Are you interested in buying stocks? Owning shares of well-known, profitable companies has been one of the best-known ways to acquire wealth over the past century.
Additionally, several well-known companies like GameStop and AMC have received tons of media attention in 2021 as so-called “meme stocks”. Their rapid gains have inspired many to give stocks a try and see what they’re all about.
However, if you’re new to stocks and just starting out, then it can be a little intimidating knowing which ones to pick and how to get started. In this post, I’ll explain how to invest in stocks and what you’ll want to consider.
What Are Your Investing Goals?
Before investing in stocks or any financial products, you’ll want to think about your purpose for doing so and what you’re hoping to accomplish.
Many successful investors start with a long-term mindset that they want to one day achieve financial independence and create future retirement income. This can be a good approach to take because even though stocks fluctuate in value, their long-term performance (15 years or more) often averages out to produce net positive returns.
Other people look at stocks as an opportunity to “get rich quick”. While this has certainly happened to many people, keep in mind that there are probably more instances of people losing money (or their entire life savings) by taking unnecessary risks. If short-term returns are one of your goals, then I’d suggest you proceed with caution and limit the amount you invest to no more than 1 to 5 percent of your available funds.
Determine Your Level of Risk
It’s important when you invest that you’re comfortable with the level of risk you’re taking. This will help you avoid rash moves in the future such as selling your stocks when the market is down and taking a huge loss.
The majority of stocks can be broken down into one of the three categories:
- Large-cap stocks come from big-name, well-known companies (i.e. Google, Apple). They typically produce steady returns with the lowest level of risk.
- Mid-cap stocks will include companies you may or may not know. These types of stocks are riskier than large-cap stocks, but also have the potential for higher gains.
- Small-cap stocks are up and coming companies that are currently not well known but could become bigger as time goes on (think like the next Uber or Airbnb). These are traditionally the riskiest stocks but also have the potential to produce the highest returns.
Again, you’ll want to pick stocks from companies that align with your goals as well as tolerance for risk. For example, if you’re investing for the future and can stomach the risk, then a mixture of all three types is acceptable. However, if you don’t really like risk, then perhaps sticking with large-cap stocks would work the best.
Buying Stocks Individually
Buying stocks is a pretty straightforward process. There are hundreds of websites you can visit to find all of the latest prices, details, and stats for every publicly traded company (i.e. Google Finance, Yahoo Finance).
To make a purchase, you’ll just need a broker and the stock symbol of the company you’re interested in. Brokers generally come in one of two types:
- Full-service brokers are companies like Vanguard and Fidelity who not only sell stocks but also a full suite of financial services such as other investment products as well as wealth management.
- Online brokers (like E-Trade, TD Ameritrade, Robinhood) focus solely on discounted stock trades. However, many larger ones now also offer other investment products and services.
If you’re just investing for fun and only want to buy a handful of stocks, then any reputable online broker will work fine. But if you’re thinking long-term and would like to take advantage of other types of investments, then a full-service broker might be a better way to go.
Sometimes when an individual stock costs too much to buy, most brokers will now let you buy what’s called a fractional share. This is where you buy a fraction of a stock share based on the dollar amount you’d like to invest. This is particularly helpful for big-name companies where a share may cost hundreds or even thousands of dollars.
Mutual Funds and ETFs
If you’d like to invest in dozens or even hundreds of stocks all at the same time, then a good alternative would be to purchase either a mutual fund or an ETF.
- Mutual funds are collections of securities (stocks, bonds, etc.). The funds are created using money that’s pooled together from groups of investors. Individuals can buy shares of mutual funds and this lets them capitalize off of this larger group of assets.
- ETFs (exchange-traded funds) are similar in design to mutual funds. However, the major difference is that your shares can be traded in the open stock market.
Mutual funds and ETFs are available through most full-service brokerages. Because ETFs trade just like stocks, many online brokers will also carry them.
Another popular method of investing in stocks is to use what’s called a robo-advisor. Robo-advisors are financial platforms that automatically pick your stocks and investments based on a few simple questions about your goals and tolerance for risk. Everything is controlled through an app, and there’s little to no human interaction involved.
In recent years, robo-advisors have gained a lot of traction thanks to their simplicity, low cost, and low minimum balances (some even making them zero). However, they can also be very inflexible, and investors need to remember that you’re relying on a computer for investment advice. Regardless, if you’re interested in checking them, then have a look at apps like Betterment, So-Fi, and Wealthfront.
Whether it’s individual stocks, mutual funds, or ETFs you’d like to own, one set of tools that everyone should consider using for their investments are retirement accounts. Retirement accounts are just like traditional brokerage accounts but with one major advantage: Lower taxes.
When you invest in a traditional-style account like a 401k or IRA, you’ll defer paying taxes on your contributions and earnings. Taxes won’t be due until one day in the future when you withdraw the funds to use as a replacement for your working income.
With a Roth-style account, the tax savings are applied at the back end. Contributions are taxed, but then any gains and future withdrawals are tax-free once you retire.
You can set up an IRA at virtually any financial institution of your choice and invest in practically any financial product you’d like – including individual stocks. The investment options for 401k plans are usually pre-defined and may or may not include the ability to buy individual stocks.
Whether you decide to invest with a traditional broker or through a retirement plan, chances are you’ll eventually have more than one account to keep track of. This is where an app like Buxfer can help. Buxfer can sync with over 20,000 financial institutions and automatically imports all of your latest balances into one place so you’ll always know how they’re doing.
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