These FAQs on investing in stocks for beginners are essential to help any beginner plan their financial goals and make sound decisions.
In this article:
- What Are Stocks?
- What Is a Stock Market?
- When Do Stock Prices Go Up or Down?
- How Can You Predict the Stock Market?
- When Is the Right Time to Buy and Sell Stocks?
- What Investing Strategy Should You Use When Investing in Stocks?
- How Much Money Do You Need Before You Start to Buy Stocks?
- What Is Expense Ratio?
- How Do You Open an Account?
How to Start Investing in Stocks for Beginners | Frequently Asked Questions
What Are Stocks?
To know how investing in stocks works, let’s begin by reviewing the definition. Stocks are a type of investment that deals with equity.
It is a representation of the investor’s part ownership of a company. With shares, you can have a part of the assets and earnings of the business—shareholders’ equity, so to speak.
You can have a diversified portfolio with stocks since they come in different types:
1. Common Stock
The most common type of stock, it entitles you voting rights according to the number of shares you own. It can have a higher return than bonds.
On the downside, you are the least priority in case the business shuts down and its assets are liquidated.
2. Preferred Stock
It is a stock that doesn’t grant you voting rights. However, the company guarantees to pay dividends as long as you hold the shares.
You will also be a priority over people who invest in common stock during liquidation.
3. Growth Stocks
It is a stock that has the potential to grow faster than the average in the market. Some investors consider this as part of their investment strategy since it can provide significant gains.
You may also consider investing in stocks that are less well-known. These include marijuana stocks, precious metals, and real estate.
What Is a Stock Market?
It is a place where stock trading occurs or where buying and selling of shares from different companies happen. The stock exchange facilitates transactions.
The market is a continually fluctuating system. There is an ebb and flow of returns.
One investor may lose, but another can gain from it. A stock investing strategy can help mitigate possible losses or maximize the returns.
When Do Stock Prices Go Up or Down?
Many factors affect the rise and fall of stock prices. Some of these are natural disasters, social and political unrest, supply and demand, the media, and even opinions of famous investors.
These factors increase the unpredictability of stocks, but you can perform analyses to help you make a sound decision. Two of the most common are technical and fundamental.
In stock trading, technical analysis involves assessing metrics or statistical trends. For example, you may look into the balance sheet, market capitalization, or income statement of the company.
The fundamental analysis is more comprehensive. It looks into the internal and external factors that can affect or change the movements of the shares in the market.
How Can You Predict the Stock Market?
Investing in stocks can be challenging since you can’t predict the future of the market. In fact, it can change in a matter of minutes!
Some stock investors try to wait for the perfect time to pitch in their cash. They may even wait out some pretty dismal returns in the hopes of their individual stocks turning around.
Some people invest in stocks to see if the yields are low so they can cash out before losing even more. It might help to learn how stock valuation works and how the market’s activity affects the price of stocks.
When Is the Right Time to Buy and Sell Stocks?
The right time to start investing in stocks depends on many factors. The first factor is your financial situation: do you have extra money you can spend?
Second is your goal. Are you interested in long-term investing?
Any time is good since your time horizon is still many years from now. You can give the stock market enough time to grow or rebound if it slows down.
You can also trade according to the stock’s valuation. Before you buy and sell shares, an investor needs to make a comparison between the actual prices and the fair value of the stocks.
If, for example, the trading price of a stock is $50 for each share, but they assess the fair value at $55, an investor would want to buy. If the trading is $50, but its fair value is $45, it’s best not to purchase it.
You can use many methods in calculating the stock’s fair value. The results often vary, on average.
It’s difficult to say if a particular commodity is reasonably valued, undervalued, or overvalued. It will still depend on the investor’s assessment of when the best time to invest may be.
What Investing Strategy Should You Use When Investing in Stocks?
When investing in stocks, you may choose among four methods.
- One is managing your stock investments on your own.
- The second is allowing someone to maintain them for you in the form of robo advisors.
- The third is through direct investing.
- The final option is investing through a traditional advisor.
Investing Stocks On Your Own Through a Brokerage Account
For the first option, you can choose a brokerage, some of which are online.
For robo advisors, some of them offer to manage your stock investments at a low cost.
This method may assist you in aligning your investments with your financial goals. You can buy stocks even when you don’t have a lot of money.
You can also learn how to buy stocks with direct investing. In this setup, you purchase the shares directly from the company.
If you prefer being more hands-off with your investment, you can also choose to go with a traditional advisor. These financial advisors charge a fee for their expertise in picking investments. This fee comes in the form of a small percentage (usually 1% for investments less than $1 million) that will be deducted from the total investment per year.
How Much Money Do You Need to Allot Before You Start Stock Investing?
It depends on whether the shares you plan to invest in are expensive or not. The stock prices can range from a couple of dollars to six digits.
You can, therefore, begin investing in stocks with only a small amount of money. So much of this is dependent on your financial fluidity, your interests, and your fluctuation tolerance.
There is no “right” amount of money to put toward your stock investment. Be smart with your money, though.
A good rule of thumb is not to overexert yourself financially in the hopes of a big return. For some, there’s a fine line between investing in stocks and gambling.
Also, don’t invest your emergency fund. You need this to be as liquid as possible.
What Is Expense Ratio?
Investing in stocks, especially under a mutual fund, isn’t free. It comes with costs including the following:
- Purchase fee
- Redemption fee
- Management fee
- Account fee
To know how much of your asset funds go toward these expenses, you can use the expense ratio. It is the equivalent of the total expenses divided by the average fund asset value.
Sales commissions and sales loads are not part of calculating the expense ratio. It also doesn’t include the costs of running the account daily.
There’s no magic number for this one. It can be as low as less than a percent to as high as over 10%.
Almost always, the more human intervention is necessary, the higher the expense ratio is.
Either way, investors can then use it to evaluate whether it’s best to buy stocks through mutual funds or get individual stocks. They can also decide whether to go through a brokerage or opt for direct investing.
How Do You Open an Account?
Mutual funds are available in retirement plans such as a 401(k). You can start investing in stocks through that.
You can also try an online broker if you want to purchase shares, other investments, or funds. These can include a target-date fund.
What is a target-date fund? It is a type of fund you need to cash out on a certain date.
Another alternative is opening IRAs (individual retirement accounts), which offer tax benefits for investors. Another option is a brokerage account, which is taxable.
When it comes to investing in stocks, conducting due diligence is essential. Once you have learned all the fundamentals for stock investing, you can expand your research to include more complex concepts.
It may also help to consult with a mentor or a financial advisor who has been in the industry longer.
If you wish to invest in stocks using precious metals through IRA, companies such as BirchGold can help you. They have experts who can provide guidance to help you make wiser decisions.
Do you have other questions you might want to add about investing in stocks? Don’t hesitate to share them in the comments section below.
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Editor’s Note: This post was originally published on April 10, 2018, and has been updated for quality and relevancy.