How do I start investing?
Good investing is an effective way of building wealth. These days, you don’t need to have huge sums to your name to make money. But before you make your move, it’s important to know the ins and outs surrounding how to start investing in stocks.
Of course, it makes sense that beginners should learn about investing before putting their hard-earned cash into stocks.
But even if you’ve already dipped your toe into the stock market, it can help to understand the fundamentals.
Knowing what type of investor you are will go a long way in helping you comfortably navigate your first steps.
The basics of investing in stocks
Generally, investing in stocks is a long-term financial strategy.
When doing so, you’re buying shares of ownership in a public company — known as the company’s stock — and by investing in it, you’re banking on the company growing and performing well over time.
If this happens, then your shares grow in value, and you may be able to sell them to others for more than you purchased them, thus generating profit.
Before plunging into the stocks though, there are some things you’ll need to establish about your own position.
Along with working out how much money you can afford to invest, you’ll also need to establish what sort of investor you are — or how much appetite for risk you have — and then plan your investments accordingly.
Investing within your means
Stocks are not a way to make a quick buck. They often require time and patience, and so you shouldn’t be investing money that you may need back within a minimum of five years.
Alongside the general volatility that stock prices can bring, external factors like the COVID-19 pandemic or the Russia-Ukraine conflict mean there is too much uncertainty to safely navigate investing in stocks as a short-term investment.
According to The Motley Fool, a stock price drop of 20 per cent in any given year isn’t unusual, while the COVID-19 pandemic caused the market to plunge by more than 40 per cent, only to rebound to an all-time high just months later.
You should by no means bank on stock investment to dig you out of a financial hole.
Investing within your means is key, and you should not be investing things like your emergency fund, money saved for a child’s tuition payment, your house down payment, or next year’s vacation fund.
When investing, it’s useful to consider the sensible proverb:
“Never invest money that you can't afford to lose.”
What kind of investor are you?
There are two things to consider when unpacking the sort of investor that you want to be: your tolerance for risk, and how active you want to be in managing your investments, or your investing style.
In investing, risk is the potential for your investments to lose value, while risk tolerance is your willingness to take that risk.
The categorization of stocks, from large capitalization stocks to small cap stocks, and aggressive growth stocks to value stocks, is undertaken since all stock investments have varying levels of risk.
Establishing just how much risk you are willing to stomach is important in defining where you should invest your capital.
The hand you want in managing your investments is something to decide upon before you get started.
While you may want to be active in the decision-making, you may instead prefer to set it and forget it.
This can naturally change with time, but if you’re looking to invest in stocks as a beginner, there are options at your disposal.
A financial advisor like Unbiased can offer you support in your investment decisions and can also help you better understand where your money is going.
Alternatively, technological advancements surrounding investing mean that automated, algorithmic advisors can automatically invest for you, basing the decisions on details like your goals and risk tolerance level.
What are your investment goals?
The earlier you can start investing, the more time you have to build on your wealth.
But everyone has different investment goals, from a retirement fund to a house purchase. When you open a brokerage account, you’ll be asked about what it is that you want to achieve from your investments.
Goals can change over time, but if you know what you’re setting out to achieve with your investments, then you’ll have a better chance of making the right choices.
Whether you’re protecting your wealth or saving for a big purchase, consistently review your goals to you remain on the right track.
The earlier you can start investing, the more time you have to build on your wealth
Taking that first step
When you feel like you know what sort of investor you want to be, you can decide on the type of account you’d like to open.
Opening an account can take minutes, and can easily be funded via EFT transfer, wiring money or even mailing a check.
If you’re at the stage where you’re still learning how to start investing in stocks, you’ll likely be choosing between a standard brokerage account and an individual retirement account (IRA).
If you’re investing to make profit to reinvest, and want easy access to your money, then a standard brokerage account is probably the way to go.
However, if instead you’re looking to build on your wealth as a retiree, then an IRA is likely the best option for you.
It can pay to shop around for the right account, since financial institutions will vary in their minimum deposit requirements – and some won’t require any at all.
So, even if you’re interested in how to invest in stocks for beginners with little money, there are still opportunities available to you.
Alternatively, if you are happy to be more passive and let your investments sit over time, you can opt for a robo-advisor account in which you’ll simply key in your investment style and risk appetite, along with some other important details.
Building your portfolio
One thing you’re likely to hear a lot about once you begin investing is ensuring you have a diverse portfolio.
A portfolio is simply your collection of financial investments, and it often helps to invest in complementary assets, so that if one part of your portfolio declines, other sections rising may consequently offset any losses.
Fundamentally, diversification is about avoiding putting all of your eggs in one basket.
If you are building up your portfolio as a beginner, it can be useful to only invest in businesses that you understand.
Even a minor grasp of how a company or stock is performing can be helpful when dealing with your investments, particularly if you are opting to have a hand in how they are managed.
That said, checking stock prices each day will do little good unless you’re trying to beat the odds.
Remember: when investing, you’re playing the long game.
Making sure that you’re well equipped to start your investment journey is key to success.
Kate has written for leading publications and blue chip companies over the last 20 years.