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The first thing that pops into most people’s minds when they hear the word “investing” is stocks. Stocks give people the chance to invest in companies and businesses through a streamlined process. If you’ve ever wanted to own a small piece of a major company you know and love or a company you think is on the verge of doing something big, you’ll want to learn about how to invest in stocks.
What is stock investing?
Stock investing is the practice of purchasing pieces of a company as a means of growing your cash or wealth. When a company is put on a stock exchange, it is split up into several fractional pieces known as shares. If you purchase a share of a company’s stock, you are now a partial owner of the company.
People invest in stocks because, as a partial owner, you get to partake in a fractional portion of the successes of the company. This means if the value of the company goes up, the value of your stock goes up too.
Until recently, you needed to have at least the cost of one share of a company in order to invest. For example, if a company’s shares cost $100 apiece, you would need $100 to invest. However, many investment firms are now allowing investors to break down ownership even further with fractional shares. Instead of owning a full share of stock, you can now own a piece. Because of this, the minimum investment is as little as $1.
How to invest in stocks
1. Research what kind of stocks are right for you.
As long as a company is publicly traded, you are able to buy a piece of ownership in the company. Take some time to research the different companies you may be interested in investing in. Many resources exist to help you learn about different companies and investment opportunities.
2. Figure out how much you can afford to invest.
Decide what amount of money you have that you’re willing to invest in your stock portfolio. Remember, with fractional shares and lower-priced stocks, you can get started for as little as $1.
3. Decide on an investment account.
Since you’re not allowed to go to the stock exchanges yourself, you’ll need to open an investment account to facilitate your purchases. When it comes to investment accounts, you have two main options — managed accounts and self-directed accounts.
- Managed accounts: Managed accounts are stock investment accounts where a financial professional will make your trades for you. They may also give suggestions or advice on how best to allocate your money. You will pay an additional fee for this service, though. The fee will be a small percentage of your total invested assets, a fee per trade that is made, or a fixed hourly rate for help. The limitations, though, are that many managed accounts typically have an account minimum to get started that may be several thousand dollars.
- Self-directed accounts: Self-directed accounts have the same features and investment opportunities as managed accounts without the fees. Generally, there are no account minimums, and most trading platforms offer fee-free trades on stocks. The obvious drawback is that you won’t have an investment professional to assist you in the process.
4. Take the first step.
Once you’ve decided which stocks you want to buy and what type of investment account you want to use, it’s time to get started. Follow the instructions through your investment account company to open your account, fund your account and make your first stock purchase.
Is investing right for me?
There are many reasons why people invest in stocks. Determining if investing is right for you, depends on your unique situation. There are several instances where investing might be a good fit to add to your financial planning.
You have extra money
Got some extra cash you’ve saved up or had a recent change of income? If you have extra money that you’re not sure what to do with, it could be a good time to start investing.
Your planning for a future purchase, goal or retirement
Investing helps you to grow your money for the future. If you’ve got future plans to retire, make a major purchase or reach any other financial goal, investing could be what you need to get there.
The market is “low”
Many people take advantage of dips in the economy to start investing. If they can buy stocks when the price is lower than average, it becomes easier to invest money and see returns. This is known as market timing and is a risky strategy, but can pay off for some market-savvy investors.
Stock trading for beginners
If you’re brand new to trading stocks, you’ll want to choose a beginner-friendly platform that you’re comfortable with. Look for a platform that focuses on a user-friendly interface, doesn’t overwhelm you with jargon and has support staff available.
One of the best stock trading platforms for beginners is Robinhood. The company has no account minimums and an easy-to-use mobile platform.
Pros and cons of investing in stocks
Stock investing is not for everyone, but many people find it to be a fruitful addition to their overall financial plan. The best way to know whether it’s a good fit for you is to look at the pros and cons.
- Gains are not guaranteed.
- Creates a balanced investment portfolio.
- It can be fun to experience the ups and downs of companies you follow.
- Stock investing is a risky form of investing.
- It takes some time to learn what you’re doing.
- You may have to invest more money to fully balance the risk in your stock portfolio.
Alternatives to stock investing
Stocks are not the only way you can invest your money to see good returns. Other options available include things like CDs, real estate, bonds, currencies, peer to peer loans and high-yield savings accounts. By investing in more than just stocks, you create what is known as a balanced portfolio that can self-mitigate risk based on different market conditions.
- Certificates of deposit: One of the more popular options on this list of alternatives to stock investing is CDs or certificates of deposits. With CDs, you agree to leave a fixed amount of cash in an account untouched for an agreed-upon period of time. In return, the bank or credit union gives you a percentage return on your money. The return on a CD investment might not be as high as some stocks, but it is guaranteed.
- Savings accounts: Savings accounts have the lowest risk. These accounts give you a fixed rate of return similar to a CD, except you can access your money at any time. You are limited to a certain number of monthly transactions and you may be required to keep an account minimum to avoid fees and get the highest interest rates.
- Index funds: Many of the most popular stocks are grouped together in such a way to give people an ides of how the market is doing as a whole. For example, the S&P 500 is made up of 500 large-cap U.S. companies. If you want, you can invest in index funds, which effectively give you a piece of every company in the index. Your return is dictated by how the index as a whole performs. This is an easy way to mitigate risk and diversify.
The bottom line
Knowing how to buy stocks is the first step in determining if it’s a good fit for your financial plan. The good news is that if you’re on the fence, you can always start small to get your feet wet and see if it’s for you. Many investment accounts are extremely accommodating to beginners and have extensive helpful resources.