The thought of investing in the stock market may seem slightly overwhelming. Okay, really overwhelming for many! However, it does not need to be scary.
First, let’s debunk a couple of myths:
- You have to have thousands and thousands of dollars.
False – $50 is enough to start investing today.
- You need an investment advisor.
False – No, you don’t need an investment advisor. You can place a trade yourself. An investment advisor is helpful to guide an overall portfolio and direction once you have enough investable assets. Their knowledge of the market and expertise is extremely valuable.
- It’s too risky.
False – The average annualized returns of the S&P 500 have been 11.69% from 1973-2016. Yes, there will be ups and downs in the market. The goal is long-term returns (hint: passive income).
- Buying stock is like gambling.
False – You are more likely to win with investing than gambling.
So, now that we have debunked the myths.
There is never a better time to start investing! The goal is to attain passive income on your money.
The sooner you start investing, the better off you will be.
The reason why? Simple, it is called time value of money. The more you invest now will be worth more in the future because of its potential earning capacity.
Let’s breakdown “potential earning capacity” – that unleashes the power of compound interest. Don’t get lost in the terminology. Stay focused on why invest in the stock market
As an example, we start with $50 to invest.
Each month, we add an additional $50 for 30 years. Assuming a conservative 8% return, a tax-deferred account would earn $71,384 and taxable account would earn $46,645. Key point to understand…the contribution was only $18,050. The difference is the power of compound interest.
For a second example, let’s start with $750 to invest. Each month, we add an additional $750 for 30 years. Assuming an 8% return, a tax-deferred account would earn $1,070,757 and taxable account would earn $699,674. Key point to understand…you contributed only $270,750. Again, the power of compound interest.
** For both of these examples, a lower assumed interest rate was used than the S&P 500 average of 11.69% because of inflation and to not inflate scenarios for shock and awe.
Just remember… the actual return you earn is likely to be far different than the average annualized returns of the S&P 500. Don’t let that demotivate you from investing. This isn’t the get rich fast scheme. Slow and steady always wins the race. The goal is to start earning passive income from your investments.
How to Invest in the Stock Market – Beginner’s Guide to Start
Open an Account
There are plenty of options to open an account. Personally, I prefer TD Ameritrade and Ally Invest. The main reason why is their account fees are some of the lowest in the industry. Plus, the level of service received is high quality.
Next, decide what type of account are you going to open. Will this be a retirement account or not? Retirement accounts options tend to focus on a Traditional IRA or Roth IRA. Without going into details of both, the Roth IRA is a better fit for most investors because of tax advantages. Looking for a basic account to access on a daily basis? Then, an individual, joint or custodial account will be a better fit.
Fund the Account
This is one of the big myths. You need thousands of dollars to open an account. Guess what? With both TD Ameritrade and Ally Invest, there is NO minimum balance to open an account. However, the key to success is you have to start depositing money to unleash the potential earning capacity (see above for a reminder).
From the Cents Plan, determine how much is available to set up on a monthly transfer to the brokerage account. By setting up automatic transfers, it is easier to manage and maintain. No temptation to spend the money!! Start growing passive income.
Select Stocks, Mutual Funds, or ETFs
This is the first reason most people shy away from the stock market. Trying to understand the market is like looking into a crystal ball. There is no perfect secret out there on how to bet the stock market. At least, I am yet to find one perfect trading game. Many theories exist on the best way to invest money. Honestly, that is an in-depth course in itself. Right now, the focus is on starting to invest in the stock market. Can’t dip your toe into the water without trying, right?
Stocks are probably the easiest to understand investment for the beginner investor. Each publicly traded company offers stock or ownership in the corporation. The price of stocks fluctuates throughout the day. As a beginner investor, look at companies that you personally buy the products in your household. If you plan to continue buying their product, that probably means other people will, too.
The main benefit of stocks as a beginner investor, you can buy 1 stock for the current price. Please note, even if buying one stock in 10 companies, you have to pay for 10 trading fees. As an example, if investing $100 on a monthly basis, then buy enough stocks to fulfill the whole $100 and the fee. If the stock is higher than the cash balance, then wait a couple months to accumulate enough cash.
Mutual Funds –
Mutual funds are a collection of securities (stocks, bonds, money market plus some other assets) held together in an investment fund that are professionally managed. They are able to pool money from multiple investors and leverage economies of scale. Mutual funds offer diversification within the fund. Since mutual funds are professionally managed, they do have expenses and fees. As a simple guideline, it is best to keep expense ratio below 0.75%. Once a day, a mutual fund will calculate the net asset value for fund; that determines the price for the day.
An index fund is a type of mutual fund that is created to track the market index. Typically, index funds have low operating expenses and a greater market exposure.
Electronic traded funds or ETFs are investment funds that are traded like stocks. They are a collection of stocks, bonds, or commodities. They fees are typically lower than mutual funds. The price of ETFs can go up and down throughout the day just like a single stock. Just like mutual funds, ETFs offer diversification within the index fund.
Both mutual funds and ETFs may have a minimum amount needed to invest in their funds. So, you maybe wondering which is the best? Honestly, every investor has their own portfolio of stocks, mutual funds, or ETFs. Decide what will work best on your current situation.
ZERO desire to manage the portfolio yourself?
No worries. Check out a managed portfolio. Have a professional manage your account for a small fee.
Investing in the stock market can be emotional. Avoid the urge to check your account on a daily basis. Seeing the daily swings will exhaust and demotivate you. Review your account on a monthly basis. Also, meet with a financial advisor annually to discuss your portfolio.
Bonus Tip –
Diversification. Simply put – don’t put all of your eggs in one basket. Spread them out. This will spread the risk of the ups and downs of the stock market across your portfolio.
Investing in the stock market is possible! It doesn’t have to be intimidating. Yes, there is risk. However, slow and steady wins the race. It is easy to focus on the bad years the stock market took (the media helps to accentuate this one) and overlook the “normal” gains of 6-10%. Above, how to invest in the stock market is outlined. These are the very beginner steps. Start with one trade. Then, evaluate. Every trade made is more knowledge learned.