With the stock market finally featuring some bargains, many people are wondering how to start investing in stocks. After all, if you’re smart, you want to earn money through your investments, not lose it.
Well, the first thing you need to know is that it’s usually better to start investing sooner rather than later.
The earlier you make money in the market, the longer that money can grow. That means you’ll earn more in the long run.
That said, what’s the best way to start investing in stocks?
STOCK INVESTMENTS 101: HOW TO START INVESTING IN STOCKS
Getting into the stock market can seem scary, but your odds of success go way up when you have a smart plan. Your best bet to come up with a smart plan is to work closely with someone who has lots of experience helping people like you succeed in the market.
That expert will probably tell you that most successful investors have a plan that includes the following 6 steps:
1. DECIDE IF YOU CAN DO IT ON YOUR OWN OR NEED HELP
Before you start investing, ask yourself how much you know about the stock market. Be honest with yourself about how much knowledge you have — this is an important decision.
If you’re a beginner, articles like this one can help you make some good first decisions. But in most cases, a newbie to investing is going to need the help of an experienced investor who can give you sound advice.
2. DON’T LET A LACK OF DISPOSABLE INCOME STOP YOU
The fact that you don’t have a lot of disposable income should never stop you from investing. Regardless of your disposable income situation, you can, in other words, begin investing immediately.
You should, however, take prudent investing steps if your disposable income level is low.
For example, you can create an account on a platform like SoFi. This will let you invest in fractional shares of stocks and funds in increments as low as a single dollar.
Using this strategy, you can begin making smart investments now and gradually increase your income level through those stock earnings.
3. OPEN AN ACCOUNT
The next step is to open your investing account. If you plan to invest on your own, this usually means a brokerage account (like Fidelity, Schwab, or SoFi Invest). If you need help, it usually means working with a robo-advisor.
Many investors start with their retirement account, which is a kind of brokerage investing account.
Retirement accounts like a 401(k) or an IRA are good for beginners because they usually grow over time with little work on your part.
The disadvantage is that stock choices through retirement accounts are done by someone else, and you have little say over which stocks you buy.
Some advisors will recommend using a so-called “robo-advisor” to help you pick stocks, but this is unequivocally a bad idea.
The churn and overall return (on average -3%) tend to be terrible, and allowing this automated tool to make investment decisions for you eliminates your ability (in consultation with a competent investment advisor) to make better decisions for yourself.
4. UNDERSTAND EXCHANGE TRADED FUNDS AND INDIVIDUAL STOCKS
Assuming you work with a competent investment advisor, it’s important to understand basic stock terminology. For example, you need to know the difference between exchange-traded funds and individual stocks.
An exchange-traded fund (or ETF) is basically a collection of securities that are associated with an underlying index. ETFs are not the same as mutual funds in that, unlike mutual funds, exchange-traded funds are listed on stock exchanges and trade much like regular stocks. An example of an ETF is the SPDR S&P 500 Trust ETF (SPY).
When you buy individual stocks, on the other hand, you’re investing in a single company.
Of course, that means doing the necessary research to make sure that stock is a good buy.
It also means there’s potentially a higher risk since your investment will decrease if that one company runs into financial problems.
Although every investor is different, for new investors ETFs are generally a better choice. (Unless you’re a member of our Academy)
5. CREATE AN INVESTMENT BUDGET
Now that you’ve decided how you want to invest and what kinds of stock purchases you want to make, it’s time to create a budget.
First, you’ll need to know how much different stocks cost. This depends on what each share is worth, and the cost of stock shares vary a great deal—they can be anywhere from a couple of dollars to thousands, for example.
Second, you’ll need to see how much money you have available to invest and choose good stocks that are in your price range. Again, it’s usually best for new investors to prioritize mutual funds over individual stocks.
6. BEGIN INVESTING
Now that you’ve decided to either get help or go it alone, opened an account, understood how stocks and index funds work (and how each serves a different investment purpose) and created your budget, you’re ready to start investing. There’s just one more thing.
One of the biggest mistakes people make when they want to learn how to start investing in stocks is thinking they know more than they do. The basics of investing might seem simple, but it usually takes an experienced investor to make the right choices and increase the odds of your success. That’s where we can help you.
Ready to learn more about investing in income stocks?
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