Want to invest in the stock market but you have no idea where to begin, or even what any of it means? Start with this beginner’s guide to stocks.
- Why Investing is Important
- How to Invest in Stocks
- Compare Online Brokers
|HOW TO INVEST IN STOCKS © CREDITDONKEY|
“Investing is simple, but not easy” – Warren Buffett
Warren Buffett, pretty much considered the smartest investor ever, hit the nail right on the head.
It’s really not that hard to get started. All you need is some money and a platform to invest (as simple as a smartphone app). And chances are, you are already automatically investing in the stock market through your 401(K) at work.
But how to pick smart investments is the hard part. As well as mastering your investment strategy.
In this guide, we’ll be showing you step-by-step how to invest in stocks. Note that we’re talking about investing in individual stocks (i.e. not mutual funds, ETFs, etc). You’ll learn:
- Why Invest in Stocks
- Investing is Not Gambling
- What Are Stocks
- How Much Money Do You Need to Buy Stocks
- Assess Your Risk Comfort Level
- Learn about Market Trends
- Choose a Brokerage
- Do Your Homework Before Deciding
- Analyze a Stock’s Value
- Manage Your Portfolio
WHY INVEST IN STOCKS ANYWAY?
Here’s a hard truth:
You can be smart about spending and you can be smart about saving. But unless you’re a super-rich CEO with a huge income, you’re not going to get very far. You can’t expect to save everything you need for retirement.
To build long-term wealth, investing is necessary. Parking your money in a savings account or CD allows you to earn some interest, but it’s not enough to make a true difference. Investing in stocks usually offers the largest returns over the long-term. Historically, this is the best way to generate growth to reach financial goals.
Just some of the goals may include:
- You want to buy a house
- You want to save for retirement
- You want to save for your children’s college education
Investing your money in the stock market certainly means taking on a higher degree of risk than stuffing dollars under your mattress. But it also paves the way towards bigger returns.
Historically, stocks offer an average return of around 10%, which is substantially more than the 1% to 2% you might be able to get with a money market or high-yield savings account. There’s risk involved with stocks and that’s why it’s crucial to be educated (as you’re doing now). And don’t put all your extra money in one place.
If you are considering opening a brokerage account, you must check out these promotions.
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- Retirement calculator
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INVESTING IS NOT GAMBLING (BUT WATCH OUT!)
More than a third of Americans surveyed say they are scared to invest in the stock market. Does this include you?
Some people feel like it’s gambling. Because we can’t 100% knowthat the stock we pick will grow. And it’s true that sometimes stocks take a tumble and take people’s hard-earned money with them.
But here’s the difference:
It is gambling if you pick a random stock because it has an interesting sounding name and bet your dollars as if you would bet a running horse.
It’s called investing when you do your homework and take the time to make smart selections. You study the trends and feel relatively confident in your choice. You’re letting your wisdom – rather than chance – make your choices for you.
And in this guide, we’re going to teach you how to do the latter.
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- Gambler or Investor? The Truth About Why We Trade
- How Warren Buffett Chooses a Great Stock
JUST WHAT ARE STOCKS ANYWAY?
Imagine a marketplace. Instead of artisans selling jewelry, clothing, etc., you’ve got companies selling little pieces of themselves. When you buy a share, you now own a little piece of that company. If the company increases in value, your piece will also go up in value.
Simply put, stock represents ownership in a particular company. The stocks we’re talking about are for shares of publicly traded companies, and can be bought and sold on an exchange. Stocks can also be referred to as equities or securities; for our purposes, the terms are interchangeable.
There are two basic ways to make money by investing in stocks:
- If you can sell stock for more than you purchased it
- If the stock you own pays out dividends to shareholders
For example, let’s say you buy 100 shares of a company’s stock at $20 each. That’s an initial investment of $2,000. After 5 years, the price per share has increased to $25. If you decide to sell all your shares, you’d sell for $2,500. You’d be making $500 in gains (not including any fees and commissions).
The company sets how many shares of stock it issues. And the price per share operates on a supply-and-demand model. If the company is hot and there’s a lot of people wanting to buy its stock, the price will increase. If a company has more supply than demand, than the price will fall.
- Basics for Investing in Stocks
- When Selling Stocks Makes Sense
- How Do Dividends Work?
HOW MUCH MONEY DO YOU NEED TO BUY STOCK?
You can invest in the stock market with little money. Many investors start small.
Fortunately, some brokers don’t have a minimum requirement to start trading. And some will expect you to invest at least $500 or even thousands before they’ll let you do anything. On top of the account minimum, each trade can usually set you back between $4.95 (with a broker like Ally Invest) to $6.95 (with a broker like E*TRADE and TD Ameritrade).
And then there’s the price of stocks themselves. While prices can fluctuate wildly from one minute to the next, the average per share price for an individual stock hovers around $70, according to The Wall Street Journal. If that seems a bit pricey, keep in mind that there are stocks currently being traded at well over $500 a share.
Look at it this way: Nothing you’ll be doing is guaranteed, so limit your investment to an amount that you’ll be comfortable losing if the stocks you choose turn out to be duds.
- If You Only Have $1,000
- What Kind of Investor Are You
- Calculator: Find Out Where You’d Be Today If You Invested $100 a Decade Ago
ASSESS YOUR RISK COMFORT LEVEL
To figure out how much you’d be comfortable losing, evaluate your risk tolerance. Here are some factors to consider:
- Your age: If you’re relatively young and you have years ahead of you to invest, you may be more comfortable with an aggressive approach (remember, higher risk can result in higher returns). You have time on your side. You can reinvest and survive the ups and downs of the stock market.On the other hand, if you’re nearing retirement or you’re generally uncomfortable with taking risks when it comes to your hard-earned dollars, playing it safe might make more sense. For retirees and those near retirement, preservation of capital is important.
- Your short-term goals: Are you trying to save up for a house? Think of your short term goals and when you want to reach them. Is it smarter to just save up for that in a savings account? You can’t be sure that your stock will give you growth in just a short period. It may even go down. And if you need that money soon, you want to make sure it’s within reach.