Buying stocks is a lucrative long-term investment that can generate significant returns. This post provides the ultimate guide on managing money growth and analyzing the market as a beginner.
Did you know that about 53% of Americans owned different forms of publicly traded stock in 2019? While the number of investors is still high, most people are skeptical about buying stocks due to volatility.
Others are also hesitant to make this move after witnessing the collapse of some investments. While the stock market is volatile, you can make significant profits in the long run.
Still, you must research beforehand, understand your options and invest wisely. Are you wondering how to invest in stocks and unlock your financial freedom?
Besides, do you want to determine the right amount to spend on a portfolio? Continue reading to discover six key steps to follow before investing in stocks.
How to Start Investing in Stocks
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1. Choose an investment strategy
Selecting an investment strategy is the first step before buying stocks. The right method will mainly depend on the time you want to spend on the venture.
It may also vary based on your understanding of the stock market. Some investment strategies to consider are:
Managing and choosing your stocks
Selecting the right stocks to invest in and managing them without professional help is a popular strategy. Still, it requires adequate knowledge of the market trends and various industries.
Managing your stocks is time-consuming since you must study the market before investing. Hence, it may not be suitable if you are a beginner or want to concentrate on other ventures.
Using a robo-advisor
A robo-advisor is an investment platform that will trade on your behalf. This tool analyzes portfolios and determines the best times to buy or sell stocks.
Using a Robo-advisor is a cost-effective way to trade with limited knowledge. You can also focus on other activities since the automated program will manage your assets once you deposit money.
Recommended Robo-advisor: Betterment
Short-term trading is an investment method that involves entering and leaving the stock market within a short time. This strategy is lucrative since you can make significant profits in a short period.
Still, it involves high risk because you have limited time to understand the market. Short-term trading can last anywhere from seconds to days or a few weeks.
Due to this aspect, it's a popular strategy among traders that want to profit from short-term trends and price movements. If you opt for short-term trading, you may need to use derivative products for widespread bets.
These will help you open buy and sell positions based on the speculated price of an asset.
A long-term investment strategy involves buying and holding stocks for an extended period. During this time, you can study the market to determine how to diversify your assets.
It's also possible to avoid costly mistakes that may cause significant losses. Long-term stock investment is suitable if you are willing to wait longer for better results.
Still, you should understand your risk comfort level and tolerance to market volatility.
2. Open an investment account
The next step after determining the most suitable investment strategy is opening an account. In most cases, the right option will depend on the selected trading method.
Some key steps to follow when opening an investment account for stocks trading are:
- Determine the type of account you need.
- Compare the services each company offers.
- Assess the convenience of each account.
- Pick a suitable brokerage firm.
If you want to manage stocks without help, you should open a brokerage account. This process involves determining what you need and the cost of running each account.
You may open a margin or cash account if you want to use a traditional brokerage. The margin option will allow you to borrow money for trading at an agreed interest.
Another investment account to consider is a traditional IRA. This option is suitable if you want a long-term investment for your retirement.
If you opted for a robo-advisor, you should open an advisor account. The company offering these services will ask some questions to determine your investment goals.
Based on the feedback, they will then build your portfolio and manage your stocks. Robo-advisors will charge you an agreed fee for managing your investment.
Others may also require you to hold a percentage of the money you make in the account.
3. Decide how much you want to invest
Once you set up your brokerage account, you should determine the amount you want to invest. This aspect can vary based on various factors.
Such include the value of the stocks you want to buy, risk averseness, and market trends. Investing in exchange-traded funds (ETF) is a suitable option if you have a small budget.
These allow you to buy stocks for a share price of as low as $100 or less. Still, you can opt for mutual funds, which involve pooling your money alongside other investors.
These may require you to contribute at least $1000. If you want to trade stocks for a long time, you should invest the amount you can comfortably afford.
Thus, it would be best if you considered your earnings and daily or monthly expenditure. Further, set aside some amount to cushion you for at least two to three years in case of bumps in the stock market.
Setting up an emergency fund is also vital if you don't want to hold and sell stocks for an extended period. This way, you can protect your finances against the high risks associated with short-term trades.
4. Research your investment
Researching your investments before buying stocks may help you avoid losses. Understand your portfolio options by determining the pros and cons of each.
For example, weigh whether you should select a mutual fund over stocks based on your budget. Further, determine if you want to diversify your assets or invest them in one industry.
You should also assess if an index fund is more suitable for your goals than an ETF. While understanding stocks and available options before investing is vital, you should also learn about the companies.
Assess how each brand you consider involves the investors. During this process, check if they provide accurate information about their performance.
Besides, check their cash flow statement to determine if they manage finances properly. Other critical aspects to research about companies before investing in stocks are:
- Their market sizes
- The potential for growth
- Ability to adapt to market changes
- Technological advancement
- Customer satisfaction
- Debt to equity ratio
Researching various companies before investing will help you assess the chances of getting value for your money. This measure is critical, especially if you plan to hold on to the stock for several years.
5. Start investing
The next phase after understanding your options is investing. Funds your stocks account by depositing the money you want to use for trading, including transaction fees.
After that, buy stocks through a broker's website or directly from the company. If you want to invest in index funds, pick an index while considering various factors, including the company size and the services or products they sell.
You may then buy the indexes through a brokerage or a mutual fund company. When buying stocks, it's vital to avoid putting all your money in one portfolio.
Instead, diversify the investment to lower risks. More helpful tips on how to invest in stocks are:
- Avoid individual stocks
- Don't focus so much on short-term trading
- Prepare for a downturn
- Assume an appropriate amount of risk
- Understand that past performances don't always predict the future
6. Managing your stock portfolio
Managing your investment is a crucial process in the stock market. If you apply the right strategies, you can effectively determine when to buy or sell.
Ultimately, you will understand the market better and make wise investment decisions. Manage your stock portfolio by following up on economic news and industry trends.
Further, understand how different sectors react to market changes and technology evolution. Revisit your portfolio several times each year, preferably monthly.
During the process, check if the stocks in your account align with the investment goals. Moreover, protect your assets by distributing them among several regions and sectors.
Such measures will help you develop the best long-term investment and risk management strategies.
Evaluating how to invest in stocks can be challenging if you don't have enough knowledge. If you make some mistakes, you may lose money or get meager returns.
Reading materials on stocks for beginners will help you strategize investment. Besides, you can determine how to manage your accounts and ensure you spend the right amount.
Learning about stocks allows you to understand the benefits and risks of each category. You can also identify the suitability of various investments based on your goals and budget.
Are you looking for more information on the stock market? Would you like more guidance on managing your portfolio? If yes, browse this page to read other helpful articles.
Betterment can help grow your money by making saving and investing easy. Invest in a tailored portfolio, set buckets for your goals, and earn rewards.
Most people researching stocks for beginners often have some questions about the process. Here are answers to some common queries.
Yes. Investing in stocks is an effective way to build long-term wealth. You can also make significant returns on a short-term investment if you aren't afraid of high risks.
While stock investments are lucrative, you should always research before spending money. Further, get an expert's help before trading and track your assets for profit-making opportunities.
There is no specific amount you need to start buying stocks. If you open a brokerage account that doesn't have transaction costs, you may invest with any amount that is enough to buy a share.
For example, you can buy a stock with as little as $10. If your brokerage charges transaction costs, you need to spend more than the value of a stock when investing.
For example, if you buy stocks worth $100 and the brokerage charges $8, you need a minimum of $108.
If you sell stocks for a profit, you have to pay taxes. You will also need to remit a given amount for the dividends you earn from the investments.
You don't have to pay taxes if your investment has an unrealized gain. For example, if the stock you bought increases in value by 20% after some time, you don't have to remit any amount for the gain.
This is because you are yet to profit from the change.
Fractional shares refer to partial ownership in a company. These may occur when different brands merge or when they split stocks.
Fractional shares allow investors to diversify portfolios at a low cost. Instead of buying a whole share, you can purchase a fraction of stocks valued in a dollar amount.
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He and his wife are “empty nesters” living in New Hampshire.