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Stock investing can help build your wealth by putting your money to work for you. And you don’t need to be a financial whiz to do it. While you can eventually dive deep into complex strategies if you want, getting started takes some time, thought and knowledge of basic concepts.
In this article, we guide you through a step-by-step process to start investing in stocks, defining some key terms you need to know.
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How to start investing in stocks
Investing in stocks is not difficult. Follow these steps to get started today.
1. Choose an investment approach
The first step is to decide how you want to manage your investments. How much time do you want to invest? How hands-on do you want to be? You have three options to choose from:
- Manage your portfolio: Also known as active investing, managing your own portfolio leaves all the choices up to you. You decide which stocks to buy and when to trade. This method is suitable for experienced investors who are willing to devote significant time to their investments, so beginners are better off choosing one of the two options below.
- Using a broker: This is a form of passive investment. You rely on an experienced portfolio manager to select the best investments for your goals, monitor your portfolio and make adjustments as needed. If you are new to investing, a broker may be a good way to start.
- Using a robo-advisor: Robo-advisors are another form of passive investing. You identify your investment goals and risk tolerance, and the service automatically manages your portfolio. Robo-advisors are less expensive than human advisors and are a great option if you want to “set it and forget it.”
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2. Create an investment budget
The next step is to decide how much you want – and can afford – to spend on the investment. Review your monthly budget to see if you have enough to spend on daily expenses, put money into savings and investments. You don’t need to invest a huge amount. The important thing is just getting started so your investment has more time to grow.
Once you’ve identified your investment budget, you’ll also want to consider asset allocation. It is important to include asset classes (such as stocks, bonds and gold) in your portfolio to reduce risk. When it comes to what percentage of your portfolio you keep in stocks, the rule of thumb is to aim for 100 minus your age. So, if you are 40, stocks should make up 60% of your portfolio.
No matter how much you decide to invest, you have many options, from individual stocks (which can cost anywhere from a few dollars to a few thousand dollars) to exchange traded funds (ETFs) (which can cost as little as $100).
3. Open an investment account
Next, it’s time to open an investment account. If you want to actively manage your portfolio, an online brokerage account will allow you to hand-pick your investments. If you prefer to use a broker, a managed broker account will let you skip the work of an investment advisor.
A robo-advisor is a more affordable alternative to a human investment manager. Like traditional brokers, robo-advisors collect information from you to identify your needs and goals, then create and adjust your portfolio. Because their services are automated, their fees are lower than human brokers, and they don’t charge commissions. However, if you prefer to talk to someone for more nuanced advice, a broker may be worth the cost to you.
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4. Choose what to invest in
Note: This step is only for DIY investors who choose to actively manage their portfolios.
If you’re going the hands-on route, you’ll need to know the different types of investments available:
- Individual stocks: When you buy individual stock shares, you are investing in the success of the company in question. Your success directly depends on the success of the company. For this reason, you need to research every company you are considering investing in. This is best left to experienced investors.
- Mutual Funds: Mutual funds are pooled investment funds that allow you to invest in a collection of stocks, diversifying your portfolio across industries, sectors and more. Mutual funds are usually actively managed by a professional manager who buys and sells stocks based on their expertise.
- Exchange Traded Funds (ETFs): ETFs work similarly to mutual funds but are typically managed passively by tracking a major stock index. They can be a great way for beginners to get involved in the stock market because they are generally less expensive and more tax-efficient than mutual funds.
5. Periodically review your portfolio
Whether you’re actively managing your portfolio or using a broker or robo-advisor, it’s important to keep track of your investments to make sure you’re on track to reach your goals. For example, you may decide to invest more, diversify into a new industry or sector, or switch to more conservative investments as you approach retirement. So, periodically review your portfolio’s performance to make sure it’s doing what you want.
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The bottom line
Stock investing doesn’t have to be scary. Start slow, continue to educate yourself and don’t be afraid to ask questions as you go. There are many resources to tap into to build your knowledge. Consult a financial professional for customized guidance on building a portfolio that meets your needs.