The earlier you begin investing the sooner you create wealth. The stock market is where most people look. The level of effort is low, there’s a lot of information out there…But the market is intimidating until you learn how it works. Then you can invest with confidence.
Stock Market 101
The stock market is like an auction house. Stockbrokers manage transactions (trades) between buyers and sellers. A stockbroker or individual makes trades using an intermediary such as a bank. Only companies that are public and for profit have stocks that the public can buy and sell.
The stock exchange uses indexes like the Dow Jones Industrial Average or the S&P 500 to track stock values. The indexes don’t list all available stocks. They track stocks that are representative of their industry. For example, the S&P 500 lists the 500 largest public companies.
Those stocks are industry indicators of the state of the market. But sometimes fluctuations relate to an internal event.
If Cisco’s (CSCO on the NASDAQ) stock suddenly drops, it indicates pessimism in the tech industry. If Windows has a security breach, expect Microsoft’s (MSFT on the NASDAQ) stock to plunge.
Bull and Bear Markets
When stock values rise and investors feel confident, it’s called a bull market. When the optimism fades and more people are selling than buying, it’s called a bear market.
When you invest, expect to experience both. Knowing when to buy, sell or hold is the key to making the money in the stock market. It is difficult to predict daily or evenly monthly stock price variations. So, the most common strategy is to hold stocks long-term.
There are two types of stocks – Common stocks or Preferred stocks. Both can help you build wealth over time, but you need to commit. Plan on holding your stocks for at least 5 years before doing any trading. No matter what’s happening in the market.
The majority of stock purchases are shares of common stock. Common stock includes shareholder voting rights to participate in setting company policy. The stock may pays dividends when profits allow. If the company can reinvest the profits to increase the value of the company that is often preferred. The increased company value means a higher stock price.
Common stock has the most potential of increasing your wealth over time. That’s not a guarantee – there are no guarantees. But the market does average out ahead over most time periods.
Preferred stock is not as well known. Preferred stockholders do not have voting rights. They do get a structured schedule for dividend payments. If a payment is missed, those dividends must be made up. No common stock shareholder can receive a dividend until then.
Why Buy Stocks?
When you buy stock, you’re investing in a publicly-traded corporation. You own a share of that business, but your stock is separate from other corporate property. You retain ownership, even if the company defaults or goes into bankruptcy.
Corporations sell shares to raise money for new or existing projects. When you purchase stock you can vote in shareholder meetings. Some stocks offer shareholders a percentage of profits by paying quarterly dividends.
The first time a company makes stock available, it’s called an Initial Public Offering (IPO.) Often employees of the company get options to buy the stock. An option isn’t a share until the stock is purchased.
Risk & Reward
Stocks, especially when purchased at a young age, build wealth. But the stock market is not for the faint of heart. Stocks go up, stocks go down. Then they go back up…or not.
A successful investor is in the market for the long term. According to Nerd Wallet, the annual average return on stocks is 10% over time. Riding out the volatility pays off. In fact, the market has ended up on the positive side 70% of the time.
There are tax advantages for investment income too. When you hold stocks for more than a year, any income falls under capital gains. Capital gains are typically taxed at a lower rate than normal income. When you sell at a loss, it can offset gains on other purchases. But tax law is complicated. A good strategy is to consult a CPA or your financial advisor.
Buying stocks isn’t difficult. Knowing which stocks to buy – and when – is the tricky part.
Investment courses are available outside of a traditional college environment. Morningstar has a free investing classroom. You can take a course at Udemy.com or Coursera at an affordable cost.
Universities like Yale and Stanford make some self-study courses available for free. The courseware may be a bit older, but free ivy-league classes are worth a look.
Join discussion groups online like Bogleheads.com or Reddit Investing. The forums are free and they’re a great place to find tools and resources that real people use. One note of caution – don’t take stock tips at face value based on a screen name and a link. Some investors promote a stock to help increase its value.
By the time you have purchased they sell their shares and the value declines with more sellers than buyers. This is called a pump and dump scheme. It was chronicled in the The Wolf of Wall Street movie starring Leonardo DiCaprio.
In print or online, the Wall Street Journal, Barron’s and Kiplinger’s Personal Finance are great resources. Other excellent websites include Marketwatch.com and Bloomberg News porta
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Investing in the Stock Market for Beginners
If you have a 401k or a pension plan, you’re already investing in the stock market. A collective group of individuals combine their money in a mutual fund. The fund gives some control to investors, but the fund owner is the decision-maker.
When you’re ready to start investing on your own, follow these simple steps.
Step 1: How much to spend per month?
Do you have to have a lot of money before you can invest it? No. But most financial experts suggest that you create an emergency savings account first.
Once you’re set, think about what you can afford to invest. It doesn’t have to break your budget. Do what you can afford.
Here’s a sample case. Open your investment account with $100. Plan to put $50 a month in your account for a total of $600 per year. In just 10 years, with a 7% annual rate of return, your $700 investment is worth $8,487.
Step 2: Fees and commissions
Brokers can get very creative when it comes to charging your account. Make sure you understand every fee that can be applied to your account. Some of them can be avoided by choosing a different broker.
Actively managed accounts (run by people versus software) usually have higher fees.
Types of fees:
- Annual Broker Fees: There are plenty of brokers that don’t charge annual fees.
- Management fees: These are common charges but make sure you consider what you get for what you pay.
- Inactivity Fees: Just say no to brokers who want to charge you for doing nothing.
- Paper Statement Fees: Seriously?
- Trade Commissions: These are fees per stock trade. There are similar fees set on mutual fund purchases. These are declining in popularity and are pretty easy to avoid paying.
- Subscriptions: Subscriptions are optional services. Buy them if you like.
- Sales Commission: This is a one-time cost for the person who sold you the account.
- Research: Depending on your broker, research can come with a hefty price tag. Shop around, there are free options out there.
One important consideration about fees – they add up. Fees are often percentages of your account balance. The services haven’t changed, but the amount you pay for them goes up.
Be mindful of fees taken by different investment vehicles. Mutual funds are known to potentially have some high fees. It does not matter how much a stock increases in value if it is all paid back in fees.
Step 3: Pick your broker
The larger banks have investment banking centers. JP Morgan, Morgan Stanley, Bank of America or Citigroup will all offer broker services. If you already bank with them, it can be a logical first choice.
You can speak or meet with a broker, which is helpful for some new investors. These are called actively managed accounts. They typically have higher fees than online brokers.
Online broker accounts are less personal and more affordable for new investors. Companies like TD Ameritrade, Charles Schwab and e*Trade transformed the industry. Using Digital technology made the stock market more accessible and reduced transaction fees.
Online accounts offer lower fees, with a minimum deposit as small as $5.00. Though most offer investment education online, you still need to learn on your own.
Robo-Brokers are an option that fill the gap between traditional and digital brokers. A robo-broker is an algorithm created to meet your investment goal.
Services like Betterment and Wealthfront set up your portfolio and automate trading and re-balancing. It’s an affordable option and there’s no minimum account balance required.
Step 4: Set Up your portfolio
To protect against the ups and downs of the market, you want a diversified portfolio. You should also think about how you handle risk. Do you like to keep your money close or are you a risk-taker?
Are you conservative or aggressive? Are you starting young and investing for the long term? Or are you starting later in life to ramp up your net worth?
Either way, brokers help align your portfolio to your objectives and preferences.
Socially Responsible Investment (SRI) is a way to align your money with your values. If you are a climate change advocate, you don’t want to invest in fossil fuels. Hospitals might not want to invest in gun manufacturers or tobacco companies.
More and more brokers offer SRI options. You don’t have to sacrifice your returns either.
But you do have to make sure there is some diversity in your portfolio. Robo-broker Betterment (mentioned above) offers a fund for socially responsible investment.
Now you’ve got everything you need to begin. Set up your account, make your first deposit and start to increase your net worth.
Investing with Little Money
A “little money” means different things to different people. For example, a savings account touts its 1.79% interest as a great option.
If you carry a $10,000 balance.
That’s more than a little money for people with little money. For some of us, especially students, squeezing an extra $100 a month is almost impossible.
Here are three simple digital solutions to start investing today – for under $20.
With Acorn, you can start investing once your account balance reaches $5.00. It uses your spare change to invest.
All you need is a credit or debit card. Connect the Acorn app to your card, everything you buy rounds up to the nearest dollar. A $16.25 purchase rounds up to $17.00. Acorn puts 75 cents into your investment account.
Acorn uses an algorithm to invest in Exchange-Traded Funds (EFTs). EFTs are a mix of stocks, bonds and commodities. It provides automatic diversification. Acorn allows you to choose a conservative or aggressive investment approach.
If you want to kick up your investments, you can set the app to round up to the nearest $10.00. In that case, your $16.25 purchase rounds up to $20.00, putting $3.75 in your Acorn account.
Wish you bought shares in Apple? The Public App wants you to take a slice right now.
Public is an innovative way to invest. The app lets you buy a fraction of a share of stock. For $5.00, you can buy a slice of any stock on the NASDAQ.
There are no commissions. You can also invest in EFTs and other funds. Public uses themes to help you set up your portfolio. Each theme includes a bundle of different investments, including SRI options. Hook your credit or debit card up to the app, deposit $5.00 and own a slice of the Fortune 500.
Wealth Simple Platform
WealthSimple is a Canadian company that offers an investment platform. The basic plan has no minimum investment or minimum balance.
On the Basic plan, you get a personalized portfolio, with options for socially responsible investing. The platform balances your account, automates deposits and will re-invest dividends. They also have employees who provide financial advice.
WealthSiimple isn’t free. They charge a 0.5% management fee. That translates into a monthly charge of $5.00 on every $1000 in your account. Those fees can add up over time.
Remember, the company is a hybrid. WealthSimple delivers automated passive investment but has advisors when needed. This may be the reason the platform’s fees are a bit higher than others.
How to Start Investing Summary
The sooner you start investing the better is the moral of this story. The average annual return in the market is 7%. The market year ends strong 70% of the time.
People who don’t invest may be spending their money instead. Other people think they need a lot of cash to start. Or they’re intimidated by the stock market.
Investing in stocks for beginners can feel overwhelming. Take your time and never risk more than you can afford to lose. Allow yourself a learning curve.
Use the tools available to you – apps, platforms, robo-advisors, investment banks. Expect there will be gains and losses.
Always keep track of fees paid. Try to minimize fees. The more you require personal guidance and recommendations the higher the fees.
Once you learn how to start investing, the biggest mistake you can make is to procrastinate. Get started now.
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