Investing in the Stock Market 101
Many people are afraid of the stock market. They think, “If I didn’t study finance in college, how am I supposed to know how to invest?” or, “Investing is too risky, I don’t want to lose all my hard-earned money!” Well, I am here to reassure you that it is very possible for the average person to have success in the stock market. In fact, now more than ever, people are using the strength of the stock market to help supplement their income in retirement. In this article, I am going to help you with the basics so you can feel comfortable getting your foot in the door and start investing!
Before you start investing, it is important to understand what you are investing in and what best suits your needs. Often times when people think of investing, they automatically default to individual stocks like Apple or Microsoft. While there is nothing wrong with buying shares in individual companies, it is just one of your many options! You could also invest in index funds like the S&P 500, which track a stock index. Individual stocks are good for someone who has the time and interest to track and manage their stocks regularly. Index funds are better for someone who wants to take a more passive approach. Mutual funds are another great investment option, where you can have access to a whole group of stocks at once. There are also ETFs or exchange-traded funds, which provide you with a broad market exposure for a very low fee. Lastly, you can buy bonds. Bonds are a promise from a company that they will pay you back your investment plus interest over a period of time.
When you are getting started with investing, it is helpful to determine how much money you would like to put aside for your investments before you start. It can get easy to get carried away and lose track of your funds, so setting a limit of what you want to invest within a certain period of time could help you comfortably ease into the investing world. Deciding how much you want to invest is a very personal decision, but generally you should not invest any money that you may need within the next five years. This money is better served in a savings account where it can accrue interest. Rather, you should allocate your assets based on a few factors including your current age, financial goals, the age that you would like to retire, and your risk tolerance.
Now that you’re ready to start investing, you will need a vehicle to do so. You can make a brokerage account with companies like Charles Schwab, Fidelity, E*TRADE, and many more. Once you have your account set up, you can connect to your bank so that you can make transfers in and out of your account to place your trades and collect your earnings. Next, you will need to decide if you would like to use a standard brokerage account or an individual retirement account, also known as an IRA. An IRA might be right for you if you are planning for your retirement and would like to start putting money away now. The downside to and IRA account is that you may face penalties if you withdrawal money before a certain age. Standard brokerage accounts allow you to have easier access to your money whenever you want it.
It is finally time to buy some stocks! Until you get the hang of investing, I would recommend choosing stocks that are not too volatile. This way you won’t run the risk of losing too much right away. Another recommendation is to invest in companies that you understand. Not only does this make investing more fun, but it also makes it easier for you to follow in the news if you understand the developments a business is making. Lastly, it is always a good idea to have diversification within your portfolio. This means that you have a variety of different types of companies that you invest in. Having a balance of different types of businesses in your portfolio can allow you to invest in a bunch of companies without too much risk. But it also allows you to try and invest in some riskier stocks that you might be interested in, without increasing your overall risk levels.
Investing can seem daunting on the surface, but when you break it down and develop an understanding of how the market works, anyone can take advantage of it. It is a fun and effective way to grow your funds while also learning about different business. Once you get started, you will be investing like a pro in no time!