Beginner’s Guide to Investing
A few decades ago, investing was reserved for the experienced and rich who could set aside significant sums towards stocks and other investments. That has changed today, with more companies making it possible for beginners with smaller amounts of money to invest in different investment vehicles.
That said, before you start investing, you should learn a few investment basics to minimize your risks and increase your earnings. Follow along to learn the fundamentals of investments for beginners.
Why Invest in Stocks?
Stocks are the first thing that comes to mind when talking about investing. Investing in the stock market is not as complicated as you might think, but before you go all out buying shares from different companies, you should understand the basic rules of investing in the stock market.
When investors buy stocks, they purchase a share of ownership in a public company, hoping that it will grow or perform well over time. The good performance of a company means that your shares become more valuable, and other investors will buy them at a higher price.
Before you invest in the stock market, here are some things to do:
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- Decide on how you want to invest. Based on your investor profile, you may choose to select the stocks and funds on your own or delegate the process to an expert.
- Set up an investment account. The investment account you need depends on whether you will manage the stocks yourself or work with an expert. If you will manage the stocks yourself, open a brokerage account of your choice.
- Learn the difference between investment types. You should be familiar with different types of investments such as mutual funds, individual stocks, or ETFs.
- Set a budget for your stock market investment. You can start investing in stocks with any amount, depending on the investment type you choose. Individual stocks and ETFs are ideal when you are working with a smaller budget. The amount you should invest in the stock depends highly on your circumstances and risk tolerance. For example, a more conservative approach is better than risking it all and possibly jeopardizing your financial stability if you are approaching retirement. Another rule is that you must never invest your emergency funds or the money you need in the short term.
- Focus on long-term investments. The stock market is profitable for investors who stick for the long term.
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Stocks to Invest in as a Beginner
Investing in the stock market for beginners can seem overwhelming. Which stocks do you choose? How much money should you invest? How do you diversify your portfolio? While there is no right or wrong answer to these questions, certain guidelines can help you choose an investment that works for you.
The first step in picking the ideal stock investment is to determine your investment goals. Investors buy stocks to generate retirement income, preserve their wealth, or for capital appreciation. These goals will inform the strategy you use and the type of stock you choose.
An income-oriented investor is keen on companies that pay good dividends regularly. These tend to be well-established companies. Investors who want to preserve their wealth are typically conservative and go for stable stocks that do well in good and bad times. Finally, investors looking for capital appreciations are more likely to take bigger risks with companies in their early development that have a promising future. These investors typically gain big or lose big depending on the direction the company takes.
Identify companies in which you would like to invest. You can find these companies by:
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- Searching exchange-traded funds for the industry you would like to invest in.
- Using a screener to filter stocks based on different investment metrics such as the dividend yield and market cap.
- Reading stock analysis articles in the industry that you intend to invest in.
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During your research, especially when reading investment news and opinions, it’s best to consider both sides of the argument and leave your biases at the door. This way, you can evaluate the stocks with a level head and make sound investment decisions.
Read corporate presentations from the companies you choose to learn how they make money. Gauge their position in the market and their outlook based on your research. Once you have completed your research, you will better understand the market and can choose stocks that meet your investment goals.
That said, some stocks are generally not ideal for beginners. These include:
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- IPOs.
- Companies you do not understand.
- Penny stocks.
- Rapidly growing companies (especially those that have yet to start profiting). You can explore growth investing as you gain more experience in the market, but until then, focus on building a base for your portfolio.
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Alternatives to the Stock Market
Based on your risk tolerance and personal preferences, the stock market might not be the best investment for you. But that doesn’t mean you do not have other investment options. Here are other investments for beginners:
Mutual Funds and Exchange-Traded Funds
If you are not comfortable buying individual stocks or bonds, mutual funds and exchange-traded funds allow you to invest in different assets in a single transaction.
Mutual funds are investment vehicles that collect money from different investors to invest in securities such as stocks and other money market instruments. Professional money managers manage mutual funds and allocate assets to generate gains or income for the mutual fund investors.
As a beginner, investing in a mutual fund gives you access to a diversified and professionally managed portfolio at a lower price than you get from investing in individual stocks.
On the other hand, exchange-traded funds are securities that track an industry, sector, commodity, or index and can be sold or bought on a stock exchange similar to a stock. Some of the ETFs available to investors include bond, stock, industry, commodity, currency, and inverse ETFs. The SPDRS&P 500 ETF is one of the well-known ETFs in America; the ETF tracks the S&P 500 index.
ETFs have an associated price, making it easier to trade them. They can contain different investments, including bonds, stocks, commodities, or a combination of these. They trade like regular stocks, meaning their prices fluctuate throughout the trading day.
Index Funds
An index fund tracks a market index. They are an easy and effective wealth-building strategy for long-term investors. They are also ideal for beginners as they do not require you to be a stock market expert to invest in them.
Index funds invest in dozens to hundreds of securities, making them diversified and low-risk investments for beginners. They are also available for different investments, including stock index funds and bond index funds. Index funds are also cheaper and more tax-efficient than actively managed funds (eg. mutual funds).
401(k)
Employer-sponsored 401(k) plans are the easiest way to begin investing, and they do not have a minimum investment. Experts, however, recommend contributing 10-15% of your salary to your 401(k) plan and increasing this percentage over time. Financial advisors recommend funding a 401(k) plan to get you started on planning for your financial security in retirement.
A 401(k) plan allows you to invest in one or more funds, including index funds, foreign funds, bonds, and real estate funds. This plan comes with the advantage of earning a compound interest and deferring taxes; therefore, it is tax-efficient and profitable in the long term.
Even if you are unemployed, you can explore other retirement accounts, such as a traditional IRA or a Roth IRA account.
Robo-advisor
Robo-advisors are a great and low-cost way for beginners to get started on their investment journey. These automated investing services build and manage your investment portfolio using computer algorithms and advanced software.
You can access services such as tax optimization, portfolio rebalancing, and financial planning. These services come at a lower cost than what a human investment manager would charge you.
You can determine whether a robo-investor is the best choice for you by evaluating:
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- The type of account you have: a robo advisor can handle both taxable and retirement accounts.
- The minimum investment requirements
- The portfolio recommendation
- The investment selection
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Diversification and Risk Management
Whether investing in an individual stock or a retirement plan, you need to diversify your investment portfolio to reduce risks and maximize returns. Keeping your portfolio diversified means investing in different financial vehicles, industries, and sectors. It also means identifying investments that react differently to the same event.
Featured Image: Megapixl
