Investing in the stock market is one of the best ways to build wealth.
But, if you don’t have vast portfolios or a large amount of money it can be intimidating to get started. Many potential investors really wonder how to start investing in stocks.
Follow this guide to learn about some of the most common and cost-effective ways to get started investing.
How to Start Investing in Stocks: Find a Broker
The first step to take as a beginner investor is to find a broker. Nowadays there are hundreds of options available to you. These range from full-service investment firms to discount online brokerages.
Look at things like fees, brokerage size, and the type of services they offer. If you’re looking for somewhere to start a retirement account you’ll definitely have different needs than a day trader would.
Fees are one of the most important factors to think about. Many brokerages charge $10 or more per trade for every transaction you make. This may not matter as much if you plan to invest long term.
Other factors, such as the reputation of the brokerage or possible investment backed lending options can influence your decision. If you’re just starting out you may not be able to meet the minimum deposit requirements of high-end brokerage firms.
Do your research and find a broker that works for your specific needs.
Short-term investing isn’t going to be for everyone. You’re basically looking for small movements in a stock that allow you to make a one or two percentage point gain before closing a position.
Beginner investors probably shouldn’t start out investing with short-term goals in mind. There are significant risks involved in this kind of speculative investing. You need to have a well thought out strategy, the analytical skills to pick the stocks that fit it, and the discipline to follow it.
There are as many day trading strategies as there are day traders. Everyone has their own little twist that they hope will make them more successful than others. A few of the basic strategies include:
- False Breakouts
- Strong Area Breakout
- Reversal at Support
All of these rely on your ability to effectively read market indicators in real time and make educated predictions. It’s definitely not for the faint at heart.
Almost more important than having an effective strategy is being disciplined enough to follow it. If you make investment decisions emotionally you’re setting yourself up for major losses.
You have to be able to ruthlessly follow your plan and cut your losses at the first signs it isn’t working. If you find yourself obsessing over losses or unable to close a position, day trading probably isn’t for you
Albert Einstein once said that the greatest power in the universe is compounding interest. Putting your money in a broad basket of stocks and letting them accrue gains over decades is a tried and true method to build wealth.
Historical analysis has shown that stocks gain about 10 percent a year over time. Putting a little bit of money away every year over decades is a great way to start investing.
When looking at long-term investing you’re usually talking about things like mutual funds.
Active vs. Passive
One of the biggest decisions to make when picking your funds is whether you want them to be actively or passively managed. Active management means that there is someone actively performing research and analysis for your fund. They look at the indicators and make decisions about what to invest in.
Passively managed funds don’t have this kind of management. Generally, they are pegged to the makeup of a major index like the Dow Jones. This type of fund doesn’t react to changes in the market the same way an actively managed fund would.
Active fund managers argue they have the experience to reward high performing companies and steer their investors away from poor ones. Passive funds though generally have far lower fees than an active fund.
When you’re comparing funds a good thing to look at first is the annual fee. Actively managed funds will almost always have higher fees than passive funds will. Try to compare the fees of active to active and passive to passive.
Fees can vary from as high as several percents annually to fractions of a percent for ETF’s and index funds. For actively traded funds you’ll want to compare the fees against the previous performance of the fund.
Index funds are usually pretty identical other than the index they’re based on. If you’re looking at two passive funds you can generally always choose the lower fee one.
Higher fees cut into your profits. In a year where you only make a four or five percent return, you don’t want to pay half of that in annual fees.
The fund performance over history is another important indicator. It’s very important to add the disclaimer though that past performance is not an effective indicator of future performance. There is always a risk in investing.
Past performance will give you some idea of how the fund is managed. It lets you find out if it’s been successful and can give you a preview of the manager’s experience.
If you decide to trade in individual stocks instead of managed or passive funds you’ll have to pick the stocks yourself. There are several ways you can research different stocks to find winners.
There are tons of experts online that provide advice on specific stocks. You can find lots of posts like this article that go through everything from current and past prices, recent developments, and the analysis they’ve performed on a stock. These can be great resources when you’re just starting out.
Be Ready to Embrace Uncertainty
Investing can be a roller coaster ride. A stock that was up yesterday can lose a big chunk of its value with a change in the market. Make sure you’re willing to accept the ups and downs of the market now that you know how to start investing in stocks.
You can find out more about investing and building wealth by reading some of these other interesting articles.