How much should I invest in stocks? — Bright Money
Investing in stocks
You don’t need much to start investing. Some new services only ask for a dollar to open an account. But before you dive in, keep in mind your overall goals, and most importantly, always weigh the risk you’re willing to take on.
Regardless of your funds, it’s never too early to start. The sooner you do it, the more time your investments have to grow. Committing to a long-term strategy, where your investments are left for years to grow, can be both the safest kind of investing and a strategy that outperforms higher-risk short-term goals.
Are stocks risky investments?
When you buy any stock, it’s different from putting your money in a savings account.
Most savings are FDIC-insured up to $250,000. But when you invest in the stock market, none of your money is insured. You could lose it all. That’s why assessing risk is important.
That’s also why, in part, stocks often outperform regular savings. The higher risk, the higher potential for more returns — as well as a higher potential for losses.
Every stock has its own risk. Even stocks within the same sector have different risks. For example, a new soda company has a different level of risk compared to an established one, like Coca-Cola or Pepsi. The more you know about soda companies and their barriers to growth, the more informed you are about their risk level.
To know if a stock is a risky investment, look for advice from professional investors . Or listen to experts in the specific sector. Information is power in the stock market. If you have insight few others have, you may be wiser about a company’s stock value. But be mindful that valuable information is often shared quickly, and the advantage of your insight may be limited or fleeting.
What’s the difference between stocks and mutual funds?
Because we’re talking about stocks specifically here, we should acknowledge how they’re different from other investments — and their relative volatility. In other words, if you’re thinking about buying stock in a specific company or stocks in a few companies that have caught your eye, be mindful of what you’re risking.
What are your expectations for your stocks’ performance? How certain are you that your stocks are a sure thing? Are you willing to lose some — or even all — of the money you’re spending? Buying stocks in specific companies can come with a wide range of risks — from relatively safe to highly volatile.
Buying a specific stock is also very different from investing in an indexed fund, which buys stocks in numerous companies at the same time, usually over several years, all weighed and counter-weighed to even out your risk.
Most indexed funds buy stocks in different companies with a range of risk levels, so losses from high-risk investments can be compensated by gains on more stable, low-risk investments.
When you’re buying a stock in a specific company, you’re gambling on the company’s performance in the stock market. When you buy stocks as part of an indexed mutual fund, you’re gambling on several companies, with varying degrees of risk, so you’re protected if one of them falls.
How do stocks work with portfolios and asset allocation?
Most investors buy stocks as part of their overall portfolio, where the risks that come from stock investments can be balanced with the risk of other investments.
Most professional advisors consider investments in stocks higher risk than other investment options. Advisors often demonstrate this with asset allocation — typically, a pie chart which illustrates where your money is invested, from stocks and bonds to real estate and elsewhere.
Asset allocation is a common way to view and analyze investments, to ensure they’re balanced to a risk you’re comfortable with and aligned with your expectations for their performance.
In a high-risk allocation, stocks might take up a larger portion of your investments than a lower-risk portfolio.
How do you buy stocks?
Buying stocks is easier than ever. Specialized brokerage services like E-Trade and Robinhood offer easy access to the market, but more traditional brokers, like Schwab and TD Ameritrade, offer streamlined access now too. With some online brokerages, you can open an account with very little money and start buying stocks in just a few clicks.
Just one more reminder: keep your tolerance for risk front of mind. Remember your investments aren’t insured or protected. And whenever you can, invest with a plan: make sure the money you spend on buying stocks is balanced with your savings and other investments.
The money you risk on a stock hunch may be more wisely tucked away in a savings account, where it’s safe and can grow while you prepare a more balanced approach. With best informed choices, your money has the best shot at growing.
Get your personal Bright Plan
Bright can build a financial plan that’s tailored to you and that runs automatically. It’s a good place to start before buying stocks. Bright can help grow your savings, so you’re covered for emergencies, and we can make sure your goals are simple and clear.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your bank and your credit cards, then set a few goals. Bright gets to work right away, building a personalized Bright Plan. When your finances shift, Bright adapts day by day. It’s a new AI-driven financial plan that delivers real results automatically — and can serve as a solid foundation for investment planning.
Originally published at https://www.brightmoney.co.