Are you looking for a smart way to grow your wealth? If you are, you have come to the right place. In this article, we shall guide you on how you can accumulate your wealth by investing in stocks.
Many individuals have aspired to follow this route, but they do not know where to start. We do not want you to fall into this category, and that is why we shall try to make everything as simple and straightforward as possible.
Keep in mind that there is a lot you need to learn before joining this venture. Therefore, take your time and read what we have put together on this venture.
But first things first.
What Are Stocks?
These are simply equity investments that signify legal ownership in a company. So, when you buy shares of a particular firm, you become a part-owner.
Stocks are divided into two; common and preferred stock. With the former, you are entitled to a proportionate share of the corporation’s profits or losses. On the other hand, preferred stocks feature dividend payments that have been predetermined.
Another thing you need to know is that most corporations issue stocks as a way of raising money.
How Would I Benefit from Holding Stocks?
There are two main ways in which you can profit from owning stocks. The first way is when the share price rises and the profit comes from the difference with the investment you made. The other way is through quarterly dividend payments.
The prices fluctuate due to the actions of buyers and sellers in the stock market. If there are more buyers than sellers, the prices will drop.
Although the company’s performance has no direct impact on the stock’s price, it is how investors react to the performance that will affect the price. For instance, a firm’s shares will be in demand when the company performs well, which will drive up the price, and vice versa.
These are the quarterly payments that corporations send out to their shareholders. If you want stocks that will provide you with a continuous income stream that may help you in your retirement, you should consider dividend investing.
This refers to portfolios with stocks that issue dividend payments consistently throughout the year.
How To Invest In Stocks: A Starter’s Guide
Now that we have touched on some basics in investing in stocks, we shall now provide you with a step-by-step guide on how you can go about the venture.
Let’s do this.
I) Decide your Investing Approach
As you are about to dive into the world of stocks, it is vital that you think about how you will start. If you are a DIY individual, you will probably adopt a hands-on approach whereby you choose stocks and stock funds yourself.
Alternatively, you could go for a less active approach and have someone manage your investment on your behalf. In this case, a Robo-advisor would be your perfect companion. Luckily, finding this service is not as hard as there are brokerage services that offer it.
From here, you can now think about the ideal investing account for you.
II) Finding the Perfect Investing Account
By now, you must know that an investment account is a prerequisite to investing in stocks. The type of account that you get depends on your approach to trading, i.e., whether you are the DIY type or need some help with the process.
As a DIYer
If you fall into this category, an online brokerage account would be your most convenient option for acquiring different investments. The broker would help you open an individual retirement account or another taxable brokerage account if you had started saving elsewhere.
As a less active Investor
Here, we advise you to open a Robo-advisor account, which would do all the investment management for you. During the opening process, the company offering the investment management service will require you to disclose your investing goals.
From there, the service will create a portfolio that is geared towards attaining your targets.
Another point to note is that the management fee charged is not as expensive as you would expect from such a service. It normally ranges around 0.25% of what is in your account.
III) Know the Type of Investment that You Want to Go For
This is an area that often looks complicated from the outside. However, choosing the right investment should be fairly easy. In most instances, the choice is between individual stocks and Mutual funds or Exchange-traded funds (ETFs).
Let’s look at both categories of stocks briefly.
One way of starting out in the stock market is by investing in a specific company, either by purchasing a single stock or several of them. It is possible to create a diversified portfolio from various individual stocks, but you should be prepared to spend more.
With individual stocks, if you make a wise pick, you can reap huge returns. However, it is not common for a single stock to be the game-changer in your investment venture.
*Stock Mutual Funds or ETFs
Stock Mutual Funds, also known as equity mutual funds, allow you to buy pieces of different stocks within a single transaction. By investing in a fund, you get to own small pieces of the different companies, plus you can create a diversified portfolio by putting the funds together.
The main advantage of mutual funds is diversification, which helps in minimizing your risk. So, if you check the portfolios of those investors saving for their retirement, mutual funds are likely to be the dominant investment.
IV) Have a Budget for Your Investment
As you decide on the ideal budget that you should set for your investment, the following two questions would help you in your decision-making:
*How much money would be enough to get started in investing in stocks?
Well, this depends on the priciness of the shares you intend to buy. Some stocks will cost you a few dollars, while some are priced in the thousands.
If you are on a small budget and wish to trade in mutual funds, we recommend that you try out ETFs. This is because they trade like stocks, and you can always find affordable options.
*What is the ideal amount of money to invest in stocks?
If you are in the game for the long-term, you would be wise to allocate a significant portion of your portfolio towards stock funds, e.g., 80%. As for the remainder of the portfolio, it should be in bonds.
When it comes to individual stocks, always ensure that they take up the smallest portion of your portfolio.
V) Make It A Long-Term Thing
According to Warren Buffet, the best move you can make is by choosing individual stocks with promising long-term potential. This guru is advising you that you ought to treat your investments as long-term rather than a short-term thing.
So, once you invest in stocks or mutual funds, you should drop the habit of checking on your stocks now and then, unless you aspire to be a day trader.
VI) A Little Investment Education Will Be Helpful
It may not be the first step on our list, but it would be wise if you took your time to understand everything about investing before joining the field.
As you accumulate the money to invest in ETFs and mutual funds, do some research so that you can fully grasp what investing in stocks involves.
There are books and publications such as The Wall Street Journal that are very resourceful and would give you an insight on what to expect when you join this venture.
Additionally, there are investment sites you can visit or forums to join. You could go an extra step of taking a course at a brokerage firm to gauge how good you are in the trade.
The more knowledgeable you are, the less risk you will be exposed to.
VII) Use of the Dollar-Cost Averaging
This is the process whereby instead of buying into your investment positions all at once, you would do so gradually. For instance, instead of pumping $5,000 into a single index fund, you could make periodic contributions into the fund. This way, instead of buying at the top of the market, you will be buying into the fund at different periods.
IX) Managing Your Stock Portfolio
We may have stated earlier that you do not have to check your portfolio several times a day. This does not mean that you should abandon checking up on your investments altogether.
You should make a point of visiting your portfolio several times a year to be sure that it is still in line towards attaining your investment goal. However, all this depends on whether you followed the right steps to purchase individual stocks and mutual funds.
There are a few pointers that we will offer you concerning your investments. First, your portfolio should not be too weighted in one sector. If it is, we advise that you buy stocks or funds in different sectors for the sake of diversification.
Then, if you are getting close to your retirement, you ought to move over some of the stocks you have invested in into a more conservative fixed-income investment.
X) Investing in Individual Stocks
If all the steps mentioned above have given you the confidence to start your stock investment journey, ensure that you gradually do so. Since you cannot apply the dollar-cost averaging feature with individual stocks, you will have to slowly formulate your method for doing this.
By now, you must have taken different positions in mutual funds and ETFs, so you can begin investing in stocks as you navigate towards creating a portfolio. The different fund positions ensure that you are not overexposed to a single stock, provided that your position in the stocks is a minority of your total portfolio.
Once again, we emphasize that you should not overload on a single stock.
You can start diversifying your portfolio, stocking up your investment and retirement accounts with ETFs and mutual funds. Further, adding individual stocks will help you diversify your fund holdings even further.
It is important to know that as you create your portfolio, ensure that you spread out your capital among the different equities available.
If you want to maintain the ideal diversification and allocation of your investment account, you should consider getting a reputable investment management firm’s services.
XII) Do Not Stop Investing
Sometimes, even a basic move is likely to earn you extraordinary results. So, we shall give you a simple secret that may earn you unbelievable returns on your investment.
It involves purchasing shares of reputable firms at reasonable prices and then hold on to them as long as the business continues functioning well or whenever the need for the money ever arises. Keep in mind that as time goes by, you will probably meet some volatility.
However, in the end, you are likely to be very satisfied with the results.
Other Useful Tips that You Need to Know
Besides the steps outlined above, we will provide other useful pointers that may help you find your footing in the stock investment world.
How Do I Buy Stocks?
If you’re wondering how to invest in stocks, remember that there are two major ways that you could use to purchase stocks. They include via a brokerage account or investment apps (which are in plenty out there).
These platforms function the same way, and they allow you to purchase, sell, or store your purchased stocks on your desktop or smartphone.
The main distinction comes in with the commission fees and the features/resources present.
These platforms are quite advantageous as they enable you to buy stocks without the commissions reducing your profits as time goes by.
Additionally, there is the emergence of investment clubs whereby you pool your funds into a club account before choosing the ideal stocks to invest in. The only problem is that the members are likely to be of different levels of skill.
Further, meeting other club members may be time-consuming.
One thing you need to know about buying and selling stocks is that timing is everything. However, you need to develop a smart strategy whenever you need to sell, and it should depend on your financial needs.
It is important that you monitor the major market indices, with the three major ones in the US being The S&P 500, The Nasdaq, and The Dow Jones Industrial Average.
Note that market crashes are normal, and the markets always recover with time.
Finding the Ideal Stockbroker
There are two types of stockbrokers for you to choose from, and they are full-service and discount brokers. Let’s look at them briefly.
These brokers provide tons of research and resources, which may explain why many investors do not complain about the high fees they charge. So, if you go for this option, expect to be faced with higher fees and commissions.
The resourceful nature of this type of broker makes it very useful to the newbie traders.
With discount brokers, you should expect most of the hard work to be left to you. All that the broker will be doing is to provide you with the platform for performing your trades. Additionally, you will also get the necessary customer support should the need ever arise.
Experienced investors are more likely to appreciate discount brokers as they know their way around the trade. Further, the lack of commission fees is very appealing to the pros.
This is another option that you may look at, and the managers choose and buy the stocks for you. in return, you will pay the fee that you agree on, and it is usually a percentage of your total portfolio.
If you find a good manager, this arrangement could be quite convenient, and you may meet only twice a year.
FAQs on How to Invest in Stocks
Let’s conclude by checking out some frequently asked questions on how to invest in stocks.
Q: Is Stock Trading Ideal for Beginners?
A: The trading aspect of dealing with stocks may not always be ideal for beginners. This is because stock trading requires a lot of dedication and research, which beginners may not handle.
Instead, we advise that a beginner adopts a buy-and-hold strategy with stock mutual funds. This type of investment would enable you to attain the goal of buying low and selling high, which is an investor’s goal.
Q: Can I Invest in stocks if I am on a low budget?
A: Two major problems present themselves when the money you have available to invest is small. First, diversifying may be difficult, and the issue lies with the minimum requirement by most investments out there.
Luckily, you can beat the problem by investing in ETFs and stock index funds. Index funds tend to have lower minimum requirements plus they hold different stocks within a single fund to beat the diversification problem.
If you have been thinking about how to invest in stocks, but you did not know how to get started, we hope our article has helped demystify the venture for you. Always take your time to read on a particular stock before investing in it so that you fully understand the risks involved.
The only other thing is that we wish you all the best if you decide to take up the challenge of joining the stock investment world.