Following our beginner investment series, this article will explain what stocks are and how a beginner investor can get started on investing in stocks.
Investing in stocks used to be a herculean task requiring lawyers and stockbrokers, and other middlemen. With the advent of technological solutions, you can get started in minutes from the comfort of your sofa.
Investing in Stocks
There are many kinds of investment opportunities, but none beat the stock market for options. If you are a long-term investor, then the stock market is an excellent place to get started.
If you are a complete beginner to investing, you should get started with an online brokerage account. An online brokerage account is an online investment account. You can purchase shares of stock or mutual funds with the funds in that account. There are many online investment accounts to choose from.
Stock Investment Options
There are many choices to choose from investing in stocks. The most popular and most effortless approach is through a stock mutual fund. It is suitable for people who are new to stocks and just learning how to start investing.
Stock Mutual Funds
A stock mutual fund is a basket of stocks that are managed as a single portfolio. The fund is managed by financial experts who monitor the stock market and make informed decisions.
Additionally, stock mutual funds are diversified. That means that the performance of the investment isn’t tied to a single asset. This reduces risk. The downside to this is low returns. Most stock mutual funds are risk-averse. There is a principle in the investment world: the lower the risk, the lower the profit. Also, as the portfolio is managed by financial experts it comes with a management fee.
Robo-advisors are “Robot Financial Advisors.” It is backed by a complex algorithm that asks you a few simple questions. Those questions cover your investment goal and risk tolerance. The Robo-advisor uses your answers to create a well-diversified, low-cost portfolio of stocks.
Robo-advisors are similar to stock mutual funds because both offers diversified, low-cost investment opportunities. However, that is where their similarities end. A Robo-advisor is operated by an algorithm, thereby eliminating the need for financial experts. This translates into a lower management fee when compared to stock mutual funds.
If you want maximum rewards from stocks, then you should consider building your portfolio yourself. It is perfect for those who understand stocks and how to get started. For starters, you eliminate the middleman. The only person you have to pay is yourself. On the flip side, you have no one to blame but yourself if things go south.
However, investing in individual stocks can be fun and exhilarating. Once you get started, you might decide never to use any management platform again. Are you going to lose money? Yes! That is why beginner investors are advised to invest less than 10% of their funds in individual stocks.
To get started, build a stock watch list. A stock watch list is a list of companies you have personally researched and consider worthy of your investment. Next, watch the stock market and decide on your entry point. You need to be very patient when it comes to investing. Even if you have found the best stock to buy, it is rarely prudent to invest immediately. If it is too good to be true, it is likely to not be true.
All stocks undergo a circle of rising and fall. The best stocks are those that gain more than they lose. If you are patient, you are going to be rewarded with a drop in stock price. That is the time to buy those stocks. You will be smiling once the stock price goes back to its actual value.
Pro Tip: Keep Your Emotions in Check
Two powerful emotions can derail any investor: fear and greed. These emotions have bankrupted experienced investors.
Fear starts when a company’s stock dips. You begin to worry, and then panic sets in. You sell off the stocks at a price lower than your purchase price. Within a short period, the stock price begins to gain, and you blame yourself for selling out.
Even the stocks of great companies fall in prices over a short period. You should trust in your research and let the price volatility play out. If you are going to pull out, pull out for a logical reason.
Greed has greater implications than fear. Fear can cause you to lose a good percentage of your investment. Greed can make you lose everything. Greed occurs when you buy a stock that is overpriced because you want to share in the price boom. You lose funds when the stock returns to its real value or even dips. It is common for a stock price to dip after a period of an excess rise in stock price. Investors who bought at a low price often sell at this time to maximize profit and then rebuy the stock when it dips.
A good rule of thumb is never investing more than 10% of your investment funds in an individual stock. This will insulate you from unexpected price swings.
We’ve talked about stocks and how to get started. As you invest, don’t take more risk than you can handle, and remember that you can get started on stocks today, it is never too late. Happy investing!