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Investment legends observe anything comfortable is rarely profitable! Considered to be highly volatile, stock markets give you a roller coaster ride more often than you would expect. However, with considerable planning, when you make an informed investment in stocks, the chances that your money will multiply is high.
If you are a newbie that is both excited and confused on how to step into the world of the stock market, here is a guide that will help you take those baby steps. Various apps and online stock brokers can assist you in making good decisions. Yet, you may have quite a few questions. Read on to clear them off.
Determining the investor type
The ways to approach stock investments are many, and you need to choose the type that best fits your situation. If you are the DIY type of investor who intends on choosing stocks and stock funds for himself, then you need to choose between the following two types of investments.
Stock or equity mutual funds
Such mutual funds allow the investor to purchase small pieces from various stocks through a single transaction. The Index funds and ETFs help track index. As an example, Standard and Poor’s 500 funds can replicate index by purchasing stock of companies within it. By investing in the fund, you end up owning small pieces of those companies. If you are interested in building a diverse portfolio, then you can put several funds together in this way.
Individual stocks
If you have your eyes on a specific company, then you can dip your toes into the stock trading water by buying one or more shares of that company. If you do not want to make a major investment, then this should be your choice since investing in many individual stocks requires a significant investment.
The diverse nature of stock mutual funds keeps risk to a bare minimum. However, where there is a lesser risk, there is also lesser gain. It is highly unlikely for mutual funds to have a meteoric rise like some individual stocks have. This is exactly the upside of individual stocks, and the downside is that they are quite risky.
Determining the budget
One of the two questions asked by beginner investors is how much money is needed to get started? Well, the amount of money to be invested depends upon the current price of individual stocks. If you have a high taste with a limited pool of money then investing in fractional shares or pieces of stock might be the best option for you. But what you need to remember is that you said you like mutual funds. Then the best option keeping in mind that you have a small budget is investing in ETFs. Mutual and index funds have a minimum of $1,000 and above while ETF’s trade like a stock. This means that you purchase them at the share price and not on fund minimum. So, the share price can range from $10-$100 or more.
In case you choose to invest through funds, you can invest a fairly large portion of your portfolio towards stock funds and especially so, in case of long time horizon. A 30-year-old can afford to have 80% of his portfolio in stock funds if he is investing for retirement. He should then invest the remainder of the portfolio in bond funds.
When it comes to individual stocks, this is another ball game altogether. If you choose to invest in individual stocks, invest only 10% or less of your portfolio in it. This is because trading in individual stocks involves major risk. It lacks the built-in diversification of fund and is more of hands-on effort. While buying stock, refer to reputed free stock charts for comparison of stock quotes.
Opening an account
To open an account, you can use an online broker for buying stock funds and various other investments while also opening an individual retirement account. If you already have one, then you can also open a taxable brokerage account. While opening an account, choose brokers with low fees and low account minimums. Also, choose one who offers real-time customer assistance. To open an account, some brokers may have a minimum deposit requirement while others may require a minimum balance that will allow you to access certain advanced features or trading platforms.
What do you choose to invest in?
While researching for individual stocks, you need to consider the list of the top 10 stocks for 2017 or top 10 stocks to buy. If you are looking for the cream of the crop, then consider reliable sources which publish lists such as the top 5 stocks to buy or top 5 stocks to buy now. If you intend to invest on a long-term basis, then invest in mutual funds or ETFs. These would typically be five years away. Usually, beginners and long-term investors do not have a preference on which type of securities to trade and look to get exposure to whole markets.
Lastly, every beginner needs to have control over his/her emotions since stock investment is a bumpy ride that has a lot of ups and downs. To master the art and science of investment, be patient and learn with every good or bad experience.
