How to Start Investing in the Stock Market
Investing in the stock market is one of the main ways to make your money work for you and increase your wealth.
Thanks to the power of compound returns, a simple investment can turn into thousands over a few years. While there are many factors that go into what your returns will be, if you steadily invest, the interest rate on that money will pay off and you’ll see your investments increase.
So how exactly do you get started in investing? First, you need to decide how you’re going to invest, what kind of account you need to open, and how much you’re going to invest, among other factors.
Decide if You Want to Invest Yourself or Have Someone do it for You
The first thing to do before you start investing is figuring out if you’re going to do it yourself or if you’re going to hire someone to do it for you.
If you decide to do it yourself, you will need to make sure you have the time and energy to research and keep on top of stocks on a daily basis. You can stick to buying individual stocks or an index fund, which tracks a stock index such as the Nasdaq. Another option is to invest directly into managed funds that try to beat an index.
If you aren’t sure you are ready to tackle DIY investing just yet, there are other options out there. There is nothing wrong with taking a more passive approach and letting someone else invest on your behalf. The only big downside is that there are often costs associated and fees can vary by investment type and whether you seek an experienced financial advisor or expert.
You can hire a hedge fund manager and invest in mutual funds or take a more passive approach and invest in index funds through a robo-advisor. Index funds have lower costs and are pretty much guaranteed a long-term match. It’s a relatively safe bet, as the S&P 500 has on average made returns of about 10% annualized.
Open an Investing Account
Once you have decided if you’re going to invest yourself or have someone do it for you, it’s time to open an account.
You will need a special type of account called a brokerage account. Opening a brokerage account is usually very easy and is offered by a number of different companies like Fidelity, E*Trade and Charles Schwab. These companies make it easy to invest and have a lot of options available, from hedge funds, mutual funds, and indexes.
Before you start though, check to see what type of account you need. You can choose a standard brokerage account or specialized account like an Individual Retirement Account (IRA) in the U.S. Other countries might have other brokerage account options, so check the website of the broker you are thinking about opening an account with to check.
IRA’s or other type of retirement accounts usually have an annual limit of how much you can invest in them. They are designed to build up your funds for when you retire and often have tax benefits. They also can’t be touched until you are of retirement age. On the other hand, a standard account has no limit on the amount you can invest and you can easily access your money when you need it.
Robo-advice is another great option if you’re just getting started. You can easily open an account with any number of platforms. Their fees are often lower than more traditional means of investing but you won’t have as many investment choices.
Understand the Costs
Now that you have decided what type of account you want to open, it’s important to check the costs.
A lot of stock brokers have similar costs, but it’s important to understand what they are. Some costs vary depending on if you want access to educational tools, research and other similar features. Other costs could include trading on foreign stock exchanges and having an in-person branch for face-to-face chats with an advisor.
There is usually an annual management fee that is a percentage of your total funds, although some platforms may waive the fee if you are investing a certain amount. And your broker will also charge you whenever you decide to buy or sell stock. Those fees vary from $2 to $10 but they can add up. Some don’t charge trading fees but may have higher management fees or other charges. And if you’re investing in an index, there may be charges associated with that index.
Make a Budget
Determine how much you want to invest. Do you have a set amount already set aside? Do you plan to invest on a monthly basis? The more you invest, the higher your returns are likely to be but keep in mind that there is a certain amount of risk with investing.
Before you start investing, make sure you have three to six months of savings set aside in an emergency fund. Only then should you start setting aside money to invest in the stock market.
The best way to do this is to use money that you won’t need in the next five years to invest, called an asset allocation. This amount varies on your age, income and your retirement goals. In general, the older you get, the less you should invest in stocks. So if you’re young, investing in stocks means you have a few decades to handle the volatility of the market. But if you’re close to retiring, investing in something more stable like Treasury bonds is a better bet.
The amount you actually need to start investing depends on what you invest in. Buying stocks can range from a few cents to thousands of dollars. Mutual funds or exchange-traded funds can often be good for those on a low budget of $1,000 or more. ETF’s trade like a stock but you can buy them for a lot cheaper than the full price of the stock. Some brokerage accounts may also have a minimum you have to invest in order to open an account with them or use certain features, such as access to investment advice.
Now that you have an account and have set a budget, it’s time to start investing. Buy individual stocks if you’re managing your money yourself, or if you’ve decided to invest in an index fund, choose which index to follow. Remember to diversify your funds so that you don’t lose all of your money if one of the companies you have invested in goes down suddenly. Avoid investing in just a few stocks and try to invest in a variety of different industries that are relatively stable until you understand how the stock market works.
Investing in the stock market is just the beginning of your financial journey. Learn how to analyse stocks and keep track of what the market is doing. Keep investing your money on a regular basis. Just remember that it’s not uncommon for there to be a lot of volatility in the market on a day-to-day basis and the best way to invest is in the long term.
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