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How To Invest in Stocks
By Peter Burns MONEY RESEARCH COLLECTIVE
The stock market is a powerful tool for accumulating wealth, but it can be intimidating for first-time investors. Learning how to invest in stocks can ease your worries and help you reach your financial goals. This article will explore how to start investing in stocks and what to consider so you can grow your wealth over time.
Table of contents
- The pros of investing in the stock market
- The cons of investing in the stock market
- How to start investing in stocks
- Individual stocks vs. mutual funds vs. ETFs
- Concepts to understand when investing in stocks
- Resources for beginning investors
The pros of investing in the stock market
There are many upsides to investing in the stock market. People invest in stocks to grow their wealth, which is possible because the prices of stocks can increase as a company gains value. Investments can also produce dividends, quarterly payments to shareholders in cash or additional shares.
Another benefit is that you don’t need a lot of money to start investing. Stock prices range from a few dollars to thousands of dollars per share. So, buying into the stock market can cost as little as a cup of coffee. It’s also very flexible. Compared to other investments like real estate, stocks provide you with liquidity. If you need access to your funds, taking money out of the stock market is fast and easy.
The cons of investing in the stock market
Of course, not everything about investing in stocks is positive. When you buy into a company, you assume the risk of losing money if the company’s value decreases. The stock market is unpredictable and depends on many factors, so you must successfully manage stock market volatility to make a profit. However, no matter how careful you are, there is no guarantee that you’ll make money.
It’s essential to do your research to find a stock you think will be profitable, which is time-consuming. Look into the company’s financials, the industry and its competitors. Gain a complete understanding of your potential investment.
Finally, another downside to keep in mind is if you find great stocks and earn a significant profit, you may have to pay capital gains tax on your earnings when you sell the stock.
How to start investing in stocks
Investing in stocks can be an excellent way to compound your wealth over time, but it can be challenging for anyone new to investing. There are many investing tips out there, but you still have to figure out where to begin. First, you need to choose how you want to invest. Then, you can set up your accounts, do research and make your first investment. Here’s a breakdown of how to get started.
Choose an investing approach
By learning about different investment approaches before jumping in, you can avoid some common mistakes investors make. The available options depend on your goals and the involvement you want in your investments.
Online brokers
Some financial institutions allow you to set up brokerage accounts to trade investment securities like stocks and bonds so that you can do everything online or through a stock trading app. Traditionally, you would need to consult a financial advisor to access the stock market, but online brokers allow you to manage your portfolio yourself. You won’t receive the same stock investment strategy, recommendations and financial advice from an online broker as you would from a full-service broker, but you won’t have to pay the extra fees.
Finding the right online broker is vital for your success in the stock market — they offer different features. Some brokers offer educational tools and access to investment research. Others allow trades on foreign stock exchanges.
Online brokerage accounts allow for an easy money transfer so you can get started quickly. Many online brokers don’t require an initial deposit to open an account but require funds to make investments.
Robo-advisors
Robo-advisors are a more recent type of investing approach. They are brokerages that provide financial services through algorithms and artificial intelligence. If you aren’t interested in researching and managing your own portfolio, a robo-advisor can do the work for you. During onboarding, you must clarify your age, risk tolerance and investment goals, so the robo-advisor can build a stock portfolio that suits your needs. Robo-advisors are cheaper than traditional financial advisors, and most charge around 0.25% of your assets under management.
Financial advisors
The most expensive approach is to go through a financial or investment advisor. However, this method provides the most personalized and hands-on experience. Your financial advisor can give you investment advice and buy stock. They can also help with other aspects of your financial planning. Before hiring someone, it’s important to understand the fees they charge for services. Shop around to find the best option.
Set up an investment account
Once you choose an investment approach, you can sign up for a brokerage account. In most cases, it’s a simple process that only takes a few minutes. After creating an account, you must add the funds you want to invest. You can add money by completing a bank or wire transfer, mailing a check or transferring investments from a different brokerage account.
Research the stocks you want to purchase
Doing diligent research can determine whether you make or lose money. If you decide to use a stock investment company, financial advisor or robo-advisor, you won’t need to make any investment decisions, and you can skip this step.
However, you should conduct market research if you want to make your own investments. Understand the market by taking classes, listening to podcasts and reading books or articles to familiarize yourself with stocks that may turn a profit.
Many factors can cause stock prices to change. Before purchasing a stock, you should learn about the company’s organizational structure, products or services and financial position. Also, understand how politics, natural disasters, current events and inflation affect the stock market.
Decide on an investment amount
Before investing, it’s crucial to determine the level of risk you’re willing to accept. As a new investor, it’s a good idea to start small and get a feel for how investing works before jumping in with a large portion of your savings. A stock investment calculator can help you decide how much to invest and how much time you want to remain in the market. Only invest money you won’t need for the next few years.
Purchase your stocks
After choosing an approach, setting up an account, researching and selecting the stocks you want to purchase and deciding on an investment amount, you will be ready to make a purchase. Once you’ve purchased your stocks, you can actively manage your portfolio or opt to leave it alone. Either way, don’t neglect your mid-year investment portfolio checkup.
Individual stocks vs. mutual funds vs. ETFs
Stocks, mutual funds and exchange-traded funds (ETFs) are three types of investments in the stock market. An individual stock share is a certificate of ownership in a company. The number of shares you own of a company’s stock determines your ownership percentage in that business.
Mutual funds and ETFs are sold as shares but are an accumulation of securities pooled together. Both options allow you to branch out and own a small piece of many different companies and assets.
Mutual funds usually require a higher minimum investment, sometimes amounting to a few thousand dollars. A fund manager or team usually handles most mutual funds and decides what actions to take to beat the market and gain profits.
ETFs are passively-managed funds that often track a specific index in the stock market, like the Standard and Poor’s 500 (S&P 500) or Nasdaq. You can trade ETFs throughout the day like stocks. On the other hand, mutual funds are only traded once per day after the markets close.
Concepts to understand when investing in stocks
You need to understand some fundamental concepts to get the most out of your stock market investments. A few of the most important ideas regarding the stock market are dividends, tax obligations, stock volatility and portfolio diversification.
Dividends
Some stocks provide shareholders with a payment of the company’s earnings, called a dividend. Typically, shareholders receive dividends once a quarter and the company’s board of directors determines the size of the dividend payment.
When you receive a dividend, you may receive it in cash or have the dividend reinvested into the company as additional stock shares, which will generate more dividend earnings in the future. Reinvested dividends may not come out to an exact amount of shares, but instead of receiving the difference in cash, you will receive fractional shares of that stock.
Tax obligations
Profits accumulated from the rise in stock prices or the dividends gained from holding stock are subject to capital gains tax. Taxes only accrue when you sell stock at a profit; the rates differ depending on how long you’ve held the stock.
If you sell a stock you’ve owned for less than a year, your profit is considered a short-term capital gain. Short-term capital gains will be taxed at your income tax rate. Profit from stocks you’ve owned for over a year is considered long-term capital gains and will be taxed at a rate of 0%, 15% or 20%, depending on your tax bracket.
Selling stocks at a loss can mitigate some of the taxes you incur on those you sell for a profit. This practice, called tax-loss harvesting, works by selling off stocks that are losing money, so you pay less capital gains tax on your profit. If your losses outweigh your gains in the stock market, tax-loss harvesting can cancel out up to $3,000 of tax on your ordinary income.
Stock volatility
Stock volatility is how much a stock rises or falls over a period of time. Although volatility is often associated with risks, it can also be an excellent opportunity for short-term stock investment. If you keep investing when stocks are down, you can earn greater profits when the stocks change direction. Volatility in the market can also give you insight into what may happen in the future.
Portfolio diversification
Portfolio diversification is an important concept to understand. If you invest all of your money in a single asset and the value of that asset plummets, you lose everything. By building a portfolio comprising various stocks or other investments, you will have a better chance of maintaining growth and weathering the ups and downs of the stock market.
Portfolio diversification will protect you against unexpected events and lower your overall stock investment risk, but it does not guarantee you will receive a return on your investment. If the market dips and the prices of some stocks depreciate, you can still make money from the dividends of other stocks instead of losing all of your money.
Resources for beginning investors
If you dedicate time and effort, you can learn how to invest in stocks. There are endless opportunities to grow your wealth by researching the stock market and finding the best stock investment strategies for your financial situation. By keeping up to date with the newest market trends and actively managing your stocks, you will find more ways to enhance your portfolio and reach your financial goals. Keep an eye on the news and check in with resources like the U.S. Securities and Exchange Commission (SEC) website.