Last week I wrote how investing can be scary but if you read the article, you’ll find it is all relative. Despite the ups and downs, hundreds of thousands in my portfolio are pure profits.
“Good for you, but I don’t care about your hundreds of thousands. What I want to know is how to invest my $5,000. I don’t know where to start.”
For that, I apologize. some of us in the Personal Finance world overlook the fact that most of us DON’T invest. What’s more, you have no clue how to, or where to start. It’s not like they teach this in school, do they?
The following should get you on your way, getting started in stocks.
Set a goal
Before you start investing, you should probably write down what your goals are for investing. Are you simply looking to try it out? That’s how I got started back in 1999. Trying it out, back then, was easy. Back then, the only way was up (read all about it in my book). Lately, we’re dealing with more ups and downs.
Do you want to become wealthy fast? Certainly no guarantees there but is does impact your investment strategies. Risk tends to be high for those strategies.
Do you want to become wealthy but have some time to do it? It took us 13 years but without investing it wouldn’t have been possible. Set your own pace and level of risk.
If you’re looking to grow your investments over the long term, you are almost certainly in the right place. Over the long run, the market has gone up and up only. Risk for this approach can be relatively low.
If you’re looking to invest for your retirement only, also consider what your employer has to offer, you wouldn’t want to miss out on any employer matching. In that case a 401(k), IRA or Roth IRA may be the way to go.
Are you simply looking to preserve the money you have and not see it eaten by inflation? I’d say that is a worthy goal by itself.
Find a broker
Alright, you know what you want to do, now where do you send your money? Who to entrust with your hard-earned cash? There is a slew of options out there. Chances are your bank will be happy to handle your stocks but banks tend to have higher commissions. They also want to sell you their “products” and “advise” (double quotes for good reason, as they don’t always come with your best interests in mind).
There is a wide variety of online brokers, each with their own sets of fees and services. Names that come to mind that I’ve used in the past are TD Ameritrade and ETrade. What I like about these online brokers is a mostly hands-off approach by the Brokers. I don’t want that weekly call from Zachery about what it is he can do for me.
A good place to look for comparisons is Nerdwallet.com. They will give you a lot of information about the different brokers, offers, and fees. Depending on your goal or strategy, different fees at different brokers can work out better for you. If you’re planning on buying SPY only then getting 80 ETF free trades is more important than getting the fanciest stock research tools.
Watch out for some of the fine-print fees that are not advertised. Some brokers charge fees for accounts that get under a minimum amount. If your broker demands a minimum balance of $2,500 don’t deposit just that. The first stock that goes down a point may put you below the minimum.
“When opening an account read the fine print. It can save you money down the road”
What type of stock account to open
There are several different types of accounts to open. Ameritrade groups their accounts in 4 categories.
- Standard Accounts
- Retirement Accounts
- Education Accounts
- Specialty account
All of these groups then have several options underneath them. Assuming your just interested in trading stock/ETFs and this is your very first account, I would recommend opening a standard (joint if you are married) account.
for each of these accounts it will mention several “profiles”
- Cash and Margin
- Cash and Option
- Cash, Margin and Option
When opening your very first account, I would recommend opening a cash only account. You can always “upgrade” later to add margin and options.
Trading options is a bit beyond basic investing but I certainly don’t dismiss it. Margin account, means you can buy more shares than you have money for. You’re basically borrowing money (incurring debt) to buy shares with you existing shares as collateral. I have margin accounts but in the 13 years of investing I’ve never used it. I’ve seen friends and colleagues lose their shirt when they were hit with margin calls.
“If you are new to investing start with a Cash Only account. You can always upgrade to do more after”
Pick the stocks you’re interested in
What to buy is, of course, the big question. If you’re just dabbling in stock for the “fun” of it, buying SPY or any of the other known ETFs (exchange traded funds) is pretty boring. The first year I invested, I probably owned 60 different companies but that was in 1999. Not sure that strategy will work today. I personally take the approach of keeping it simple stupid. I own ETFs almost exclusively. It has worked out well for me and had I applied it from day-one, I would have had several hundred thousand more today.
If you are willing to do the research (and know how to) today may be a good buying opportunity for a lot of individual stock. The same may also be said for many of the ETFs as the market overall is down quite a bit.
If you’re looking for dividend stock, you’ll need to do some research. I’ve never chased the dividends so I’ll have to defer to others to advise you on that.
Whatever it is you end up buying, be patient. Hold on to it for a while (i.e. years). Don’t try to time the market, it does not end well for most. Even the most seasoned market managers can’t seem to beat the S&P 500 consistently (if at all).
“Don’t try to time the market, it does not end well for most.”
what’s next, you may ask. Well once you’ve invested your first chunk of money you can sit back and watch it go up and down and enjoy the ride. If you’re serious about continued investing I recommend making a fixed monthly payment to your broker account regardless of market conditions. It is called dollar-cost-averaging and tends to limit the risk of investing large chunks of money at the wrong time.
Making money on a monthly basis also gets you in the mindset of making your money work for you. I’ve heard some people recommend automatic monthly payments but I personally would caution against that. You never know what calamity may hit your budget (one that might not be covered by your emergency fund). I’d set a monthly goal and would re-evaluate each month if that goal is achievable.
Once you’ve been at it a while, you will possibly also start to see dividends from your investments. I recommend reinvesting those dividends along with your next monthly payment to the account. By combining those 2 trades into 1 you can save yourself an additional commission fee. Re-investing the dividends also greatly contributes to the “magic” of compounding.
Know about tax consequences
Ready to start selling some of your stock? Great, but be aware of any tax consequences. Capital gains is considered income and comes with its own tax rates. Educate yourself on those before you spend all the money. The good news is that capital gains taxes are very favorable in the United States.
Last but not least: Have fun
Above and beyond all: Have fun at it. Getting started in stock should be fun (at least a little). If you find that investing in stock makes you nervous and affects your sleep, get out, this may not be for you. If it doesn’t make you nervous then keep going at it. The process of investing itself can be fun but just wait till you get to that point where the money starts working for you, instead of you working for money. That’s when the real fun starts.
Disclaimer: As I am not a licensed Financial Advisor I should point out that before investing you should seek out a Professional Financial Adviser. I also need to point out investing comes with risk. No doubt, but no risk no reward, right?
Good luck reaching your financial goals.
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