How to Invest in Stocks

How to Invest in Stocks

The stock market can be intimidating for beginners. Stocks are different from certificates of deposit, money market funds, and saving accounts. Their principal value can either fall or rise. Lack of emotional control or sufficient knowledge may see you lose a lot of money. Why Start Now? If you start earlier, you will gain more. Money grows with time. Here are steps to guide you as you begin the journey. Before you invest in anything, it is always important to assess your financial situation and ensure that you can handle the new activity. Consider the following: Employment: your income and job should offer you some sense of security as you start investing. Debt: do not start investing if you have a huge amount of debt. Pay off some of it or all. Family situation: ensure a stable family situation first—one without a sudden change that requires money. Household budget: include your investment ventures in your budget.

Know the reason for investing and determine whether it is for a long-term or short-term goal. Create a cash reserve—not subject to risk of any kind. It should be equal to three or more months’ worth of living expenses. This reserve will come in handy in case of an emergency. It will also help you stay calm if your risky investments drop. With an emergency fund in place, start by investing in a retirement account. This could be an IRA or a 401(k). Retirement accounts make great investments because they are long-term and tax-sheltered. Start Your Investment Journey with a Low-Cost Online Service – Robo advisor services are perfect for investors who are not into DIY. They build an ideal portfolio for you based on your risk tolerance and needs. With an online stockbroker, you will be doing the trading. This means selling, buying, and researching. Start with ETFs (Exchange Traded Funds) or Mutual Funds – Funds are usually professionally managed so stock selection will not be on you. Your only job is to determine the amount of money you would like to invest in a certain fund/group of funds. Mutual fund investing is hassle-free, but you can make it even better with index funds. There is no chance of you outperforming the market. However, you also cannot underperform it.

This is perfect for new investors. Dollar-cost averaging typically means buying into investment positions gradually as opposed to all at once. If you have a certain amount of money for investing, do not pour it all in. Inject it into the fund gradually. Investing in ETFs and mutual funds is safe—even for novices. But to go beyond that, you must learn as much as possible. Read books, the Wall Street Journal, and even take a course. Invest Gradually in Individual Stocks – Dollar-cost averaging is not available for stock investing. You will need to come up with something of your own. Make sure you diversify, never put all your eggs in one basket. Spread out your capital. If you do not understand stock market basics, information on stock trading will not make sense to you. Some phrases such as intraday highs and earnings movers may not mean anything to you and, for the most part, they should not. Long-term investors, especially, do not have to understand these words or even the stock market in general.

But if you plan on trading stocks, understanding the stock market is a must—or at the very least, know the basics. The stock market consists of exchanges, think Nasdaq and the New York Stock Exchange. Stocks are usually listed on an exchange and it is like a market for the stock shares. Sellers and buyers come together to trade. This exchange tracks the price, demand, and supply of the stock. But a stock market is not like any other market. You cannot decide to go and pick whatever shares you want from the shelf.

Brokers represent individual traders. The Nasdaq and NYSE open at 9:30 a.m. and close at 4:00 p.m. Depending on the broker, after-hours and premarket trading sessions are available. Sometimes you will hear people say that the stock market is up or down. They are talking about one of the key market indexes. A market index monitors the performance of a certain group of stocks. The group of stocks represents a sector of the market (e.g. technology) or the whole market. You may have heard of the Dow Jones Industrial Average, Nasdaq composite and the S&P 500 which are commonly used. These indexes are used by investors to benchmark their portfolio’s performance, and sometimes, they help them make trading decisions. 

Many investors know to create a diversified portfolio and to hold on to their stocks through thick and thin. Those that involve themselves in stock trading, however, love the action. Trading in stocks means selling and buying frequently to try and time the market. Stock traders seek to benefit from short-term events by buying at a low or selling for profit. Day traders are those that trade several times a day while active traders trade several times a month. These types of traders research extensively and follow the market obsessively. Bull Vs. Bear Markets – neither of these animals are friendly but the bear is the real symbol of fear in the stock market. Bear market: stock prices falling 20%+ across multiple indexes. Bear markets come after bull markets and vice versa. They both indicate the beginning of a bigger economic pattern. In short, a bull market is good news while a bear market is not. Historically, bull markets last way longer than the average bear market. Market Crash Vs Correction – stock market correction: when the market falls by 10%+. Stock market crash: a sudden sharp drop in prices. Do not let a crash worry you. Stock markets will always rise in value. Focus less on the short-term and more on the long-term. Bear markers are unavoidable.

But with diversification, your portfolio is protected from market setbacks. If you begin investing as a teenager, you will have a great financial advantage when you are an adult, even with small returns. Do not let today’s uncertainty and bad news about the stock market stop you. Downturns are normal in the market. What Barriers Should You Expect as an Investing Teen? Before you get too excited and start calling stockbrokers, here is something you should know: teens cannot open their own brokerage accounts. You will come across so many investing apps, such as Robinhood, that make the process easier for teenagers. However, even those require you to be 18 years old. There is nothing anyone can do about this because the restriction is required by law. But it does not mean that you are completely locked out.

You can use a custodial account—have an adult in your life open and maintain it for you. With that type of account, you will be investing through your guardian until you are 21 (or 18 in some states). How Do Custodial Accounts Work? A parent opens the custodial account and gifts money into it. The maximum amount they can give is $15000 (as of 2020). You can then use the money in the account to invest. The parent is the one who will be making the actual trade, though. You cannot contact your account broker and management control only belongs to your parents. Do not be discouraged— you can still be part of the process by choosing investments and asset classes. After a thorough assessment, these are some of the best services offering custodial accounts. 

E*TRADE, Ally Invest, and Charles Schwab. Most people choose to invest for the long-term, which is a fantastic idea. You can decide to do that as well and set up a retirement account. Opening one as a teenager means that your money has time to grow. And with compound interest, your funds will keep on accumulating. All you need is an income to contribute to your account. A traditional IRA allows you to contribute a maximum of $5,500 a year as a teenager (as of 2018). These work pretty much like traditional IRAs. The maximum contribution per year is $5,500. The main difference between the two is that Roth contributions are not tax-deductible. You can also withdraw money at any time (after 5 years) and you will not be penalized. Unfortunately, your account is not tax exempt. Your first $1050 income will be tax-free, the next $1050 will be taxed at 10% and anything above $2100 will be taxed at the marginal rate of your parents. What to put in your account? The best thing to do is begin with stocks then dive into low-cost mutual funds. Your parents may say no to a custodial stock account. In that case, see if they will agree to a high-yield savings account.

Online ones are the best and here are some good examples: Capital One, Ally Bank, CIT Bank, Discover, and Navy Federal Credit Union. Hopefully, you already have a checking account. Connect it with a micro savings app. You will be saving and investing anytime you make a purchase. Investing in small-cap stocks can be a smart move for the long-term investor. To optimize their returns, the investor must know when to buy them. Some people are wise and avoid market timing. However, there are tactical and strategic moves they can make to change the fund allocation in small-cap stocks when the opportunity presents itself. There are investors that select an appropriate mutual fund allocation for small-cap stocks and stick to it for the entire period. Occasionally, they rebalance the portfolio; quarterly or annually. Nonetheless, active investors can, in smart ways, alter the exposure of small-cap stock funds for the purpose of improving performance in the long-term. In rising rate environments, small-cap stocks in the U.S have outperformed the large-cap stocks—according to history. These rising rates are observed when the Federal Reserve is no longer reducing interest rates to facilitate the economy or when an economy is starting to recover.

Another time when you should consider buying small-cap stocks is when the market appears to have been down for quite some time. That is, when the market is at a low point and not much optimism left for quite some time. It will not be easy to guess this one correctly but when there is extreme pessimism you can easily feel it and see it on the international and local media. In a growing economy, smaller companies have the potential to rebound faster than the larger ones. Their general fate is not directly tied to economic factors such as interest rates to facilitate their growth. Small companies are like small boats in the water, they can navigate better and move faster than the huge ocean liners. With smaller companies, decisions on new services and products are also implemented faster because their potential obstructions, layers of management, and committees are fewer. Large companies do not have this advantage. When the economy is emerging from recession and experiencing growth, small-cap stocks can respond quicker to this new positive environment and even grow at a faster rate than the large-cap stocks.

Small companies usually raise their capital by selling shares. Large companies, on the other hand, do so by issuing bonds. Because small companies are not really that dependent on bonds when funding projects and expanding operations, high interest rates do not negatively affect their ability to grow. In the years following the 2003 and 2009 recessions, results were mixed. In 2003, small-cap stocks led mid-cap stocks and large-cap stocks. In 2009, the results were different as mid-cap stocks led and small-cap stocks barely won over large-cap stocks. Your takeaway here should be that averages or rules of thumb do not apply all the time. Even after reading about the benefits of small-cap stocks, consider where the information has been sourced from research further on this subject. Investment apps help you manage your investments in the financial market. Most of them offer amazing services at affordable fees, which saves investors a lot of money in the long run. Now you do not have to call your stockbroker to trade. You can do it with a few taps on the screen. All things considered, here are the best investments apps in 2020. Many investors in the U.S are familiar with TD Ameritrade—a large brokerage firm. Its app is the best compared to all others because it has a wide range of options and is great for beginners and pros alike. The default app is ideal for intermediate and beginner traders. The professional level one is more suited for experts. 

The benefits you will enjoy including commission-free ETF and stock trades and zero-base fee option trades. Key Features – Name of apps: TD Ameritrade Mobile and thinkorswim. No minimum deposit. Investments types: bonds, mutual funds, ETFs, options, stocks and much more. Account types: different account types including education, retirement and standard. Pros – For experts and beginners. Advanced trading platforms have no extra fees. Cons – Schwab is acquiring TD Ameritrade. Fidelity: Runner-Up – This one offers extensive resources for investors with long-term goals. The mobile app can be used with Google Assistant and Apple Watch. Key Features – Name of app: Fidelity Investments. No minimum deposit. Investment types: fractional share investing, mutual funds, ETFs, stocks, etc. Account types: education accounts, retirement, brokerage, etc. Pros – Fractional share investing. Lots of mobile app features. Most account types are supported. Cons – Phone trades are charged a $12.95 fee. Ally: Suitable for Beginners. The platform is easy to use, and they do not have a minimum required balance. Key Features – Name of app: Ally.

No minimum deposit. Investment types: mutual funds, bonds, options, ETFs, stocks, etc. Account types: self-directed and managed portfolios. No physical location. Pros – Investing and banking in one app. Forex trading app. Cons – Limited features on mobile app. Webull: Best Free. This one is relatively new, but its mobile app is nothing short of impressive. Key Features – Name of app: Webull: Stocks, Options & ETFs. No minimum deposit. Investment types: cryptocurrencies, options, ETFs, and stocks. Account types: IRA and brokerage accounts. Pros – Community area. Paper trading. Advanced charting features. Cons – Additional subscription for real-time data streams. Limited investment types. Acorns: Ideal for Automated Investment. Acorns is fun to use but its fees are a bit high. Key Features – Name of app: Acorns: Invest Spare Change. No minimum deposit. Investment types: bond ETF and stock fractional share investing. Account types: checking accounts, retirement, robo-advisor brokerage. Pros – Simple, automated micro-investing. Gamified app experience

Cons – Monthly fee for all accounts. SoFi: Ideal for Learning. If you want to start small and have access to investment education, try SoFi. Key Features – Name of app: SoFi Invest Money & Buy Crypto. $1 minimum deposit. Investment types: cryptocurrencies, ETFs, and stocks. Account types: cryptocurrency, retirement, and self-directed and managed portfolios. Pros – Fractional share investing. Member events. Cons – Lack of advanced research tools. Limited investment assets.