Sunday, June 23, 2024

How to Start Investing in Stocks: A Beginner’s Guide

Investing is like a seed you sow to reap the rewards in the future. Simply put, it is a way to lock a certain amount of money aside from what you monthly / annually earn. “The process of laying out money now in the expectation of receiving more money in the future” a legendary investor Warren Buffett said while explaining how to put your money to work in one or more types of investment vehicles in the hope to growing your money over time. 

There is no fixed amount of money that you require to begin investing, however to put it to experiment, let’s suppose you have an extra $10 a week that you’d like to invest, in this article, we walk you down the easy steps into your investment journey and show you how to maximize your returns while minimizing your costs. But, before that it’s crucial to identify which kind of investor are you! Read on to learn more.

What kind of investor are you?

Investing blindly may not be our first advice to you since there are risks involved in investing without appropriate knowledge. When opening a brokerage account, online broker such as Charles Schwab or Fidelity ask you about your investment goals and the levels of risk you’re willing to take, so it becomes crucial for you to ask yourself, what kind of investor am I, after all?

You can either take an active participation in managing your growth or you can prefer to “set it and forget it”. Traditional online brokers allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds and mutual funds. Before that, lets learn about the various brokerage services that are available to you and how to choose what fits your bill!

Online Brokers

Investment brokers either provide full-service or discount. As the name suggests, full-service brokerage ranges from financial advice for retirement, healthcare and everything related to monetary processes. Full-time services come with substantial fees, including a percentage of your assets, transactions and yearly membership fee. Usually, the full-service brokers prefer charging according to your net worth. Traditional brokers justify their high fees by giving advice detailed to your needs.

Discount brokers

Once upon a time, discount brokers were treated as an exception, but with growing investment needs, they have become the norm. As the landscape of financial services in 21st century progresses, online brokers provide you with tools to select and place your own transactions, along with educational materials on their sites and mobile apps. They also offer a set-it-and-forget-it-robo-advisory service.

In addition, if you are an investor willing to invest in stocks, you must take into account that there are number of discount brokers with minimum deposit bars against certain fees that are charged to accounts that don’t have a minimum deposit, or you could try Robo-advisors.

Robo-Advisors

After the devastating global depression in the financial market in 2008, RoboAdvisor was introduced as a new breed of investment advisor by Jon Stein and Eli Broverman. Their primary aim to introduce RoboAdvisor was to utilize technology to lower costs for investors and streamline investment advice. 

Since Betterment (the first robo-advisor company) launched, other financial services companies have stepped up their game by establishing robo-like advisory services. According to a report by Charles Schwab, a renowned online broker, suggested that approximately 58% of Americans would like to take to robo-advice by 2025 for an easier investment process. And we wonder, why not? Algorithm has taken over the internet to solve many problems that were once manually solved. If you prefer algorithm to make decisions for you, including tax-loss harvesting and rebalancing, then look further than a robo-advisory. It’s also best suited for investors looking for a long-term wealth building.

Investing through your employer

It’s not easy or ideal to invest into your retirement plan while you have just begun your career. You may find yourself on a tight budget for investment in the beginning, but the truth is you probably won’t even miss a contribution that small when you work based retirement plans deduct your contributions from your paycheck before taxes are calculated. Suppose you are comfortable investing 1% of your total salary, gradually you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401(k) retirement account at work, then you may be investing in your future already with allocations to mutual funds and even your own company’s stock.

Minimums to Open an Account

Contrary to how easy stock investment marketers make it sound to enter the investment game, let us tell you, there is no such thing as a free lunch. It’s more like one-hand-give-one-hand-take policy that works best in stock investment. One of the basic requirements to begin investment is to invest into your Demat account. Every financial institute demands for a certain minimum deposit to keep it as a security without which your account application remains incomplete. Some firms won’t precede your application the sum of below $1,000. Others may often reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.

Commissions and Fees

As economists like to say, there’s no such a thing as free lunch. Though many attempts to eliminate commissions on trades by ETFs offering index investing to everyone who wants to trade with bare-bones brokerage accounts, however, brokers will find their way to make money from their customers in one way or another. 

With every trade stock that you earn, a certain surcharge goes to broker by default, either through buying or selling. The minimum brokerage fees charge beings with $2 per trade, and can be as high as $10 for some discount broker. Some brokers may charge nothing for commissioning, but will make up for it in some or the way since no charitable organizations running brokerage services. 

Fees can add up and affect your profitability depending how frequently you trade. Stock investment can cost you a lot if you roll-in and roll-out frequently, especially with a small amount of money available to invest. 

How it really works 

It’s crucial to remember that a trade is an order to purchase or sell shares in one company. If you wish to buy 5 different stocks at the same, this will be considered as five separate trades for which you will be charged for each one separately. 

Suppose you want to buy stocks of five companies with a budget of $1,000. To put perspectives together, you will incur $50 as trade cost—assuming the fee is $10—which is equivalent to 5% of your  $1,000. If you fully invest the $1,000, your account balance will be reduced to $950 after applying the trading costs. This decline represents loss before your investments even before you trading. Don’t you worry, losses lead to new gains and stock market is the perfect playground to play!

Plot twist

Suppose you sell these five stocks, you will have to incur the trade cost all over again which is $50.  To begin the round trip of buying and selling, another $100 is debited, or 10% of your deposit amount of $1,000. You are not eligible to regain the initial invested expenses if your investments cannot make it enough to cover these basic expenses. The world of stock market has its high, don’t let the lows discourage you.  

If you plan to trade frequently, check out our list of brokers for cost-conscious traders.

Mutual Fund Loads

Mutual is another effective way to grow your finances, and very popular in Indian family systems. Besides the trading fee, there are miscellaneous costs associated with this investment type. Mutual funds are pools of investor funds managed by highly skilled professionals who invest in an organized manner, for example, large-cap U.S stocks, Muthut Finance, Kotak Mahindra, Sharekhan, to name a few large and small finance companies providing mutual funds service. 

The process is tad more like “the-long-way-home” with many fees associated with the process of mutual funds. MER (Management Expense Ratio) is one of the crucial fees that are charged by the management team each year based on the number of assets in the fund. One weird thing about MER is that the higher the MER, the more it affects the fund’s overall returns.

To acquaint you with finance jargons, you must remember a number of sales charges called loads at the time of purchasing your mutual fund. There are also front-end loads, no-load and back-end load funds. Its crucial to understand that has a prior load before buying it. To be sure, check out your broker’s list of no-load funds and no-transaction-fee funds if you save on extra charges. 

On a brighter side of mutual funds for beginners is the advantage of fees compared to commissions on stock. The advantage is that fees remain same regardless of the amount that you invest. You can invest as little as $50 or $100 in a mutual fund as long as you meet the minimum requirement. The term for this is called dollar-cost averaging (DCA), must try!

Diversify and Reduce Risks

If you are looking for your free meal ticket in investing, look no further than diversification. Diversification allows you to invest in a range of asses in order to reduce the risk of one investment’s performance and secure your overall returns on investment. To help you remember this better, we’d like to say “Don’t pull all your eggs in one basket.” 

The challenge with diversification is that is nearly impossible to have a well-diversified portfolio, so be careful while investing. Suppose with a $1,000 deposit you must invest in one or two companies at the most. This may increase you risk, but to be honest, that when the major benefit of mutual funds or ETFs’ comes into focus. 

In terms of diversification, the greatest difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) in the first place. What makes a single stock more diversified than the other is large number of stocks and investments within a stock fund.

Stock Market Simulators

One of the most valuable tools of the 21st century is stock market simulators. If you are someone who wants to gain experience in trading without risking money in the process, good news is there are an array of trading simulators available for you to choose from. Our favorite one is Investopedia’s simulator which is entirely a free-ware tool. 

What’s better than imaginary money being used for wide portfolios of stocks options, ETFs and other securities? Stock market simulators are exactly this dream come true. The good part is that some of these simulators typically track real-time price movements of investments and other notable considerations such as trading fees or dividend payout which allows you to pitch your ins and outs strategy, consequences of virtual investments without any risks so that when you take to trading in real-time and with real money, you are well-equipped with accurate knowledge to prevent financial losses. Some simulators even allow users to compete against other participants, providing an additional incentive to invest thoughtfully. 

Now that we you know it’s more complicated than just selecting the right investment (a feat that is difficult enough in itself), you must keep being aware of the restrictions that you may face as a new investor, we hope this piece was helpful enough to inspire you get you started with your investment venture. However, having said that, we would never stop recommending you to do your homework to choose brokers with whom you would like to open an account.

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