Investing in the stock market can seem like a black box, but when you break it down step by step, you’ll see it’s not as difficult as it appears.
The basics to having a strong portfolio are thorough research, defined goals, a solid strategy, and a reliable investment platform that will support you every step of the way – especially if you’re a DIYer.
But before we dive into finding stocks to invest in and getting started with investing, you need to assess your current situation to see if investing in stocks is a smart financial move.
Follow along as we dive more into everything beginners need to know about how to invest in stocks below.
How to know if you’re ready to invest in the stock market
Before you start investing, make sure you’re ready to take this leap with your finances. Here are some indicators that you are:
You’ve done your research
- Stocks represent ownership (shares) in a company. As an owner (shareholder), you have voting rights as well as earning potential (through dividends and capital gains).
- When you invest in stocks, you take on some risk. This is why it’s recommended to invest only with disposable income.
- Stocks are not a short-term investment strategy. Do your due diligence! Research the securities you want to invest in and ensure they are in line with your goals.
- You don’t need a lot of money to begin. You can start investing in stocks with small amounts of money and do what’s called fractional trading. (We’ll discuss this more later.)
Rest assured that investing in stocks isn’t as complex as it seems. That is, as long as you use the tools and knowledge available to you to support you on your investment journey.
You have long-term financial goals
As we briefly mentioned before, investing in stocks is not some get-rich-quick scheme, nor is the money you’ll make from it to be used for short-term goals. (For instance, don’t expect earnings from your stocks to pay for a down payment on a new car within six months.)
In general, a sound investment strategy develops over time. And having long-term financial goals will help you determine if it makes sense to invest as a means to save for those goals.
You have your finances under control
As we also alluded to earlier, make sure your finances are organized before you invest in stocks. The two financial responsibilities we want to touch on in this section are high-interest debts and emergency funds.
For starters, make sure you pay off any high-interest debt (e.g. credit cards) before you invest in stocks. Investing the money that would be allotted to that debt only makes sense if you can earn more on your investments than your debts are accruing in interest. However, paying off high-interest debt is likely to provide a better return on your money.
As for the emergency fund, a solid six months’ worth of expenses is the standard advice. Depending on if you’re paying off debt and have a secure job, you may need to portion more or less. But what’s important is you have one to fall back on in case of emergencies.
How to find stocks to invest in
Here are some best practices new investors need to adopt when choosing stocks to invest in.
Determine your financial goals and purpose of your portfolio
Before diving in headfirst, you need to first understand why you want to start investing in the first place.
To figure out your investing goals, ask yourself the following questions:
- Are you planning on short- or long-term investments?
- How much disposable income are you able to invest?
- Are you saving for other big purchases?
- Are you trying to build up a solid portfolio for retirement?
- At what age do you want to retire?
- What’s your risk tolerance? (a.k.a. how much risk you’re willing to take on)
With answers to these questions, you’ll be able to set goals to create an investment strategy tailored toward your current circumstances and future ambitions.
Research and find companies with potential
Once you have your goals set, the next step is to research which companies you’ll invest your money in. (In other words, where you’ll buy shares – a.k.a. ownership.)
When figuring out where to invest, take into account the following considerations:
- How a company measures up to competitors. When you compare a company to its competitors, you’ll receive insights into its growth potential. How does the company compare to competitors? What’s its market share? Does it have a strong competitive advantage?
- A company’s long-term stability. The stock market has ups and downs, year in and year out. That’s why long-term stability matters more than daily volatility. It’s a strong indicator that the company is still earning revenue, maintaining reasonable debt levels, and is doing well overall.
- The effectiveness of company leadership. Don’t underestimate the quality of strong leadership. Having effective leaders who have been around for a while can signal a company that has a balanced and stable culture. If they have strong expertise, that’s a good indicator that they also bring value to the company. Listen to quarterly earning calls or transcripts of other speeches to get a feel for their character.
- How dividends are handled. If a company pays dividends, that’s often a sign of financial strength and stability. This is especially true if the company increases yearly payouts. However, be aware that sudden spikes can indicate desperation or lack of self-investment. And lack of dividends can mean they’ve pulled funds to make it through challenging times.
Getting started with stock investing
From judging your risk tolerance to choosing an investment platform, getting started with stock investing is easier once you have the fundamentals down.
Determine your investment style and risk tolerance
Ask yourself the following questions so that you can you find a suitable investing style to match your needs:
- Are you a risk taker, or more risk averse?
- Are you looking for long-term growth or quick gains?
- Will you handle your own portfolio, hire an advisor, or invest through a robo-advisor?
As far as risk tolerance goes, keep in mind that investing in stocks always carries an inherent level of risk with it. There can be short-term spikes, and there can be long-term losses (and vice versa). If market volatility leaves you on edge, perhaps it’s best to pursue low-risk investments.
Heed these tips to create an investment strategy
Here are some of our best tips when you get around to creating an investment strategy:
It’s up to you how long you want your investment plan to last, but one of the best ways to grow wealth via stocks is by focusing on investing long-term. The average 10-year stock market return is just under 10%. If you plan to invest for decades, there is major ROI in store for you.
Ride out volatile markets
Yes, there will be ups and downs. As we’ve mentioned already, stocks are volatile. So, one of the best pieces of advice we can give you during volatile markets is to ignore the short-term fluctuations. Hang tight. This too shall pass.
Dollar-cost averaging is one of the simplest ways to build wealth over time. It entails investing the same amount of money in the same stock at regular intervals – for example, monthly. You can ignore share price and rest assured that you’ll have good or better results than if you tried to time the market.
This method is also one of the best ways for new investors to get skin in the game bit by bit while still earning reasonable gains.
If you invest all of your money in one single stock or industry, you run the possibility of putting your assets at a greater risk of loss. When you allocate your investments across various industries’, sectors, and stocks, you’re minimizing your risk.
Choose an investment platform
Online stock trading platforms, or online stock brokers, charge a fee or commission to buy and sell stocks for the investor.
When choosing a platform, keep the following in mind:
- Fees. Some platforms charge exorbitant fees, but Chipper, for example, only charges a 1% commission when you buy or sell stocks. There are no charges for holding stocks in your Chipper account, and you can hold stocks without selling for as long as you want.
- Funding methods. Some platforms have limited account funding options, such as linking a checking or savings account. Others may allow you to wire transfer money, transfer funds from another broker, or deposit a check. No matter your preference, ensure your online stock broker allows it.
- Platform usability. Is the platform intuitive and easy to navigate? Or do you need constant help from customer service to navigate your way around your stocks? As long as you’re a DIYer, you’ll want to choose one that is simple to use.
- Availability of support. Likewise, choose a platform that provides help when you need it. Investing in stocks is (likely) new territory for you. It’s nice to have someone to lean on when you get stuck, or a trade doesn’t go as planned.
Determine how much you want to invest
Last but not least, figure out how much you want to invest – most strategically spread out over time (i.e. dollar-cost averaging).
Many financial planners advise investing 15% of pre-tax income. But this depends entirely upon your financial goals and current financial circumstances.
A useful tactic is to reverse engineer your financial goal. For example, if you want to have a nest egg of a million dollars, you’d need to invest $5,000 every year starting at the age of 30, assuming an annual return of 6.5%. (Use a simple savings calculator to estimate your investment growth over time.)
How to start investing with little money
Try not to let lack of money be the reason why you choose not to invest. There’s no such thing as too small of an investment, especially when you factor in how it compounds over time.
Plus, micro-investing makes it easy for people to start investing with little money as it allows consumers to purchase fractional shares. Gone are the days where you have to purchase a whole share, or pay a broker to purchase the share for you. Let an online investment platform like Chipper make your money work for you.
But at the end of the day, think of it this way: A little bit goes a long way.
Do your research to see which businesses you should invest in. Develop a long-term investment plan, and be prepared to stick with it through thick and thin. Trust us when we say the odds are in your favor.