Are you looking to invest in stocks? This post is all about how to invest in stocks for dummies.
Investing in stock is a great way to grow your wealth. Additionally, owning stock can help you build savings for the future and protect your money, while also maximizing your income. Investing in stock is a complicated process, so here are some basic steps that will help you get started and eventually grow into a successful stock investor.
This post is all about the steps on how to invest in stocks for dummies.
How to invest in stocks for dummies:
Step 1:
The first step in stock investing is to decide how you wish to invest your money. There are several methods to choose from that depict how you will invest and how active you will be in choosing which stocks to invest in. The first method is through a hands-on approach. With this approach, you will act as an active investor in your stock. Active investors are very involved in their investments and monitor their stocks very frequently, typically daily. The next method is to choose an expert to manage the process for you. A robo-advisor is a great choice for this process. A robo-advisor manages your stock investment based on your information and investing goals. The final method we suggest, is to invest in your employer’s 401k. This is a very common way for beginners to start investing in a stock. This method typically involves investing regularly and taking a hands-off approach. This is a great way for new investors to learn and practice proven investing methods.
Step 2:
The next step to stock investing is to obtain an investment account. For those choosing the hands-on approach, a brokerage account is typical. A brokerage account allows the investor to buy and sell different types of investments, such as stocks, bonds, mutual funds, and exchange-traded funds. With this type of account, the investor will have the ability to use their funds in any way they wish. This will likely be the fastest and cheapest method for buying investments. Additionally, through a broker, you have the ability to open an IRA or a taxable brokerage account, if you are already saving for retirement in an employer’s 401k.
For investors that decide to choose an expert to manage the process for them, opening an account through a robo-advisor may be the best option. In this type of account, the robo-advisor will provide complete management of your investments. Robo-advisors will pick your investments for you, based on your investing goals, by building a portfolio designed to achieve your goals. A robo-advisor may be expensive, however, this option is still a fraction of the price it would cost for a human investment manager. Additionally, you can get an IRA through a robo-advisor, as well.
Step 3:
When learning to invest, it is imperative you understand the difference between investing in stocks versus funds. Funds can range from Index Funds to exchange-traded funds. What makes investing in funds attractive is your ability to purchase small pieces of many different stocks in one transaction. When you begin investing in multiple different funds, you start to create a diversified portfolio. In the long term, diversified portfolios always prevail.
On the other hand, you have individual stocks. The methodology behind this type of investing is mostly self-explanatory. Each stock is an individual company you can choose to invest in. When looking at a diverse portfolio from the lens of individual stock investing perspective, it takes a considerable amount of effort to achieve diversity. Building a diverse portfolio with specifically individual stocks is possible, but requires an investment of a significant amount of time.
When it comes to the payoffs of both of the investment options, it depends on what you are looking for. Mutual funds are unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely. However, the odds that any individual stock will make you rich are exceedingly slim. It is a fact that smart investing in different funds is more likely to provide a positive return on a long-term basis. If getting rich quick is what you’re looking for, then start researching individual stocks and their potential. I will warn, however, this route is considerably more risky. Weigh the pros and cons and factor your findings into your decision.
Step 4:
New investors often ask a couple of questions when first getting into this market. One of which is: “How much money will I need to start investing in stocks?”. The amount of money you need to buy an individual stock depends on how expensive the shares are. Shares can range in value anywhere from a few dollars to a few thousand dollars. If your interest lies in mutual funds and you have a limited budget, an ETF may be your best option. It’s very typical for mutual funds to have minimums of $1,000 or more. However, ETFs trade like a stock, which means you purchase them for a share price. In some cases, these prices can be less than $100, which tends to work out with a low budget.
Another question that may come into play may be: “How much money should I invest in stocks?”. This is an important question to consider when deciding between individual stocks and funds. Typically, you can allocate a fairly large part of your portfolio to funds when your focus is on the long term. For example, a 30-year-old investing for retirement might have 80% of his or her portfolio in stock funds. However, individual stocks are a different story. A general rule of thumb is to make these a small percentage of your investment portfolio. Due to the volatility of individual stocks in the market, it would be in your best interest to keep your total investment in individual stocks minimal.
Step 5:
When it comes to investing, the focus is always on the long-term over the short-term. Long-term is the goal because of the amount of potential that can be achieved over a period, versus selling early or short selling. Day trading, however, is popular due to the quick and sizable returns you can make. Consequently, the risk with day trading is very high. Funds we recommend looking into for long-term investments would be index funds, like the S&P 500. An index fund is a portfolio of stocks made up of a variety of different segments. The segments can be made up of categories like technology, healthcare, and food. Not only is this fund diversified, but it also encompasses the top 500 performing companies. This specific fund is a viable option when it comes to managing and continuing steady growth for your portfolio.
Step 6:
Since the stock market is not guaranteed to always be bullish, or positive in growth, investing in several popular stocks or meme crypto’s in a time of a positive trend can be risky. This can cause damage to your portfolio. Depending on your investment preference, you can invest more conservatively or aggressively. Having a considerable amount in government bonds, CD’s or certificate deposits and index funds would be considered more conservative and have a slower growth rate. A more aggressive portfolio will house both larger and international companies. A popular international company we know of is Alibaba. This is a marketplace that allows the buying of a wide variety of products all at great prices. With this company, it’s imperative to understand the level of risk involved. Depending on goals and age, each portfolio type can be effective. One thing you should keep in mind is you aren’t likely to see a high reward in a short period, without higher risk.
This post was all about how to invest in stocks for dummies.
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