Investing in stocks is one of the easiest ways to make residual income and grow your wealth. In fact, many people use stocks as a way to build on their retirement funds and trusts. It is essential to know how to invest in stocks if you want to make a substantial profit from it.
Here are the basic steps to follow when you’re getting started with stock investing:
Choose an Investing Style
There are several techniques to invest in the stock market. Below are the two primary techniques you can choose from depending on your situation:
- The DIY Method – If you are looking to select stocks and stock funds yourself, or if you are experienced in stock trading, you can simply get a reputable stockbroker and handle the various aspects of buying and selling stocks on your own.
- The Passive Method – If you’re looking to venture in stock investing but you would prefer someone to manage the process for you, you might want to consider working with a robo-advisor. A robo-advisor is a cost-friendly investment management service that can invest your funds for you based on your specific goals.
Open a Brokerage Account
When it comes to opening a brokerage account, there are three vital questions you need to answer to ensure you get an account that suits you stock investing needs.
How will you buy stocks?
You can choose to be doing everything yourself by opening a brokerage account. This is often the quickest and most economical way to buy stocks. A broker can also help you open an individual retirement account (IRA).
There are many brokers on the market to choose from. It’s advisable, therefore, to first evaluate prospective broker based on factors such as costs, investment selection, and investor research tools.
Some of the best online stock brokers on the market today include:
Ally Invest is the best among the low-cost brokers, Merrill Edge is the best for no account minimum, while E-Trade is the best when it comes to educational resources.
Another option is to allow a robo-advisor to invest your money for you. Robo-advisors were designed to make investing as accessible and straightforward as possible.
With a robo-advisor, you don’t need any prior experience in stock investing. The robo-advisor’s automated intelligence will invest your money in various stocks depending on your financial goals.
Some of the best robo-advisors on today’s market include:
Wealthsimple is the best if you want to avoid account minimums.
How will you pay for your stocks?
You can choose to have a cash account or a margin account. With a cash account, you’ll need to fully pay for each stock purchase at the time you purchase it. With a margin account, you have the option of borrowing money from the brokerage
The firm will hold your securities as collateral and charge interest on the loan. It is worth noting that if the account value drops below the specified amount needed to maintain the loan, you’ll have to pay down the loan balance to an amount determined based on your new account balance.
This is referred to as a margin call, and it can often result in the payment of a large sum of money.
What is your risk tolerance?
You’ll need to outline your investment goals based on risk. You may get options such as income, growth, and aggressive growth. It is imperative that you understand what each term means.
Also, you need to be sure that the level of risk you choose is an accurate reflection of your ability to withstand risk. Any investment your broker suggests for you should be commensurate with your risk tolerance.
Understand Your Options
After you have opened a brokerage account, you need to choose what to invest in. While there’s a wide selection of investment options to choose from, Exchange Traded funds (ETFs), Mutual Funds, and Individual stocks are the most recommended for beginner stock investors.
ETFs are a way to purchase a basket of stocks in a single transaction. The ETF that matches the S&P500 Index, and has a ticker symbol of SPY is perhaps the most popular. You don’t want to invest in stocks that will outperform the stock market. You want to invest in those that match the market.
The SPY is considered the safest place to begin when you’re trying to figure out what to invest in for the first time.
Mutual funds, on the other hand, are operated by fund managers and should match your investment objectives. They are composed of a bunch of funds collected from several investors, and the goal is to invest in securities like bonds and stocks.
If you decide to invest in individual stocks, you’re acquiring an ownership stake in the company, together with your share of the net income and resultant dividends generated by the business.
While you don’t need to invest in stocks to get rich, you should realize that over the past few centuries, stocks have remained the best returning asset class, generating more wealth compared to other investment options.
Nonetheless, it’s advisable to choose individual stocks only if you believe that the company has substantial potential for long-term growth.
Set Your Limits
Another critical thing to consider when it comes to investing in stocks is your budget. You need to have a clear idea of how much money you need to start investing in stocks. Generally, the amount of money you need to purchase a given stock depends on the price of the shares.
Nonetheless, if you are working with a lean budget, it is advisable to invest in an exchange-traded fund (ETF). You can purchase an ETF for a share price of as little and $10, but you’ll need at least $1,000 to invest in mutual funds.
You could also be wondering what portion of your funds you should put in stocks. If you are investing through funds, you can invest a relatively large percentage of your portfolio in stock funds. This is especially important if you have a long-term horizon.
If you are 30 and investing for your retirement, you can consider having 80 percent of your portfolio in stock funds. You can invest the rest in bonds and individual stocks.
Get Started
You have chosen your investment style, have opened a brokerage, and have a clear idea of what you want to invest in. It’s time to set the ball rolling.
It is best to start with ETFs that match the low-cost S&P 500 index funds. If you prefer to invest in individual stocks, you should research widely and ensure the company has a strong potential for long-term growth.
It’s also worth noting that you can start investing in stocks with as little as $500 to $1,000. Then you can top it up as you make and save more money.
Alternatives to Stock Investing
Stocks provide tremendous upside, but diversifying your portfolio should be a priority. These are three top alternatives to investing in stocks.
Bonds
Many people choose to invest in bonds as a hedge against the volatility of the stock market. Bonds are more stable but there is less upside.
Real Estate
More millionaires are made from real estate investing than any other form of investing. You can make big mistakes in real estate, so do you homework, but with a little research you can also make a big return.
Peer to Peer Lending
Not as well known as the other two on this list, investing with peer to peer lending networks allows you to make money on the interest others pay on their loans. Think of it like being a part of the bank that makes loans to people.
In Conclusion
Investing in stocks is one of the easiest, most profitable, and proven methods of growing your wealth. However, you need to know how to invest in stocks to make the most out of it. The information and investing tips above serve to demystify how the stock investing works and how you can make money by investing in stocks.
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