Perhaps you have saved up a bit of extra cash and have been wondering how to put it to work, or maybe you have a larger amount, but it is not currently growing, and you’d like to work towards having a healthy retirement nest egg in the future. Whatever your reason for being curious about the world of stock investing, it helps to have a basic introduction to this vast topic. Stock investing is a very broad and complex field, but there are foundational questions you can start with that can grow your knowledge and get you started with stock market investing.
What Type of Investor are You?
The very first step toward investing doesn’t have anything to do with investing at all. Rather, it has to do with you and your risk tolerances and goals. The type of investments you make and the decisions around them will need to be guided by a driving purpose and a set of goals. Each person is different, and investments that may work well for one person may be disastrous for another. This is because there are a wide variety of different risk profiles and types of investments.
One person might want immediate movement and choose an aggressive growth portfolio, while another person might be more comfortable with a conservative long-term approach that focuses on a preservation-of-capital portfolio. Some like online discount brokers with automated advisory services, while others prefer a face-to-face meeting with a dedicated investment advisor, they can talk to in person.
Choose Your Risk Tolerance and Management Style
One of the first questions most investment brokers will ask you is how much risk you are comfortable taking on. They might also ask you how actively you want to manage your portfolio. Some people may want to make active management decisions day to day in their portfolio, while others might prefer a more relaxed long-term buy and hold approach.
If you are simply playing with a little spare cash, you might be able to take a higher-risk short-term growth and trading approach, while if you are investing your retirement account, you will probably want a long-term plan with predictable growth and the ability to buy and hold investments for much longer.
Once you’ve thought about your risk tolerances and decided what sort of a strategy you would like to use, it will be time to find a broker.
Types of Brokers
The two main categories of brokers are full-service and discount.
Full-Service Brokers: A full-service broker might provide a wide range of traditional services such as giving personalized financial advice, helping with retirement planning, and even strategizing with you to reach specific goals such as providing for education or healthcare expenses. These types of firms usually require you to meet a minimum net worth before they work with you. For example, a minimum account size could range from $25,000 to $100,000 or more. Full-service brokers typically charge significant fees, such as a percentage of all transactions, a percentage of all assets under management, and an annual management fee. These expenses, along with the large minimum account size, create a need for a second type of professional that can serve the majority of investors who have smaller accounts with less to invest.
Discount Brokers: A discount brokerage was used by only a few people back before the advent of the internet and online money management. However, with the rise of the internet and secure online financial networks, it has become possible for anyone to invest with ease from the comfort of their own home. Reductions in overhead costs associated with online brokerage services allow you to get many of the products previously only offered by huge firms. Educational materials and automated portfolio analysis, and even automated advice is now just a click away. You can get real-time information to help you set financial goals and diversify your portfolio across a range of investments. Of course, having an actual human being who knows your goals and preferences and can answer your questions and provide personalized advice is always useful, so full-service brokers still have their place.
Meet the Robo-Advisors
After 2008, a new type of investment advisor arrived on the scene. The goal of a robo-advisor is to reduce costs for investors while speeding up and streamlining investment advice. Two popular robo-advisory services are provided by Betterment and Charles Schwab. Several other “robo-first” online brokerages have emerged in recent years, with robo-advisor services at the forefront of their mission statements.
A robo-advisor is essentially an algorithm that is programmed to make investment decisions for you based on real-time market data, live access to your portfolio information, and the information you give it about your preferences and goals.
Robo-advisor services can help you with things like rebalancing, diversification, and tax-loss harvesting, and some providers also offer limited access to human, financial advisors as well.
Check Fees First
While brokerages have been reducing their trading fees overall, as a rule, there is no such thing as a truly free brokerage, and they all have fees somewhere. You will want to check what you are being charged for trades, and what other account fees may exist. Fees might not seem like a big deal, but they are the blight of many small investors, who get excited at the prospect of making money on trades but forget to factor in the losses due to trading fees.
Understand How Fees Affect Performance
For example, let’s say you are just starting and want to make a very small trade with a profit of only $20. If you are using online services with a trading fee of $7 per trade (a common and fairly reasonable fee), you will lose at least $14 ($7 to sell, plus another $7 to buy) of the profit you would have made, resulting in a profit of just $6. If you wanted to trade out of one position and into another of equal value, it would cost you that money just to make that move, and thus you would require an upward move in the stock just to cover your trading fees. Also keep in mind that managing a portfolio often involves many dozens or hundreds of trades, so these fees add up quickly if you are not careful.
As with bank accounts, most brokerages have a minimum account value. Be sure to check what those minimums are, and to maintain them to keep your account in good standing.
Diversify, Diversify, Diversify
It is important not to put all your eggs into one basket, and with stocks, this means it is wise to spread your investments across a range of risk profiles and market sectors. It can be hard to do this with a small account. Mutual Funds and ETFs (Exchange Traded Funds) are good ways to diversify with even a small account. These funds allow you to purchase shares of a larger portfolio that have already been invested in a large collection of stocks. Popular funds track the S&P 500 index and other major market indicators. These funds typically charge a small management fee, so be sure to check what that is before investing and choose wisely.
Take the First Step
The Stock Market is broad and volatile topic, and you can find plenty of videos, tutorials, books, podcasts, and seminars to cover it adequately. Don’t get discouraged when first starting! The first step towards building a great portfolio is to open an account and begin, even with a small amount of money.