How to start investing in stocks – beginner’s guide
You are new to the stock market . If you are wondering how to start investing in stocks, you have come to the right place. The federal reserve’s consumer financial survey shows that only 14% of US adults invest in individual stocks in the stock market. The majority of Americans invest in the stock market only through their 401(k) programs. For many, the stock market is a mysterious enigma. Everyone has heard horror stories of market crashes and people losing money in the stock market.
While it is fear that keeps some away from the stock market, it is a lack of guidance that holds others back. In this article we show you how easy it is for you to invest in the stock market. The article also illustrates strategies that you can use to compound your wealth. While there are a number of ways to become rich such as through real estate, the stock market remains one of the best ways to build a fortune. After all, research has shown that the top 10% of the wealthiest Americans invest in the stock market. There is no reason for you not to. Now let’s get right into it.
Why do people invest in the stock market?
If you observe the stock market on a daily weekly or even monthly basis, you will find that the stock market keeps going up and down. However if you look at the stock market over a period of the last 100 years, despite several crashes the market has always gone up. If you had invested $1000 in Amazon ten years ago you would now have $18,000. The S&P 500 index has returned an average of 10% over the last 50 years.
If you have spare cash you have an option of letting it sit in your bank account earning close to 0%. Or you can invest that money in the stock market and gain at least 10% on an annual basis. Note that the stock market is volatile. Hence, you should never invest money that you would need in the next five years. Also you should have an emergency fund in your bank account. You never know when you would need cash for emergencies. Please remember never to invest your emergency fund in the stock market.
The brokerage account: your first step on how to start investing in stocks
If you are wondering how to start investing in stocks, the first step is to open a brokerage account. There are many companies which offer brokerage accounts. Some of them are Robinhood, Webull, Fidelity, Merrill Lynch, Etrade and Charles Schwab. A few years ago every time you bought or sold stocks you needed to pay a trading fee. Today most brokerage accounts allow you to trade for free. Apps such as Square’s Cash App allow you to buy and sell stocks in the same app that you use for sending and receiving money from your friends.
When selecting a brokerage account there are a few things you need to keep in mind. Some brokerage accounts allow you to trade in fractional shares and this is very beneficial because of the following reason. One share of Tesla cost around $800 today. If you have only five dollars to buy stocks you can buy a fraction of Tesla‘s share for that amount. Without fractional shares, you would need to come up with $800 to buy one full share of tesla. Another consideration when selecting a brokerage account is ease of use. When it comes to ease-of-use my favorite apps are Robinhood and Square’s Cash App.
Once you have selected a brokerage account and have signed up you would need to fund your brokerage account. You can do this easily by linking your bank account with the brokerage account. If you are using an app like Robinhood they will allow you to transfer and use up to $1000 immediately from your bank account even while the money transfer is in progress.
The next step on how to start investing in stocks: deciding what stocks to buy
Once your brokerage account is funded, here is the next step on how to start investing in stocks. Before buying any stock you have to do your due diligence and research. What I like to do is to look at the current trends in the world. For example today there are a lot of innovations that are happening in artificial intelligence, 5G, self driving cars, e-commerce, electric vehicles, genetic engineering 3-D printing, robotics and space. I then do research to find out which companies are the leading innovators in these spaces.
There are some reputable stock picking services such as Motley fool which give you tips on which stocks to buy. You may want to consider subscribing to one of these services. If you do not want to buy individual stocks, you can choose to invest in index funds such as the S&P 500. The S&P 500 includes the largest 500 companies in the United States. As mentioned earlier, the S&P 500 has consistently returned 10% year over year over the last 50 years.
When to buy stocks?
Once you have decided what stocks to buy, you maybe wondering how to find the best time to start investing in stocks. There is a saying that goes like this: “time in the stock market matters more than timing the stock market”. The stock market is very volatile. On any given day, week or month the stock market keeps going up and down. It is very hard for anyone to predict the stock market over the short term. In an ideal situation, you would want to buy a stock when the price is low and sell when the price is high. In reality, it is very hard to predict the price of a stock. No one knows when it is going to be low and when it is going to be high.
The legendary investor Warren Buffett once said “be greedy when others are fearful and be fearful when others are greedy”. When you researched and identified the right companies to invest in, you can start monitoring the stock market. When you notice everyone selling in panic, it may be a good opportunity for you to buy those great companies at a discount.
Dollar cost averaging is another excellent strategy to invest in the stock market. This is how it works. If you are using an app such as Robinhood you could set up investments to happen at regular intervals for fixed sums of money. For example you could invest five dollars every week in the S&P 500. This strategy will allow you to take advantage of the ups and downs of the stock market. This method will make sure that you do not spend all of your money buying a stock when it is at its peak.
When to sell stocks
Knowing when to sell stocks is an important part of learning how to start investing in stocks. There are people like day traders, who buy and sell stocks every day. However, the people who make the most money in the stock market are the ones who invest for the long-term. So in an ideal world once you have selected great companies you would buy the stock and let it ride for the next 5 to 10 years. The only time when you would sell a stock is if something material changes with the company.
For example, if there is a new technology that makes the company’s business model obsolete, then you do not want to hold on to that company’s stock. It would be time to sell the stock. If there is a management change and if the new management is making some bad decisions, you might want to consider selling the stock. Another reason you may want to sell your stock is to balance your portfolio. If you have a large percentage of your portfolio invested in a single stock, you may want to consider selling some of that stock to buy other stocks to diversify your portfolio.
How to minimize your taxes
Anytime you sell an asset that has appreciated be it stocks or real estate, you would need to pay Uncle Sam a sizable chunk of money. However there are ways in which you can minimize your tax obligations. Taxes that you pay on appreciated assets can be categorized as short term capital gains tax and long-term capital gains tax. If you hold stocks for less than a year before selling, then you incur short term capital gains tax. On the other hand, if you hold stocks for more than a year then you have to pay the long term capital gains tax. The long-term capital gains tax is usually lower than the short term capital gains tax.
If you do not want to pay any taxes when you sell stocks, then you might want to consider opening an IRA account. The US government allows you to invest a few thousand dollars every year in your IRA account. An IRA account is a retirement account. This means that you cannot withdraw the money from this account until you reach retirement age. You need to keep this in mind. The advantage of an IRA account is that if you sell a stock in an IRA account you do not need to pay any taxes.
I hope this article was helpful. Investing in the stock market can be a rewarding experience. This article contains my personal opinions and should not be considered financial advice. Please remember to do your own diligence and seek guidance from your personal financial advisor before investing.
