“Investing is the process of laying out money now in the expectation of receiving more money in the future.” ~ Warren Buffett
Investing in stocks is one way of building wealth, but many beginners find getting started very daunting. Sometimes it feels like everyone else is doing it but you know absolutely nothing about the stock market. In this guide we’ll take you through the basics of investing in stocks, so you too can build wealth by utilizing the power of growing companies.
Before jumping in, though, you need to understand the basics of the stock market and how stock trading works.
The stock market is made up of exchanges, such as the Nasdaq and the New York Stock Exchange. A stock will be listed on a certain Exchange, which brings buyers and sellers together. The Stock Exchange tracks the supply and demand, and the price, of each stock, acting as a ‘market’ for the shares in these stocks. Brokers, often online brokers, represent individual traders. You use your broker to place your stock trades, who then deals on your behalf with the exchange.
Getting started with investing in stocks is actually quite simple and can certainly deliver long-term gains, but there are some questions you need to ask yourself first. We’re currently going through uncertain times, so many people will be asking the same questions, like “Is this the right time to buy stocks?” Obviously, no investment is risk-free, but there are some simple strategies that can be used to invest your money reliably and safely.
It may be that you’re just curious about how to make your money work for you or that you’re actually interested in starting to invest in stocks; either way, investing in the stock market can be an attractive investment strategy for the long term. This type of investing nets an average return of 7% after inflation, each year, so it’s certainly worth investigating the basics to learn how investing in stocks works.
Investing In Stocks: How To Get Started
The following points are worth keeping in mind before you start on your investing journey –
No. 1: Investing in Stocks Is Just One Way Of Growing Your Wealth
While investing in stocks has become a very popular way of growing wealth, it’s certainly not your only option. There’s a range of investment strategies available to you and your decision will depend on your income, your own needs, and when you need to access the money. For example, you may choose to purchase real estate, put your money in a savings account, or invest in bonds, foreign currency, or precious metals. There are varying levels of risk and return with all these investment strategies.
No. 2: There’s Substantial Risk In Investing in Stocks
Investing in stocks does come with risks, particularly in the short term. In the long term, stocks are typically considered a safe investment strategy; however, there are no guarantees. As we’ve seen so many times in the past, the stock market can be volatile, especially in the short term.
If you’re considering short-term investing, there are more low-risk, reliable, investment strategies available to you. Historically, the stock market has grown at an average rate of around 7% per annum, but from year to year, it can and does experience extreme highs and lows. It’s important to realize that, even over long periods of time, stock market investment returns are never guaranteed. As an investor, it’s up to you to be cautious and realistic, understanding that nothing is guaranteed.
No. 3: Most People Invest Today Using An Online Brokerage Website
Investors typically invest using a brokerage firm; they do this by opening an account and depositing some money. With money in your account, you can then instruct the brokerage to purchase stock on your behalf. The brokerage will typically charge a small fee for their services. However, with today’s stock market being so unpredictable and so many people living under stay-at-home restrictions, investors are leaning more towards using their mobile devices. One example is Robinhood; this is a free and simple website and app which reached 10 million accounts in 2019. Low trading costs combined with the ease of using Robinhood make for a compelling model for trading newcomers who are hesitant to trade large amounts of money.
No. 4: Not All Brokerages Are The Same
Different brokerages have different weaknesses and strengths. Your investing needs may require pursuing brokerages for different reasons. By this we mean, one brokerage may offer exceptional customer service, while another may offer a no-or-low fee service. Who you choose will depend on how much guidance you require and your investing goals. Look for the best brokerage for your needs because this is not a one-size-fits-all situation. You need the best stock broker for you!
No. 5: It’s Very Risky Investing Everything In A Single Corporation’s Stock
You wouldn’t be the first investor tempted to put everything into a startup you believe might become the next Amazon or Apple. However, this would be a huge risk because there’s simply no way anyone can determine which company will become an overnight success. A wrong guess could mean losing some or all of your entire investment.
No. 6: Spread Out Your Investments To Reduce Risk
Reducing risk by investing in a number of different companies is a common investment strategy. This means that, should one company’s stock fall, your investment is spread out and protected. Note that this investment strategy may involve additional brokerage fees, thus restricting your returns in the long run.
No. 7: Dividends Payments Provide An Income Stream, Without Selling Shares
Small payments known as ‘dividends’ are distributed by companies to shareholders, usually quarterly. You’ll usually be eligible to receive dividends if you own shares in a company. Dividends only represent a small percentage of your investment; however, they quickly add up, especially if you have a lot of money invested in the stock market. Be aware that, depending on their financial situation, a company can lower, raise, or even eliminate dividends.
No. 8: ‘Mutual Fund’ – A Collection of Investments, Typically Stocks
Mutual funds are just a collection of investments. A mutual fund can be comprised of just stocks, or it can include other forms of investments, like foreign currency, precious metal, and/or bonds. Your brokerage will typically charge a small fee, per year, for management and maintenance costs. What do mutual funds invest in? The answer is that this will vary from company to company, so this should form part of your own research.
No. 9: ‘Index Fund’ – A Specific Type Of Mutual Fund, Typically With Simple Rules and Low Management Costs
An Index Fund is a common form of Mutual Fund. It’s typically operated within a simple framework and, due to minimal management requirements, will have very low fees. An Index Fund generally invests in shares like the Dow Jones Industrial Average or SP 500. If you want to diversify your investments as much as possible and you’re trying to match the return of the stock market as a whole, then Index Funds can be a good choice.
No. 10: Many People Consider Index Funds The Smartest Stock Investment
Index Funds are usually a good choice if you’re unsure how to invest your money. It’s true that you may not achieve the impressive returns that you would when investing in an individual stock, but as an investment, they’re also much lower risk. Index Funds typically have low fees, which can significantly impact your investment over the long term. In addition, because they match the market, they’re a convenient investment and eliminate the need for studying, guesswork, or research, when it comes to investing.
No. 11: 401(K) and Other Tax-Deferred Accounts Are Ideal For Retirement Investing
If you’re saving for retirement and you want to invest that money, your best option might be a Tax-Advantaged Retirement Account. These might include IRAs, 401(K)s, and other forms of retirement savings accounts. These accounts are typically tax-deferred, which means that no income tax is paid on your money until such time as you withdraw it during your retirement. This type of account can really help grow your money over time. Targeted Retirement Funds are another popular retirement investing option, which reflects when you plan on retiring and adjusts the risk level of your investments accordingly.
No. 12: Don’t Worry Too Much About Taxes on Stocks
Many investors are concerned about taxes on their investments, but we don’t believe this should be a big issue. Your brokerage will usually help with this, but when it comes to retirement investments, you’ll pay normal income tax on tax-deferred investments. Taxes on gains and dividends will be owed when you invest in a normal brokerage account. However, if you’re transferring money into your bank account from an investment, always ensure you put aside a portion of your earnings for taxation purposes. A good rule of thumb is 20%, but we suggest you check this figure with your tax professional.
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