However, investing also comes with the risk of losses.
The stock market is a common way for investors, no matter their experience, to invest for a lifetime.
Beginning investors can get help from expert advisors, leave their portfolio selection and management to robo-advisors, or take a DIY approach to investing in stocks,
Click Play to Learn How to Start Investing in Stocks
What's your tolerance for risk (the chance that you may lose money while investing)? Stocks are categorized in various ways, such as large capitalization stocks, small cap stocks, aggressive growth stocks, and value stocks. They all have different levels of risk. Once you determine your risk tolerance, you can set your investment sights on the stocks that complement it.
You should also determine your investment goals. When opening a brokerage account, an online broker such as Charles Schwab or Fidelity will ask you about your investment goals (and the aforementioned level of risk that you’re willing to take).
If you're just beginning your career, an investment goal could be to increase the amount of money in your account. If you're older, you may want to generate income as well as grow and protect your wealth.
Your investment goals might include buying a house, funding your retirement, or saving for tuition. Goals can change over time. Just make sure that you define and review them periodically so that you can keep your focus on achieving them.
Some investors want to take an active hand in managing their investments, while others prefer to set it and forget it. Your preference may change, but decide on an approach to get started.
If you're confident about your investing knowledge and capability, you could manage your investing and portfolio on your own. Traditional online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.
An experienced broker or financial advisor can help you make your investment decisions, monitor your portfolio, and make changes to it. This is a good option for beginners who understand the importance of investing but may want an expert to help them do it.
A robo-advisor is an automated, hands-off option that typically costs less than working with a broker or financial advisor. Once a robo-advisor program has your goals, risk tolerance level, and other details, it automatically invests for you.
Retirement plan at work: You can invest in various stock and bond mutual funds and target-date funds through a retirement plan at work, such as a 401(k), if your employer offers one. It may also offer the option of investing in the employer's company stock.
Once you enroll in a plan, contributions are made automatically at a level you set. Employers may make matching contributions on your behalf. Your contributions are tax deductible and your account balance grows tax deferred. This is a great way to maximize your investing dollars with little effort. It can also instill in investors the discipline of regular investing.
An IRA or taxable account at a brokerage: You can also start investing in stocks by opening an individual retirement account (even in addition to having a workplace plan). Or, you can go with a regular, taxable brokerage account. Normally, you'll have lots of options for investing in stocks. These could include individual stocks, stock mutual funds and exchange traded funds (ETFs), stock options.
A robo-advisor account: As referenced above, this type of account takes your investment goals and creates a stock portfolio for you.
Diversification is an important investment concept to understand. In a nutshell, by investing in a range of assets, or diversifying, you reduce the risk that one investment’s performance can severely hurt the return of your overall investment portfolio. You could think of it as financial jargon for not putting all of your eggs in one basket.
It can be difficult to diversify when investing in individual stocks if your budget is limited. For example, with just $1,000, you may only be able to invest in one or two companies. This results in greater risk.
This is where mutual funds and ETFs can help. Both types of funds tend to own a large number of stocks and other investments. This makes them a more diversified option than a single stock.
Futures & Options Training in HyderabadMany financial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money.
It pays to shop around, and not just to find out minimum deposits. Check out our broker reviews (see below). Some firms don't require minimum deposits. Others may reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.
The Costs to Invest in Stocks
As economists like to say, there's no free lunch. All brokers have to make money from their customers in one way or another.
In most cases, your broker will charge a commission every time that you trade stocks, whether you buy or sell. Trading fees range from $2 per trade to as high as $10. Some brokers charge no trade commissions at all, but they make up for it with other fees.
Depending on how often you trade, these fees can add up, affect your portfolio's return, and deplete the amount of money you have to invest.
Imagine that you decide to buy one share of stock in each of five companies with your $1,000. Assuming a transaction fee of $10, you will incur $50 in trading costs which is equivalent to five percent of your $1,000.
Imagine that you decide to buy one share of stock in each of five companies with your $1,000. Assuming a transaction fee of $10, you will incur $50 in trading costs which is equivalent to five percent of your $1,000.
Should you sell these stocks, the round trip (the act of buying and then selling) would cost you a total of $100, or 10 percent of your initial deposit amount of $1,000. These costs alone can eat into your account balance before your investments even have a chance to earn a positive return.
Mutual funds are professionally managed pools of investor funds that focus their investments in different markets.
They have various fees that you should be aware of. One of these is the management expense ratio (MER). The MER is the fee paid by shareholders of a mutual fund (or ETF) and goes toward the expenses of running a fund.
It’s based on the total of a fund's assets under management. The MER can range from 0.05 percent to 2 percent annually. Bear in mind that, the higher the MER, the more it impacts the fund's overall return.
You may also see sales charges called loads. These include front-end loads and back-end loads. Be sure you understand whether a fund carries a sales load prior to buying it. Check out your broker's list of no-load funds and no-transaction-fee funds to avoid these charges.
For the beginning investor, mutual fund fees may be more palatable compared to the commissions charged when you buy individual stocks. Plus, you can invest less to get started with a fund than you’d probably pay to invest in individual stocks.
By the way, investing small amounts consistently over time in a mutual fund can give you the benefits of dollar cost averaging (DCA) by reducing the impact of volatility.
Full-service brokers, as the name implies, offer a full range of traditional brokerage services, including financial advice for college planning, retirement planning, estate planning, and for other life events and opportunities. This custom-tailored advice justifies the higher fees that they typically charge, compared to other brokers. These can include a percentage of your transactions, a percentage of your assets under management, and sometimes, a yearly membership fee. Minimum account sizes can start at $25,000.
Discount brokers used to be the exception but are now the norm. They offer you tools to select your investments and place your orders. Some also offer a set-it-and-forget-it robo-advisory service (more below). Many provide educational materials on their sites and mobile apps, which can be helpful for beginning investors.