How to start investing in stocks
The attractiveness of stocks lies in their higher return, making them a powerful tool to grow wealth. To start investing in stocks, you will need three main things: money that you want to invest, the strategy what stocks to invest in, and an account with access to the stock exchange. By reading this guide, you will learn step by step how to invest in stocks to be able to choose what way is the most suitable for you.
Are stocks a suitable asset class for you at all?
Any investment journey starts by defining an investor’s time horizon. If you are expecting to spend money you accumulated for investment purposes within the next five years, you should probably consider other asset classes than stocks or even saving accounts. Equities investment should be considered a long-term investment over five or more years, as it riskier investment instruments than others. Remember that no investment is without risk, but the more return you expect, the higher risk you are taking. Looking at the long term can help you worry less about day-to-day fluctuations.
There are three main risks associated with holding stocks:
1. Price risk – a risk that the value of share might fall due to economic or political situation.
2. Liquidity risk – this typically occurs when you suddenly want to spend some of the money invested during a bear market, but it cannot be sold at the price you expected.
3. Default risk- this may be very unlikely for large companies though it could be possible for small companies during uncertainty.
There is nothing wrong with being too conservative, but think carefully that you will need to adjust to accepting more risks to reach your financial goals.
What stocks to invest in?
There is more than one way of investing in stocks. Let’s look at them closer:
1. Invest in individual stocks. As Warren Buffet said: “People would be better off if they said ‘I bought a business today,’ not ‘I bought a stock today’ because that gives a different perspective on it” he urges people to make intelligent choices based on true value and focus less on share price than a company overall fundamentally.
2. Fractional shares investing. Fractional shares allow you to purchase stocks based on the dollar amount you want to invest in. If you are a young investor or beginner with a small amount of money to invest, it could be a great choice for you. Fractional shares investment is available with some of the brokerage firms or robo-advisors like Wealthface.
3. Invest in equity funds. As an alternative to direct investment in shares, there are options to invest in equity mutual funds or exchange-traded funds. Funds are more popular among investors as they follow the main basic rule of portfolio construction – diversification. Stocks in funds can be diversified geographically, by sectors between large, middle, and small-cap stocks. Diversification minimizes risks and enhances the possibility to outperform the market.
How to invest in stocks?
1. Open a brokerage account. A brokerage account allows you to start investing in the stock market. You can quickly deposit money as you would put money in a bank account. Your account balance then is used to buy and sell stocks, ETFs, or mutual funds as per your instructions. In case the brokerage firm goes bankrupt, your cash up to $250,000 and securities up to $500,000 are insured by Securities Investor Protection Corporation (SIPC).
2. Hire a financial advisor. The financial advisor will execute the trades on your behalf. A financial advisor usually tells you ‘when to invest,’ ‘how to invest,’ and ‘how much to invest.’
3. Use a Robo-advisor. Robo-advisors make investing in stocks easy with algorithmic investing and small human interaction. You will answer a few questions online about your time horizon and financial goals; once done computer program runs an algorithm that matches your information with a suitable portfolio tailored to your needs. Robo-advisor platforms are a very inexpensive way to invest in stocks.
Keep in mind that there is no right or wrong way to invest in stocks. No matter what route you choose, pay attention to fee structure or expense ratios. Compare brokerage and investing platforms before signing up.
Finally, the success of your portfolio performance lies in consistency. There is no need to check your portfolio daily, schedule monthly or quarterly reviews to check the track. You’ll experience inevitable swings as the economy goes through its usual cycles, very important do not freak out and sell your stocks if suddenly you see the market is dipping. Remember that the main goal is to buy low and sell high.