Getting started with investing can be an intimidating feat. With all of the options, services, and products available, how can you know where to start? Plus, isn’t investing just for big wigs on Wall Street?
Contrary to popular opinion, anyone can get started in the stock market — and it doesn’t always take much money to do so. As technology has developed, more providers and services have become available, thus lowering fees and making investing more widely accessible.
Here are six investing tips for beginning investors.
1. Identify Your Goals
Before creating a portfolio, it’s important for new investors to identify their goals. Are you in the market for short-term gains, or for long-term financial plans, like retirement? These goals will help you create a sound strategy for investing.
Short-term strategies are often used over a period of five years or less. Typical short-term investments include:
- High-interest savings accounts
- Certificates of deposits (CDs)
- Money market accounts
Long-term investments include more complex strategies. But no matter how you’re choosing to invest, every good strategy should start with identifying your goals. What do you want to accomplish with your investments? Why are you investing? How long will you invest for?
Another important note of investing is that it’s impossible to time a market. No matter how much research you do, or how much of an expert you believe you are, you will not be able to predict when a market will be hot or heading for a downturn. Keep this in mind while making your goals.
Goals for investing should be actionable and in a specific timeframe. According to U.S. News & World Report, a good investment goal is one that is clear, understandable, and realistic. You shouldn’t create a goal that’s impossible to achieve — instead of creating a goal that says you will make a certain amount of money in a year, consider something easier, such as, “I will invest $10,000 this year in the stock market.”
2. Decide What Type of Brokerage Account You’re Interested In
To start investing, a brokerage account will often be necessary.
A brokerage account is where an individual firm holds an investor’s funds and places the investments through the firm. The investor owns the shares, but the brokerage firm makes the actual investment for the investor.
There are a few different types of brokerage firms, including full-service firms that offer personalized investment advice and discount brokerage firms that offer fewer services and lower fees.
Before choosing a firm to invest with, it’s important to identify all of the costs associated with the firm. Most firms charge both a commission fee and a management fee, and some even have an account minimum.
According to the Financial Industry Regulatory Authority (FINRA), new investors should identify whether their brokerage account will be a cash account or margin loan account. A cash account requires you to pay the full amount for your securities at the time of purchase. A margin account will usually allow the firm to lend you some of the money up front, like a loan. This option is often more expensive than paying in cash.
Some brokers offer robo-advisor services. This online service will automatically set up a portfolio based on your preferences. According to Ernst & Young, the top four robo-advisor services manage $128 billion in assets as of November 2017.
Online stock brokers are a great option for new investors looking to have more flexibility with their portfolios. Online brokers are typically less expensive than traditional brokerage accounts and have a wide range of online resources to help guide investors as they develop their investment strategy, according to the Seattle Times.
3. Educate Yourself on the Different Types of Investments
There are multiple types of investments, including penny stocks and index funds. Penny stocks are shares of small public companies traded at low prices, whereas index funds are a type of mutual fund that follows a market index, such as the S&P 500.
You may think you know the best stocks, but there is much more to investing than just putting money into hand-picked selections. Instead, you are better off putting your investments in a well-diversified portfolio of exchange-traded funds (ETFs) than individual stocks.
An ETF is a collection of stocks or bonds in a single fund, according to Vanguard. They often have less risk than single stocks and require less work than managing selections on your own.
Additionally, ETFs are better than mutual funds because they typically have much lower fees. According to the U.S. Securities and Exchange Commission (SEC), mutual funds have shareholder fees and operating costs. The SEC illustrates how mutual fees can add up over time with this example: “In 20 years, 0.50% annual fees reduce portfolio value by $10,000 compared to a portfolio with a 0.25% annual fee.”
ETFs like Vanguard often don’t charge commission costs, thus making them a much cheaper option.
If you are going to invest in individual stocks, it’s recommended you put no more than 10 percent of your net worth in investments with idiosyncratic risk (e.g. a single stock, startup equity). It’s also recommended you invest for the long run, as statistics show day trading is of high risk and often doesn’t provide high returns, according to Forbes.
4. Ask Key Questions Before Investing
Before choosing investments to add to your portfolio, it’s key to evaluate each option carefully. In doing so, you’ll have a better idea of the type of risk you may be bringing on.
You should be able to answer these four questions before adding to your portfolio:
Do You Understand the Investment?
According to the SEC, you shouldn’t make an investment in something you don’t understand. The SEC recommends reading the investment’s disclosure statement carefully to determine how it will make you money. If you don’t understand it, speak to a financial professional or think twice before making the investment.
How Do the Risks Compare With the Rewards?
Every investment comes with risk, but the SEC suggests that the higher the possible return, the bigger the risk. The SEC also says investments pitched with little or no risk are often scams and should be ignored.
Is the Investment Registered and Is the Seller Licensed?
The SEC advises new investors look up specific companies and brokers to ensure they are properly licensed and have registered investments. If a company isn’t licensed, you run the risk of being exposed to a scam; additionally, investments are registered so prospective buyers have access to key information like the company’s management, products, services, and finances.
If You Are Going to Invest in a Company, Is the Company Sustainable?
Profitable companies with a track record of returns can help protect you from experiencing major losses. Do some research on a company before adding it to your portfolio. If it has a rocky history, you might want to think twice before making a stock purchase in its name.
5. Understand Why Diversification Is Important
A diversified portfolio means your investing strategy includes a wide variety of investments. According to Fidelity, spreading your investments around will help reduce the volatility of your portfolio over time.
Fidelity recommends a diversified portfolio have four components:
- Domestic stocks
- Short-term investments
- International stocks
You should expect to rebalance your portfolio at least once or twice a year (some experts recommend as often as every quarter). Automated investment solutions (such as Wealthfront or Betterment) automatically rebalance your portfolio for you.
6. Understand the Risks of Investing
All investing comes with risk. By understanding what you’re risking, you can have an easier time managing your portfolio and resisting fear of market volatility.
According to Warren Buffett, a stock market downturn can rattle investors, and result in “an unsettled mind” that won’t “make good decisions,” as reported by CBS.
In times of turmoil, most investing experts recommend staying in the market, sticking to your original goals, and not making any rash investment decisions.
Enter the Stock Market and Crush Your Financial Goals
Anyone can get started investing. After research, goal setting, and understanding the risks that come with it, investing can be an accessible opportunity for building wealth.