appropriate for your risk tolerance, investment goals, and age. It uses these parameters to optimize your investment selections, tax efficiency, all while making subtle changes over time. You can even opt for Robo-advisor to get an IRA, with low costs around the 0.25% marker.
How Much Will You Invest
As you commit to stock investment, experts suggest that you think of it as a marathon, not a sprint. In short, an investor should only put in their money if their goal is to get it back in the long run.
Generally speaking, some stock prices rise over time, but there is too much market volatility for you to invest short-term and see any tangible results. The stock market is like an auction; people will buy into a company if it performs well, thereby driving up the price, and sell if it performs poorly, causing its price to plummet. For instance, Occidental Petroleum Corp and Apache Corporation stocks plunged more than 40% in March 2020, only to roar back to January 2020 highs in February 2021.
In short, an investor needs to set aside money meant for investing. For those with a modest budget, investing in exchange-traded funds (ETFs) is their best bet, not forgetting that mutual funds often require minimums of $1,000.
One way to differentiate stockbrokers is by filtering them according to the costs and features they offer. Although most are similar, some offer handy extras such as educational tools and investment research tools. Some even provide demo versions where you can operate the system before committing any cash.
Investment Accounts
Now that you are in the business end of stocks buying, advances in technology mean you can now trade stocks from the comfort of your home using investing platforms. Armed with a brokerage account, you can buy, sell, store, and track your shares on these investment apps using a smart device.
A little research into investment accounts can save you a pretty penny. There are investment apps and brokerage companies such as TD Ameritrade, Robinhood, Fidelity, and Webull that allow zero-commission trades, which means commissions will not eat into your returns.
Choose the type of account you need depending on your needs, which could mean:
Individual retirement accounts (IRA) allow you to trade in stocks, ETFs, and mutual funds, but it has an annual limit on the amount you can invest. Its typical usage is saving for retirement, in the form of traditional or Roth ITAs. If you are a small business owner or are self-employed, you can opt for the SEP-IRA or SIMPLE IRA. The main advantage of IRAs is the potential tax-deferments you get when buying stocks.
Standard brokerage accounts have no annual contribution or income limits on taxable investment accounts, and you can easily access your money at any time, unlike the IRA. But, you will have to pay short-term capital gains tax if you withdraw it within a year, or long-term capital gains after one year.
Finding Stocks That Fit Your Portfolio
Some investors have found it rewarding to diversify their stocks portfolio. While highly volatile stocks and penny stocks can be lucrative, learn how to evaluate stocks and only invest in businesses you understand.
Stockholders have had great success by investing in various stocks from different types of companies. This minimizes the risk of one company or companies in the same industry hurting their returns. As seen in 2020, the service industry was decimated while the technology industry flourished.
SMART investors buy stock in rock-solid businesses as they keep learning about stock trading before trying their hand in the more risky investments. As Warren Buffet so aptly puts it, you need not do extraordinary things in the stock market to achieve incredible results.
Over-diversification can work in certain instances, but it can potentially reduce your returns on investments and increase your costs if you have modest investment assets. If you start with a minimum deposit, it would help to invest in a few companies as you grow your knowledge and investment assets.
To sum up, investing in the stock market need not be a money pit. Sure, the market is highly volatile, but people who have done their research on stocks, diversified their portfolios, and held on to solid company shares, have realized exceptional investment returns.