How to Invest in Stocks in 5 Easy steps
No one is born knowing how to save or invest. Every successful investor starts with the basics. A few people may stumble into financial security—a wealthy
relative or a business may take off. But for most people, the only way to attain financial security is to save and invest over a period of time. As a beginner, you might be intimidated to begin the process. The best time to start investing is now!
Define Your Goals
Ask yourself what you want to achieve. Is your goal a down payment on a house? Are you saving for retirement? Or do you just want to get started and learn how to invest in the stock market? Divide your goals into short-term, medium-term (one to five years), and long-term (more than five years). Then, decide how much money you'd like to save for each goal. Use these calculators to help you define your target amount.
Decide How Much To Invest
The next step is to keep track of your income and your expenses every month. Write down what you earn, and then your monthly expenses. Include a category for savings and investing. How much should you be investing? It's recommended to save 15-20% of your gross household income on retirement savings.
Why? First, investing 15-20% of your income consistently month after month, year after year will put you on the path to becoming financially free thanks to time and compound interest. And second, investing 15-20% still leaves some wiggle room in your budget to reach other important financial goals—like saving for your kids’ college funds and paying off your house early.
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If you work, you may be eligible to participate in an employer-sponsored retirement plan such as a 401(k), 403(b), or 457(b). That automatically deducts money from your paycheck and may reduce the taxes you are paying. Additionally, with many plans, the employer matches some or all of your contributions. When your employer does that, it’s offering “free money.” Here are some quick ways you can save some money in your monthly budget:
Pack your lunch instead of eating out.
Cancel your cable package and switch over to a cheaper streaming service.
Skip the coffee shop and brew your own cup of coffee in the morning.
Cut down on the brand-name items and go with the generic option when it makes sense.
Reduce insurance premiums with reliable term-life insurance.
Learn the difference between Stocks and Stock Funds
There are several types of investments to grow your money, but let's focus on the common types for beginners. Stock investing doesn't have to be complicated. For most people, stock market investing means choosing among these two investment types:
Stock mutual funds or Exchange-Traded Funds (ETFs). Mutual funds and ETFs let you purchase small pieces of many different stocks in a single transaction. Index funds are a kind of mutual fund or ETF that tracks an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build a diversified portfolio. Note that stock funds are also known as equity funds. S&P 500 Index funds such as $VOO, $IVV, OR $SPY are examples of stocks funds that could be added to a beginner's portfolio.
Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
The upside of stock funds is that they are inherently diversified, which lessens your risk. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim.
Open an Investment Account
In order to invest, you need an investment account. This doesn't mean you have to invest money right away. In fact, you should not invest a cent until you've fully researched what company or industry you want to invest in. But this will put you in a position to invest when you are ready. Plus, you can research companies and create a watch list. Investment accounts can be divided into two main categories: taxable accounts (like a brokerage account) and tax-advantaged accounts (like an\Roth IRA, 401(k), Health Savings Account (HSA), or 529 College Savings Plan). As a general rule, investments that tend to lose less of their return to taxes are good candidates for taxable accounts. And investments that lose more of their return to taxes may be better suited for tax-advantaged accounts.
Consider the following online brokers to open an account today:
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