HOW TO START INVESTING IN STOCKS: A BEGINNER'S GUIDE
Investing is a way to put money aside while you are busy with life and to make that money work for you so that you can fully enjoy the fruits of your labor in the future. Investing is a mean to a happy end. Legendary investor Warren Buffett defines investing as "... the process of depositing money now to get more money in the future." The goal of investing is to arrange your money to work in one or more types of investment vehicles in the hope that you will increase it over time.
Let’s say you have $ 1,000 set aside and you’re ready to enter the world of investing. Or maybe you have an extra $ 10 a week and you want to invest. In this article, we will walk you through the beginnings of investing and show you how to increase your return while minimizing your costs.
IMPORTANT NOTES
An investment is defined as an act of giving away the money or capital in anticipation of generating additional income or profit. Unlike spending, investing money is set aside for the future, hoping it will grow over time.
However, investing also carries the risk of loss.
Investing in the stock market is the most common way for beginners to gain investment experience.
What kind of investor are you?
Before you hand over money, you have to answer the question what kind of investor are you? When you open a brokerage account, an online broker like Charles Schwab or Fidelity will ask you about your investment goals and the amount of risk you are willing to take.
Some investors want to be active in managing the growth of their money, and some would rather "set it up and forget it." More traditional online intermediaries (online brokers), such as the ones listed above, allow you to invest in stocks, bonds, traded funds, index funds and mutual funds.
Internet (network) brokers
Brokers are either full service or discounted. Brokers that provide a complete service, as the name suggests, provide a full range of traditional brokerage services, including financial advice for retirement, health care and everything related to money. They typically deal only with customers of higher net worth and may charge significant fees, including a percentage of your transactions, a percentage of your assets they manage, and sometimes an annual membership fee. It is common to see a minimum account size of $ 25,000 or more for a full brokerage service. Still, traditional brokers justify their high prices by giving advice tailored to your needs.
Discount brokers used to be the exception, but now they are the rule. Online brokers offer you tools to select and place your own transactions, and many of them also offer a robotic advisory service. As the financial services space has progressed in the 21st century, network intermediaries have added more features, including educational material on their websites and mobile applications.
In addition, although there are a large number of intermediaries with a discount without minimum deposit limits or with a very low deposit limit, you may face other restrictions, and certain fees are charged to accounts that do not have a minimum deposit. This is something that an investor needs to consider if he wants to invest in stocks.
Robo-advisors
After the financial crisis in 2008, a new type of investment advisor was born: the robo-advisor. Their mission was to use technology to reduce costs for investors and simplify investment advice.
Since Betterment was launched, other robo companies have been established, and even network brokers like Charles Schwab have added advisory services similar to robots. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robotic tips by 2025. If you want the algorithm to make investment decisions for you, including tax collection and rebalancing, tax loss, a robo-advisor may be the right thing for you.
Investing through your employer
If you have a small budget, try to invest only 1% of your salary in the retirement plan available to you at work. The truth is that you probably won’t miss even such a small contribution.
Work-based pension plans deduct contributions from the payroll before taxes, which will make the contribution even less painful. Once 1% of your contribution is comfortable, you may be able to increase it by receiving an annual increase. You probably won’t miss the extra attachments. If you have a 401k retirement account at work, you may already be investing in your future by setting aside in mutual funds, and even in your own company’s inventory.
Minimums for opening an account
Many financial institutions have minimum deposit requirements. In other words, they will not accept your application for an account unless you invest a certain amount of money. Some companies will not even allow you to open an account for only $ 1,000.
It pays out to sneak around and check out our brokerage reviews before deciding where you want to open an account. At the top of each review we list the minimum deposits. Some companies do not require minimum deposits. Others can often lower costs, such as trading fees and account management fees, if you have a balance above a certain threshold. However, others may allow a certain number of transactions without commission, just to open an account.
Commissions and fees
As economists like to say, there is no free lunch. Although many brokers have been competing lately to reduce or eliminate trading commissions, and ETFs offer an index investment to anyone who can trade through bare-bones broker accounts, all brokers have to make money from their customers in one way or another.
In most cases, your broker charges a commission each time you trade stocks, whether buying or selling. Trading fees range from a minimum of $ 2 per trade, but can reach as high as $ 10 for some discounted brokers. Some intermediaries do not charge any commissions for the trade, but compensate for it in other ways. There are no charities that provide brokerage services.
Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very expensive if you jump often and don’t jump out of position, especially with the small amount of money available to invest.
Remember, a trade is an order to buy or sell shares in one company. If you want to buy five different shares at the same time, it is considered the five separate trades and you will be charged for each one.
Imagine now deciding to buy shares in those five companies for a thousand dollars. To do this, you will have $ 50 in trade costs - assuming a fee of $ 10 - which is equivalent to 5% of your thousand USD. If you invested $ 1,000 in full, the account would be reduced to $ 950 after the cost of trading. This represents a 5% loss before your investment even has a chance to make money.
If you sell these five stocks, you would again incur the cost of trading, which would amount to an additional $ 50. To make a return trip (purchase and sale) on these five stocks, it would cost you $ 100, or 10% of your initial $ 1,000 deposit. If your investments are not earning enough for it, you have lost money by entering and exiting positions.
Mutual funds (fee)
In addition to the trading fee for the purchase of a mutual fund, there are other costs associated with this type of investment. Mutual funds are professionally managed funds of investment funds that invest in a concentrated manner, such as large-scale US equities.
There are many fees that an investor will have when investing in mutual funds. One of the most important fees to consider is the ratio of management expenses (MER), which the management team charges each year, based on the value of the assets in the fund. MER ranges from 0.05% to 0.7% per year and varies depending on the type of fund. But the higher the MER, the more it affects the total returns of the fund.
When buying mutual funds, you may see a number of selling expenses called encumbrances. Some are front load, but you will also see load-free means and back. Be sure to know if the fund you are considering is carrying a sales burden before you buy it. Check the list of brokers without transaction fees if you want to avoid these additional costs.
In terms of the initial investor, mutual fund fees are actually an advantage over stock commissions. The reason for this is that the fees are the same, regardless of the amount you invest. Therefore, as long as you meet the minimum requirements for opening an account, you can only invest $ 50 or $ 100 per month in a mutual fund. The term for this is called dollar cost averaging (DCA), and it can be a great way to start investing.
Diversification and risk reduction
Diversification is considered the only free investment lunch. In short, investing in a range of assets reduces the performance risk of an investment and seriously damages the return on the total investment. You can consider it financial jargon "don't put all your eggs in one basket".
In terms of diversification, the biggest difficulty will come from investing in stocks. As mentioned earlier, the cost of investing in a large number of stocks can be detrimental to the portfolio. With a $ 1,000 deposit, it's almost impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies to get started. This will increase your risk.
This is where the main benefit from mutual funds or traded funds (ETFs) comes into focus. Both types of securities have a large number of shares and other investments in the fund, which makes them more diverse than individual shares.
Lower limit
It is possible to invest if you are just starting out with a small amount of money. It’s more complex than choosing the right investment (a feat that is inherently difficult) and you need to be aware of the limitations you face as a new investor.
You will need to do your homework to find the minimum deposit requirements and then compare the commissions with other brokers. It is likely that you will not be able to buy individual shares profitably and still be diversified with a small amount of money. You will also need to choose which broker you want to open an account with.
