If you are new to investing, it is probably easy to feel that it’s all too intimidating. The good news is that, although not necessarily easy, getting started may be easier than you might have imagined.
Here are the steps you may follow step by step through the process of getting started with investing in the stock market.
Step 1: Set Financial Goals
You need to set your investment goals because that defines what you are saving for. Are you saving up for retirement, a down payment on a house, or looking to grow your wealth? Determined financial goals will guide your investment strategy, including how much risk to take and the specific time frame to achieve your investments.
i.) Short-term Goals: If you need to use the money in the near future-for instance, in three months for a weekend getaway or a rainy-day fund-you might be interested in investing in the relatively risk-free, more stable investments like bonds or money market funds.
ii.) Long-Term Goals (5+ years): When investing for something five years out or more, such as retirement or creating wealth, you can assume to have a higher risk tolerance with equities, that have the potential of earning much higher returns over the long term.
Step 2: Educate Yourself
Investing is a complex process, so you have to take time for preparatory learning. You don’t have to be an expert; having general knowledge about key concepts will save you from making uninformed decisions in the right direction.
The concepts you need to familiarise yourselves with are:
i.) Stocks and Bonds: Understand what stocks are all about- that is ownership in a company-and what bonds all about loans made towards corporations or governments.
ii.) Risk vs. Return: Risk and return are directly proportional; risk will be higher where there is a prospect of high returns.
iii.) Diversification: Spreading out your investments into different assets in reduction of risk.
iv.) Mutual Funds and ETFs: Generally pooled investment vehicles that provide diversification for you by holding a variety of assets.
v.) Dividends: Payments made by companies to shareholders based on their shares of profit.
There is much one can learn online free of charge, especially in articles, videos, and courses, to get a basic understanding.
Step 3: Set Up a Budget and Save for Capital
You would need a clear budget when going forward with your investment. You have to set aside an emergency fund of 3-6 months of living expenses, and do not invest money that you will possibly require for short-term needs.
Once you have gotten your personal finances in check, determine how much money you may be able to dedicate or comfortably invest. You can start small if necessary, but the earlier and the more you invest, the more it is that you will be able to reap from the power of compound interest.
Step 4: Choose an Investment Account
An investment account is basically needed for investment into the stock market. However, there are different kinds of accounts with various purposes.
Brokerage Account: It is a brokerage account through which you can purchase and sell stocks, bonds, and other securities. The accounts are flexible and therefore, there are few restrictions on when to access your money.
Retirement accounts (IRA, 401(k)): Tax-advantaged accounts to save for long-term retirement. Contributions may be tax-deductible in Traditional IRA or 401(k) or grow tax-free in a Roth IRA or 401(k). Before you open a retirement account, you will choose a brokerage firm. There are many brokers now that offer easy-to-use online platforms with low fees and great tools. Some of the most popular brokerage platforms include: Fidelity, Vanguard, Charles Schwab, and TD Ameritrade
Robo-Advisors (such as Betterment or Wealthfront): These are automated platforms that build and manage a diversified portfolio on your behalf. In choosing a brokerage firm, consider fees, investment options available, minimum accounts, and level of customer service.
Step 5: Decide Where to Invest
Now that you’re set up with your account, you need to decide what to put it in. That depends on your financial goals, what kind of risk you’re willing to take, and when you need the money.
Individual Stocks
An investment in individual stocks is a purchase of shares of specific companies. The returns are potentially the highest, but the risks of stocks being largely known to fluctuate greatly are much higher.
Mutual Funds & ETFs
Mutual funds and ETFs pool money collected from many investors to invest in an inventory of stocks, bonds, or other investment products. They are excellent investment options for beginners since they offer instant diversification and often have lower risks than investing in individual stocks.
i.) ETFs are traded in the same manner as stocks, over an exchange, and usually cost less.
ii.) Mutual funds are actively managed by fund managers, which tends to lead to higher fees.
A low-cost index fund or ETF is normally a good place for beginners to get started. These funds track a broad market index, such as the S&P 500. They should give broad exposure to the market, spreading risk across hundreds of companies.
Step 6: Make Your First Investment
Of course, after you’ve decided what you want to invest in, it’s time to actually make your first purchase. Most people tend to start investing with around $100-$500, though this again varies by brokerage and investment product you’re choosing.
Most brokers have a pretty straightforward process to buy either stocks or funds. The steps are as follows:
Logging into your brokerage account
Searching for the stock or fund you want to invest in.
Record the value you want to commit
Choose to buy; you should use market order in case you want to purchase immediately or limit order when you want to specify that price you want to pay.
Step 7: Monitoring Investments and Maintaining Self-discipline
Once you have invested, forget about it. You will, of course, want periodically to review your portfolio, but avoid making excessive changes because of the day-to-day gyrations of the market. Long-term investing is disciplined.
Rebalancing. At various points you will need to rebalance your portfolio. Rebalancing is the act of making adjustments to your investments to bring your portfolio back closer to a more desirable level of risk.
Keep abreast of financial news; never, however, react to news in the market.
Change your life and/or your risk tolerance; so does your portfolio.
Step 8: Learn and Adjust as You Go
Investing is a process, and the best way to improve is through continuous learning and adaptation. Schedule time for reviewing your goals periodically to track your progress and learn about new investment opportunities. Alternatively, you could work with a financial advisor when you need personalized advice.
Conclusion
The idea of beginning to invest in the stock market may seem daunting, but with a clear plan and the right approach, it’s perfectly manageable. You will be on your way to building long-term wealth if you have a goal, educate yourself, pick the right accounts and investments, and are disciplined. Don’t wait too long to take the first step because the early bird catches the worm!