If you are wondering about how to invest in stocks, there are actually steps that you need to consider and take. Unless you are loaded, you can’t just pick stocks without making any research before. Investments may be fruitful for future gain because you are hoping to ‘save now’ and your saving will grow and likely multiply. However, investments have their own risks and challenges. The possibility of losing your money is always there, and that particular risk would be bigger if you don’t make any preparation first. That’s why it is crucial to learn the steps so you can minimize the risks while increasing the possibility of profits and gains at the same time.
The Basic Step in Stocks Investment
Before you learn about how to invest in stocks, you need to understand the concept first. Stock investment means that you will buy ownership shares within a public company. The small shares are referred to as the company’s stock. When you invest in the stock, you basically hope that the company will perform well and grow over time. When it happens, the shares will be more valuable. More people would be more interested, and they would be willing to buy those shares from you with higher price that you had paid. In the event you want to sell those stocks, you should be able to enjoy huge profits.
If you expect profits overnight, then the stock investment may not be for you. This is a more suitable saving for long term goal. It would be wiser if you have diversified investment portfolio. Even when the market has fluctuated (it goes up and down), you should stay invested.
Understand Your Investment Approach
One way on how to invest in stocks is to understand (and determine) the investment approach. The problem with stock investment is that there are different types of them. Some people may prefer the individual stocks, and others would choose the robo-advisor. It depends on your personal characteristics and preferences, really.
Before you decide what kind of investment you want to have, you need to ask yourself these questions?
- Am I an analytical person?
- Do I love doing research and enjoying numbers?
- Do I love math?
- Am I willing to do a lot of ‘homework’?
- Do I have enough times to stock market investment, at least several hours every week?
- Do I have the interest to read about various companies to invest in, but do I really want to deal with math-related stuff?
- Am I a professional with full time schedules, so I don’t really have time to analyze the stocks?
You need to look into yourself and answer all of those questions honestly. They are simple yes and no types, so you shouldn’t have any issue, but you can understand yourself more especially related to your own unique investment approach.
Various Stock Market Investment Types and Ways
The next step in learning how to invest in stocks is to understand different stock types.
- Individual stocks. This investment would be perfect for you if you have the desire and time to perform thorough research, including evaluating the stocks within the ongoing basis. This is only applicable if you are dedicated completely for this action. This investment would be ideal for those who love learning, while observing and monitoring the overall condition. Over time, patient and smart investors would be able to beat the market eventually. However, you need to deal with moderate math calculations and (quarterly) earning reports. If you dislike them, you can always take the passive approach, which is absolutely okay.
- Index funds. Besides the individual stocks, having index funds is also possible. It would track stock index (such as S&P 500). This is more about (passively) managed funds. This kind of investment is lower in cost. It is also guaranteed (virtually) to match their underlying indexes’ long term performance. The S&P 500 can produce 10% annualized total returns over time. With this kind of performance, you can expect to build (substantial) wealth in the long run.
- Robo advisor. This is a relatively new way in stock investment, but its popularity has increased within the last few years. This is a type of brokerage that would invest your money (on your behalf, of course) within index funds portfolio that would be suitable for your risk tolerance, investing goals, and age. Basically, the robo advisor would pick the proper investment type for you. But it can also optimize the tax efficiency and also make changes automatically over time.
- Known as Exchange Traded Funds, this kind of investment would buy a lot of individual stocks in order to tack the underlying index. When you have ETFs investment, it’s similar to buy stocks from a wide range of companies within the same sector. It’s also like buying stocks from a stock index. The ETF shares would perform trading on exchanges (like the stocks), but they do provide greater and bigger diversification when compared to the individual stock.
- Mutual funds. This one is almost similar to ETFs but with significant differences. The (actively managed) mutual funds would have managers responsible for choosing different stocks, so they can beat the benchmark index. When you buy mutual fund stock shares, the profits would be generated from capital gains, interest income, and dividends. Low cost index funds are basically mutual funds working like ETFs.
How Much Can You Afford?
After you have decided the type of investment to have, the following stage in how to invest in stocks is to determine the investment funds. How much can you afford? How much would you be willing to spare if you want to invest in stock market?
First thing first: Stock market is a market that you can’t predict. One minute it may deliver millions of profits for you, and the next minute, all of your money can be gone. Poof! Just like that. If you want to invest in stock, make sure that all of your basic requirements have been met. You MUST NOT use the money that you may need within the upcoming 5 years for investment. You shouldn’t use these types of money for stock investment:
- Money that you have saved for a down payment (any kind of down payment) although you may not be prepared yet to buy a car or a house for some years ahead.
- The emergency fund
- Your vacation funds for next year or the upcoming season
- Money that you have kept aside for extra saving
- Money that you may need for your kids’ next tuition
Here’s what you need to keep in mind when it comes to stock investment: Only use money that you can afford losing. If the worst case scenario happens, you won’t regret it too much and the condition won’t affect your finance. Some people, who have been experts in stock investment, even claim that you should consider the money gone once you have committed the money for investment. If it makes you profit, then consider it a bonus. But if you lose it, you don’t have to cry over it.
Asset allocation is the next step in how to invest in stocks. You have decided that your investable money would be the one that you won’t need for at least 5 years ahead. This is more popular as asset allocation. In asset allocation, there are several contributing factors that you should consider, and it includes investment objectives, your own risk tolerance, and your age.
What’s with age? You see, when you get older, you wouldn’t be interested much in investing your money there. When you retire, you rely much on your investment income, so taking risks won’t be an option for you. But when you are young, you have plenty of time to figure out the market’s ups and downs. You may likely still have your income source, so you won’t depend so much on your investment.
You can try this method. Take your age. Subtract it from around 110. The result would be your investable money’s percentage that should have been in stocks. The remainder can be in investments with fixed income types, such as high-yield CDs and bonds. Depending on your risk tolerance, you should be able to adjust the ratio – going down or up is totally up to you.
For instance, you are 30 years of age. Based on the method above, your investable money should be around 80% in stocks while the remaining 20% should be in fixed income. If you are one of those risk takers (or you probably plan on working past the standard retirement age), you may want to change the ratio (in favor of the stocks). However, if you don’t really fancy big fluctuations in your investment portfolio, you may want to make a slight modification in other directions.
Accounts to Invest in Stocks
Do you know that there are accounts allowing you to buy stocks, and those accounts are different from one another. One of the ways on how to invest in stocks is to familiarize yourself with these accounts too.
- Retirement accounts. IRA (Individual Retirement Accounts) and 401(k) are two of the most popular retirement accounts. Anyone is free to open an IRA while the 401(k) is only offered by an employer (to their employees). If you want to open an IRA, you can do it at a robo advisor or through online brokerage. These accounts like to provide tax advantages incentivizing you to save up for retirement, but they come with (annual) contribution limits too. Other types of retirement accounts include solo 401(k), SEP-IRAs, and 401(b).
- Education savings account. In the event you save up for qualified education, the saving plan enables you to invest in stock too, typically through target date portfolios and mutual funds. The examples of this account are Coverdell Education Savings Account and 529 Plans.
- Taxable investment accounts. The previous retirement accounts get special tax treatment form for the investments. Plus, they have contribution limits. It’s quite different from the taxable investment account. Proceeds from the stock investment (made within this taxable account) would be treated and also considered as a regular income and it doesn’t have any special tax treatment. And there is no contribution limit.
So, you have your options when it comes to stock investments. You can set the account via a brokerage (through the financial advisor or online), via your boss or employer (if you pick the employer sponsored plan), and via the bank, especially if you pick the Coverdell ESAs. Simply pick the one that fits your preference and needs, including your comfort level.
Whatever you do, it is always a good idea to do your own personal research and really understand what it is all about. Before you learn about how to invest in stocks, it’s always a good idea to take a look at your condition and also requirements.