How to Invest in the Stock Market

Today, buying stocks is one of the most popular investment classes in the world and now it’s even easier for investors to access stock trading platforms from anywhere in the world. 

New investors should follow some basic steps to ensure that they understand the risks of buying equities, and also get the most for their money. There are ways to buys stocks today that are essentially free, and there are also low-cost ETFs that allow you to save time and money, while still creating a diversified portfolio. 

Let’s have a look at some of the most important things to keep in mind when you are investing in stocks.

1. – Choose Your Investment Style

If you are committed to evaluating stocks and doing the necessary research you can buy individual stocks. However if you do not want to do all that work you can invest in index funds or ETFs which track a stock index like the S&P 500 which typically produces 10% annualized returns.

Compound returns are an investors best friend so understand it and leverage it to achieve your financial goals. Albert Einstein famously said, “Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.”

If you invest $2000 per year with a 10% annualized return you’ll have nearly $400,000 in 30 years and over $1,000,000 in 40 years. You can see that after 20 years the rate of growth starts to really snowball which is why getting started investing as early possible is key.

Time
Period
Stock Market
with 10% return
Initial investment$2,000
5 years$16,644
10 years$40,230
20 years$139,390
30 years$396,587
40 years$1,063,690

2. – Make a Budget

It’s critical to know how much you can afford to deploy into the stock market.

Depending on the investment type, the minimum capital needed to buy stocks or other funds varies. For instance, as mentioned before, traditional brokers often target high-income people and may require $25,000 USD for a minimum deposit.

Mutual funds, on the other hand, are generally cheaper, since the burden is divided for many individual investors. Digital platforms, such as discount online brokers or robo-advisor apps, offer the lowest cost solutions and may have a minimum deposit of $1 USD. 

It is important to understand that stocks do offer decent returns over a long period of time, but in the short run, the investments you make may fall in value. If you are investing money in the markets that you can’t afford to lose, you are setting yourself up to get hurt. 

3. – Open a brokerage account

Opening a brokerage account will allow you to buy publicly traded stocks and may allow you to buy ETFs and other funds that trade just like stocks. You will have to provide personal information, and then all you have to do is deposit money in the account. 

There are also brokerage services that cater to people with a higher net worth and include things like healthcare insurance, other insurance, retirement planning, and other things that could make sense to buy as part of a bundle.

These packages require a high minimum deposit and aren’t really geared to retail investors. 

Discount Brokers can Make Sense 

A more affordable option is using discount brokers, which may be free to use. Platforms like Robinhood offer trading at no cost, although you may not be able to buy all the funds that a slightly more expensive broker would offer.  

Regardless of the kind you choose, online brokerage accounts allow you to place orders through an easy to understand interface and will keep track of all your investments (which you make on the platform) in one place. 

Robo-Advisor

You can also choose to use a robo-advisor, which will automatically invest your money on a semi-managed basis (it really depends on the robo). Once you have opened a robo-advisor account, you’ll be directed through a couple of questions that collect information about your financial status and goals.

Based on that input and its algorithms, the system then provides you a portfolio that it thinks will be the best for your goals. You can get into these robos at a very reasonable price (annual fees can be as low as 0.25% of your total balance).

4. Choose your Stocks and ETFs

If you are getting started in stock market investing here are a few concepts to master before you get started.

  • Diversify your portfolio
  • Invest in companies you really understand
  • Avoid penny stocks
  • Learn the fundamentals and concepts used to evaluate stocks

Low-Cost ETFs are Easy 

An ETF is an Exchange Traded Fund, and they are one of the best and cheapest ways to invest your money without knowing much about the markets. All you have to do is decide on which index you want to buy (the NASDAQ or S&P 500 for example), and then you can buy shares in an ETF that will track the performance of the index. 

There are some fees associated with owning ETFs, but they are generally very low. Shares in an ETF are traded just like stocks, and many ETFs can be bought with a discount brokerage account. If the markets rise, you will make money.

Mutual Funds are Still Around 

Joining a mutual fund company is a bit different. These platforms were very popular a few decades ago, and they are more or less the precursor to managed ETFs. 

Instead of buying a specific security, investors will put money into shares of a fund (or funds), which represents a collection of various stocks. The list is created and evaluated by a portfolio manager who is an experienced professional investor.

By owning mutual funds’ shares, each individual investor’s return is determined from the total values of the whole bucket. Aside from purchase price, there might be a variety of fees, such as transaction fees, commission (aka load), or operational cost. 

While mutual funds do sometimes outperform the broad market, the fees involved make them look less attractive than lower cost ETFs.

Bottom Line

The most proven approach to make money in the stock market is to buy stock of great business with proven track records at a good price and to hold on to them for the long haul or to just buy an ETF of the S&P 500 which consistently yield 10% returns per year. The market always has ups and downs but over the long haul it produces great returns.