Last Updated on December 6, 2019
With consistency, a well-researched strategy and proper risk management, investing in stocks is one of the most popular ways to build long-term wealth and security.
Stocks, simply put, are equity investments that let you attain partial ownership in a business or corporation and procure a percentage of the corporation’s assets and earnings.
In simple terms, investing involves the purchase of assets with a fixed amount of funds with the aim of getting profit on it at a later date. However, the future is unpredictable and one must take extra caution as well as plan wisely when making investments so as to avoid having a financial crisis at any point in time.
Like any kind of investment, there is risk involved, but the potential rewards can be huge, so with that said how can you start the journey of investing in stocks?
How to Invest in Stocks
Investing in stocks is an easy process to start with, all that is needed is an investment account, usually, a brokerage account, if you want to be actively involved in the investments or an account, opened through a Robo-Advisor.
- Opening a Brokerage Account:
You can open an online brokerage account through which you can easily get on the path to buying stocks and other forms of investments. If you have very little knowledge of how to start and get involved with the process, turning to financial experts is a good solution to take to get started.
A financial advisor or broker could be hired to initiate the trade, whilst you give an idea of what you want to invest in and the funds to secure the assets. Both financial advisors and brokers are concerned with the insightful management of a client’s investments. The key difference between both of them is that a financial advisor holds a ‘fiduciary’ responsibility to always place the client’s interest above all else.
This is not the same with a stockbroker who only needs to proffer the appropriate advice when handling the client’s resources. The fee structure of financial advisors is set at a fixed amount or certain percentage of the total Assets Under Management (AUM) while brokers charge fees based on commissions on trades for the clients.
You might also decide to open an Individual Retirement Account (IRA), which is an account, with a broker. The account can be used to invest and trade in stocks, as well as some other investment options and, is set up by a financial institution. You can hire make all your investment decisions with an IRA or hire a financial professional to handle the management.
- Opening an Account With a Robo-Advisor:
The option of the financial advisor or broker can be forgone for that of a Robo-Advisor which is an online software solution that automatically helps with the selection and management of a diversified portfolio for an individual interested in investing. Robo-Advisors charge a reasonable service fee which may be based on either a fixed amount or a certain percentage of the assets procured.
How Much Money Should You Invest In Stock?
Beginner investors usually have two questions when starting the investment process.
- How much money should I set on investing in stocks?
When making an investment, the focus should be placed on strategic risk management and setting a budget on the funds being invested. You can take a precautionary step by never investing money you can’t live without because an investment could go either way, profit or loss.
It’s wise to always have an emergency reserve of funds that can help cushion again financial disruption. Proper analysis of your income flow should be made to identify sources of funds for your investment plan.
- How much capital is needed to start investing in stocks?
Technically speaking, there is no minimum limit to get started with investing in stocks but enough funds must be available to procure at least a single share of stock. The amount you can decide to invest should be capital you’re comfortable with letting go of.
- Diversifying your portfolio:
Properly diversifying your portfolio of stocks will help manage and minimize the risk of loss. If one investment doesn’t perform well over a certain period, you can still rely on others having better performance over the same period of time.
Diversifying your portfolio is simply a strategic investment approach that entails allocating your funds into various investment areas, which react differently to the same market or economic event, to help protect against the volatility and unpredictability of the markets.
Investing in mutual funds is a prime example of diversifying your portfolio because a mutual fund is an investment that allows you to purchase shares in a collection of stocks, bonds, or other various securities. This portfolio is usually overseen by a manager who helps make investment decisions through detailed analysis and research.
Good Stocks to Invest in For Beginners
There are multiple options of securities to consider, all of which come with their own amount of risk and none of them guaranteeing success or profit. However, with the proper strategy, there are a few options that are much safer relative to others.
You can choose such stocks to minimize risk whilst providing you with the profit and objective you wish to achieve. An option of such includes blue chips which are top, recognized and well-established stocks with records of long-term growth and financial stability.
- Blue Chips
These strongly-performing stocks are shares in the world’s top companies who have held the position for a considerable amount of time. Blue chips are favored because of their high performance and the fact that they produce consistent returns and dividends.
Examples of blue chips include PepsiCo (PEP), Merck Inc. (MRK), Zoetis Inc. (ZTS) and several other top-performing companies. You can build your investment portfolio with conservative and relatively safe stocks such as these to lower your risk and possibly attain a positive experience when investing.
Are Stocks a Good Investment for Beginners?
The fact is that stocks is a good investment option for beginners to take hold of and gain the right investment experience as long as you’re comfortable parting with your money for a long period of time. Comprehensive research and caution should, however, be taken to make the experience one that is positive and favorable.
Therefore, instead of trading individual stocks, you can minimize your risk and focus on stock mutual funds where you can diversify your selection of stocks with a single fund. You can build a diversified portfolio out of individual stocks but taking this approach isn’t time-efficient and prior knowledge about what it entails is required to make it work.
Best Stock Market Investments
The best approach to take when it comes to this is to invest in low-cost mutual funds, for instance, Exchange Traded Funds (ETFs) and index funds. By procuring stocks in this type of funds, you get to own shares in the stock market in a single transaction, instead of buying individual stocks, since they both represent ‘baskets’ or collections of individual stocks or bonds.
ETFs and Index funds both come with the diversification of stocks because you have access to hundreds or possibly thousands of individual stocks contained in a single fund. Examples of such include SPDR S&P 500 (SPY), iShares Core Total Bond Market Index ETF (AGG), the Dow Jones Industrial Average and several other funds that track their benchmark’s performance.
Investing in individual stocks instead of trading funds often yield underperformance in the markets over a long period of time.
Always make sure you are aware of the trading rules too, as being ignorant may cost you time and money.