How to Invest in Stocks

5-steps to get on track to financial freedom. It’s easier than you might think.

The stock market provides a great opportunity to grow wealth. While volatility and general uncertainty are considerations to always bear in mind when investing, stocks remain a solid investment option for long-term investors, particularly because a down cycle translates into a buying opportunity for stock at a lower price.

The easiest and most direct way to access the stock market is to open an online investment account, which can then be used to purchase shares of stock in a company or shares of a mutual fund or exchange-traded fund (ETF). For most online trading platforms, the barrier to entry is low, so you can start investing with a very minimal amount of money.

5 Steps

Step 1: Decide how you want to invest in stocks

There are various methods to consider when you approach investing into the stock market. Select the option that best fits the way you want to invest, which can range from a passive tactic to a more hands-on approach.

If you are interested in a hands-on approach (based on your experience, knowledge, or your desired investing approach), then this article will provide further insight into the procedural methods regarding which investment account to choose and how to optimize your investing choice.

If you believe it’s best for someone else to manage the process of investing in the stock market, then a robo-advisor may be a great option for you. Robo-advisors are a good low-cost choice for investment management in comparison to traditional financial advisors, and these digital platforms invest your money based on specific goals you set at the opening of your account.

Step 2: Choose an investment account

In order to access the stock market, you’ll need an investment account. As we mentioned above, you can open an online brokerage account or use a robo-advisor if you would like some guidance in your investment plan. Notably, both online brokerage accounts and robo-advisors allow you to open an account with very little money.

Online Brokerage Account

The online brokerage account is the cheapest and most direct way to buy stocks, index funds, and other investments. Here, you can open an individual retirement account (IRA) and other retirement accounts. Factors to consider when choosing an online brokerage account include account costs, trading fees & commissions, availability of investment research and tools.

Robo-advisors

Robo-advisors provide a revolutionary way to tackle your investments, as these digital services provide a comprehensive investment management process for individual investors. You will be asked to choose your investing goals and then your potential portfolio will be built according to your chosen goals. Many robo-advisors charge between .25 to .50% in fees, as opposed to a 1–2% for traditional financial advisors. Through the robo-advisor platform, you can create a retirement account, such as an IRA.

Step 3: Understand the difference between basic types of investments

For many investors, especially at the beginning of their investing careers, there are two main options to choose from: individual stocks and mutual funds/exchange-traded funds.

Individual Stocks

It is possible to purchase as little as one or a few shares to get you started in the investing world, if you are interested in one specific company. Diversification of your portfolio will take a greater investment on a broader scale. The potential for gains with an individual stock is high, as a timely investment into one company at the right price will pay off very well, but it is unlikely that any individual stock will make you rich.

Mutual Funds/Exchange-traded funds

Mutual funds are comprised of many different stocks in a single transaction. Because of their inherent diversification, mutual funds lessen your risk. Index funds and exchange-traded funds (ETFs) are examples of mutual fund that track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. Because you own shares of several different companies when you invest in a fund, you can put several funds together to build a diversified portfolio. For most investors, especially the ones who are focused on retirement, a portfolio comprised mostly of mutual funds is a clear choice.

Step 4: Set a budget

A company’s stock price can range from a few dollars to thousands of dollars, so the amount of money you need to buy an individual stock depends on the price of the share. If you have a small budget and have an interest in mutual funds, an ETF is a great option. Mutual funds usually have high minimums, but ETFs trade like a stock, which means they are traded at a much lower price. ETF’s also have much lower fees, and fees matter!

Step 5: Think long-term

Investing in the stock market does not have to be difficult or complex — in general, the best idea, especially for beginners, is to keep it simple. You can choose funds for long-term growth. Warren Buffett has noted that a low-cost S&P 500 index fund is the best investment most Americans can make.

When it comes to the long-term approach, the best thing to do after you start investing in stocks or mutual funds is to avoid looking at them. Leave the daily panic to the day traders. However, it is important to check on your investment portfolio a few times a year, in order to stay vigilant on your investments and the overall market.

If your portfolio is too concentrated in one sector, consider stocks or funds in an alternative sector in order to diversify your investments. This will lessen your risk and spread out your investment choices. You can also diversify geographically, by buying international index funds, for example. Finally, if you are approaching retirement, consider some safer investments, which generally favors buying funds over stocks.

Finally, when investing, whether you’re a beginner or a seasoned veteran, keep an eye out for the fees charged on the management of your investment portfolio.

Traditional financial advisors charge from 1 to 2% on average, while robo-advisor fees range from .25 to .50%. It may not seem like much, but over time, as the fees compound and your investments grow, these seemingly minor fees can take a huge chunk out of your investments and savings. In order to stay vigilant on minimizing the costs associated with your investments, check out Compoundly the easy-to-use platform that can expose your hidden fees and lower them for you.

The less money you spend in fees = the more money you can grow and save.

Happy investing!