The stock market is not as complicated as it sounds. Read on and learn how to invest in stocks.
How to Invest in Stocks in 9 Easy Steps
Step 1: Get Rid of Debt
Before you begin investing in stocks, the first thing you should do is get rid of as much debt as possible.
The long-term average return from stocks is about 7% per year. Credit card interest continues to rise and can cost over 20% per year.
Therefore, in a typical year, you will usually spend more money to pay for interest on high credit card debt than you will earn from stock investing.
Learning how to invest in stocks also means learning how to handle your finances better.
Perhaps the biggest investment you can make is to get rid of all that high-interest debt. Afterward, invest only extra cash that you can afford to lose.
Step 2: Build an Emergency Fund
The second step in learning how to invest in stocks is building an emergency fund.
An emergency fund protects you from financial catastrophes, such as unexpected emergencies or sudden unemployment. It acts as a safety net against urgent situations that can potentially wipe out all your assets.
Begin by making sure that you have adequate insurance policies that cover life, health, property, and vehicles.
Later on, build a fund that is worth 3-6 months of your monthly expenses. In case of an emergency, this should be enough to cover your usual expenses for the next few months.
Invest the money inside an instrument that you can easily convert into cash. A high-interest savings or a money market fund should retain your money’s value while keeping it readily available for you.
Step 3: Know Your Tolerance for Risk
Generally, one of the first principles of investing is that a higher risk on your investments means more potential for higher returns.
Investments that are more complex may fluctuate more often. Not everyone feels comfortable with the many ups and downs that the stock market experiences.
If you are able to tolerate complexities such as these, then choose aggressive investments that will result in more profit. However, if you are leaning toward a more conservative attitude, then choose investments that will preserve the value of your capital.
Step 4: Determine Your Goal for Investing
The next step in knowing how to invest in stocks is to ask yourself why you are doing it. Whether you are investing to grow capital or simply to preserve it, it is important to decide before you begin.
Take into consideration your age and the time you have before you need the money.
Typically, those planning for upcoming retirement or those with short-term needs should invest in more conservative instruments. The goal of these investors should be to keep their money safe without it losing any value.
Those who have a long way to go before retirement, in general, may want to consider aiming for capital growth. Investing in more complex instruments means that they have even more potential to earn over a long investment horizon.
If you are somewhere in the middle, then you may want to consider diversifying your portfolio and mitigating complexities. Perhaps you can invest part of your extra money in long-term investments and part of it in short-term ones.
This should allow you to continuously earn capital while still having money that does not lose its value in case you need it.
Step 5: Read about Stocks
Knowing how to invest in stocks also means learning about stocks and the stock market.
You can choose to buy stocks through mutual funds or exchange-traded funds (ETFs). These types of investing allow you to buy pieces of different stocks, based on your risk profile, in one transaction.
Meanwhile, you can also choose to invest through individual stock-buying. This allows you to buy shares of a specific company that you think will suit your needs.
Make sure to invest only in companies you know. Read up on them to understand what their plans are.
Because it is inherently diversified, investing in mutual funds will usually provide more stability.
Buying individual stocks is a more tedious process that also needs a greater investment. However, with enough research and analysis, this can pay off more handsomely than investing in mutual funds.
Step 6: Choose How You Want to Invest
Some people like to have a more hands-on approach toward investing. Others prefer to have someone else manage it for them.
Hands-on investors are those who want to choose the stocks they invest in themselves. They do their own research and choose where to put their money.
Though it may be more tedious, having a more active role in investing your money can result in a bigger payoff.
On the other hand, some people know the value of investing but do not have the time or the patience to do it themselves. These people can easily use a robo-advisor, a low-cost investment management service that major brokerage firms offer today.
Using a robo-advisor gives you the benefits of stock investing minus the legwork.
These services usually ask you about your goals for investing as well as your risk appetite when signing up. From here, they build a portfolio that is aimed towards achieving those goals.
Step 7: Open an Account
Once you have chosen your investing style, it is time to open an investment account.
If you have decided to play a more active role in choosing your investments, then open a brokerage account. Evaluate brokers based on factors such as costs, investment selection, and perhaps most importantly, investor research and tools.
Meanwhile, if you have decided that you prefer someone to manage it for you, then opening an investment account through a robo-advisor is most ideal. It might cost a bit more than investing on your own, but it saves you a lot of time on research and analysis.
Step 8: Learn the Value of Mixing Your Investments
Knowing how to manage investments goes hand-in-hand with knowing how to invest in stocks. As the old saying goes, “Do not put all your eggs in one basket.”
Diversifying your investments around and away from a single asset class should help you mitigate risk. Maintain a good balance in your investments by allocating your capital in different stocks in different industries.
Step 9: Rebalance Your Portfolio Occasionally
Whether you have chosen to invest through mutual funds or to buy individual stocks, it is best to learn the value of rebalancing your portfolio.
As you near retirement, it may be better to sell some of your riskier investments and transfer them to more conservative ones.
Shift your portfolio every now and then so that it remains aligned with your goals today. Review and adjust so that you can continue growing your capital and preserving it at the same time.
Don’t forget to download, save, or share this handy infographic for reference:
Learning how to invest in stocks can be a great asset for anyone to have today. While it may sound intimidating at first, it is a worthwhile activity to study.
Whether you have long-term or short-term goals, stock market investing is never a bad option for managing your finances. Hopefully, this step-by-step guide was able to help you.
Do you have other questions about investing in the stock market? Ask us in the comments section below!