Stock investment has become a very popular investment option to build long-term wealth. Investing in stocks is much easier than what people think about it. If you have decided to invest in stocks then you will need an online brokerage account to get started. Furthermore, you will need capital and some basic knowledge about the stocks before you can invest in shares.
If you are a beginner investor and want to know more about stock investment then keep reading the article. In this guide, I have provided all the details about the stock investment that will help you get started. Let’s explore the article!
What Is Stock Investment?
Stock investment is a process to purchase a company’s stock that represents an ownership share in a company. When you buy a company’s stock you buy a small part of the company. Usually, investors buy stocks of companies that they think will go up in value. When you invest in stocks you have to do the trades via stock exchanges. All the transactions of a stock exchange are done according to government regulations that are meant to protect investors from fraudulent practices.
How To Invest In Stocks?
Investing in stocks is a step-by-step process. If you are interested in investing in stocks then you should follow the below steps to make sure you are doing it the right way. Let’s check them out!
Step 1: Determine your Investment Approach
Step 2: Decide How much you want to Invest
Step 3: Open an Investment Account
Step 4: Choose your Stocks
Step 5: Focus on Investing for the Long-term
Step 6: Manage the Portfolio
Step 1: Determine Your Investment Approach
The first step of investing in stocks is to consider how to start investing in stocks. Many investors buy individual stocks, while others take a less active approach. Answer the below questions to determine your investment approach –
1. Are you an analytical person and enjoy crunching numbers and doing research?
2. Are you comfortable with sophisticated math?
3. Can your research companies and financial prospects determine their future?
4. Are you a busy professional and don’t have the time to learn how to analyze stocks?
The best part of stock investment is, regardless of which of these statements you agree with, you can still invest in stocks. There are three ways you can invest in the stock market –
Individual Stocks: You can invest in individual stocks if you have enough time and desire to thoroughly research and evaluate stocks. For individual stock investment, you have to be smart and patient to beat the market over time.
Index Funds: You also have the option to invest in index funds, which track a stock index like the S&P 500. If you have to decide between actively vs. passively managed funds then according to many experts passively managed funds are the best option. Index funds usually have lower costs and are guaranteed to match the long-term performance of the index. For example, the S&P 500 has produced total returns of about 10%, so performance like this can help you gain substantial profit over time.
Robo-advisors: In recent years, the popularity of Robo-advisors has increased a lot and many people are preferring it for stock investment. A Robo-advisor is a brokerage that invests your money on your behalf. It invests money based on your portfolio of index funds that are appropriate for your age, risk tolerance, and investing goals. Moreover, a Robo-advisor can optimize your tax efficiency and make changes over time automatically.
Step 2: Decide How Much You Want To Invest
The second step is to decide how much money you should invest in stocks. Investing in stocks is risky and there are potential chances that you can lose your all money. Therefore, you should carefully analyze your requirement and decide how much you should invest. Moreover, you have to think about asset allocation and decide where you will invest your money. Age plays a very important factor when deciding how much money you should invest. For example, if you are 40 years old then you should invest 70% of your investable money in stocks and the other 30% in fixed income.
Step 3: Open An Investment Account
The next step of investing in stock is to open an investment account. An investment account is also known as a brokerage account and without it, you won’t be able to invest your money into stocks. An investment account is offered by TD Ameritrade, ETrade, Charles Schwab, and many others and there are various types of brokerage accounts available. You have to choose an account type depending on your requirements. If you are a beginner investor then you should choose from a standard brokerage account and an individual retirement account (IRA). Both account types will allow you to buy stocks, mutual funds, and ETFs. If you want easy access to your money then a standard brokerage account will be the best option for you. On the other hand, if your goal is to build up a long-term investment then an IRA is a great option. IRA accounts are available in two types: traditional and Roth IRAs. This type of account will provide you with some tax advantages but the main problem with this type of account is the money withdrawing process. It is a bit difficult to withdraw the invested money compared to a traditional investment account.
Step 4: Choose Your Stocks
This is a very important step because it can make or break your investment. Before buying stocks of a company, you should analyze the financial condition of the company to see if it can grow more in the future. Moreover, when investing you should not invest all your money into one company. You should try to diversify your portfolio to minimize the potential risks. Try to invest in various companies so that you have different types of companies in your portfolio. Therefore, before investing in any stocks you should consider the below factors –
1. Invest only in businesses you understand
2. Avoid high-volatility stocks until you get the hang of investing
3. Always avoid penny stocks
4. Learn the basic metrics and concepts for evaluating stocks
Step 5: Focus On Investing For The Long-term
Investing in the stock market won’t make you reach overnight. You have to consider the long-term investment to grow long-term wealth. You should understand that stock investment is filled with intricate strategies and approaches. The usual return stock market is 10% annual but some years the percentage might rise and in some years the percentage will fall. So, if you invest your money for the long term then you will be able to gain the profits of a bullish market. For example, the stock market stumbles in 2022 due to the rising concern about inflation, the pandemic, and rising interest rates. So, if you are a long-term investor then this stumble won’t you that much! So, you should try to avoid day trading to build a long-term growth of your investment.
Step 6: Manage The Portfolio
Managing the portfolio is very important for stock investors. If you have bought mutual funds and individual stocks then you should check your portfolio a few times a year to make sure your portfolio is growing according to your plan. Moreover, if your portfolio is too heavily weighted in one sector or industry then you should buy stocks or funds in a different sector to build more diversification. You should also check the geographic diversification of your portfolio. According to many professional stock investors, your portfolio should make up of at least 40% international companies to boost growth.
FAQs About How To Invest In Stocks: A Beginner’s Guide
Is Stock Investing Safely For Beginners?
Yes, stock investment is safe for beginners if the investment is done properly. Stock investment isn’t that complex but if you made mistakes initially then it becomes a bit difficult and you are at risk of losing your investment. As a beginner, you can consider taking help from investment tools as well as choosing stock mutual funds. These are low-cost ways for beginners to invest in the stock market. Moreover, these funds are available within the 401(k), IRA, or any taxable brokerage account.
Can I Invest Small Amounts Of Money In Stocks?
Yes, you can invest a small amount of money in stocks. In fact, there are many brokerages available that have $0 account minimums and many of these brokerages also support fractional trading. So, it means you can invest low dollar amounts like $5, $10, etc.
What Stocks Should I Invest In?
If you are a beginner stock investor then according to many stock experts it is a good approach to invest in stocks through a stock mutual fund, index fund, or ETF.
Can I Open A Brokerage Account If I Live Outside The U.S.?
The answer to this question depends on which broker you choose to open an account with. There are many brokers available that will allow you to open a brokerage account while you are living outside the U.S like Firstrade, TDAmeritrade, Lightspeed, Interactive Brokers, eOption, TradeStation, ZacksTrade, Charles Schwab, etc.
Last Updated on August 5, 2022 by Ana S. Sutterfield
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.