Making your money work for you is a critical part of building wealth, and investing in stocks is a great way to do it. It’s time to take control of your finances and finally figure out how to invest in stocks by following this comprehensive guide. You can then begin your journey toward financial freedom and reach the investment goals you’ve always dreamed about.
Determine Your Investment Style
The first thing you need to think about is your investment style. There are two main approaches to consider: active investing and passive investing.
Active Investing
Active investing is for those who want to roll their sleeves up and get stuck in the world of finance and investing. It involves you taking an active role in choosing each and every stock and asset and managing them as they increase (or decrease) over time.
Ideal for the logically minded investor, this method will require a great deal of time to manage your portfolio and a great deal of knowledge to choose the right asset.
However, there is potential for big gains to be achieved with this active investment style.
Passive Investing
Passive investing is like putting cruise control on along the freeway. It is a stress-free, easy answer to investing.
This style allows you to automate your finances to keep investing every month. A lot of investment brokers offer some sort of passive tools, but the simplest way is to invest in index funds like the S&P 500. Doing this will give you immediate access to 500 of the biggest stocks in the US.
By choosing a passive investment approach, you’ll be able to achieve good, healthy returns with minimal effort involved.
Budget
The next thing to consider is your budget. How much of your hard-earned cash can be allocated to your investment portfolio? It is important to understand that you don’t need to start with thousands of dollars; you can invest with as little as $100.
An approach I like to encourage is dollar-cost averaging. This is where you take a small portion of your paycheck every month and invest it. It means you are putting money to work regardless of what the stock market is doing.
Emergency Fund
Before you start investing, you should make sure you are financially ready to invest.
Create a separate emergency fund, i.e., a pot of money you can fall back on if you hit a financial bump in the road. The last thing you want to do is dip into your investments.
Pay off Debt
You will also want to get rid of any high-interest debt you may have before investing. Things like credit cards and cash loans should be kept to a minimum if you are going to build your wealth through investing.
You might be asking why; let’s say you get an average of 10% return per year on your investments. Meanwhile, your credit card is adding interest at a rate of 20%. Even though you are investing, you can still lose money over the long term.
Risk Tolerance
Next up, we need to determine your risk tolerance; this is the most important step and needs to be done right. Different assets will produce different rates of return. They will also have different risk levels, so it’s important to figure this out before diving right in.
Think about how long you want to invest; if you’re 50 and just starting out, you may want to look at safer assets with less chance of losing your savings. If you’re 18 and looking to invest for the next 30 years, you might be willing to accept more risk.
But which investments are risky and which are safe? Let’s take a look…
Bonds
Bonds are typically one of the safest investment vehicles you can use. They generally produce a return of around 2-3% per year. Bonds can be government-backed securities with a guaranteed return, meaning very little risk.
Stocks
Stock investing is a very powerful method of building wealth. Risk can vary a lot here, so it’s important to understand the company you are choosing to invest in. A typical stock market return averages around 10% per year but involves more risk than bonds.
Crypto
Cryptocurrencies are well known for making overnight millionaires, but they also come with an extreme level of risk. If you are interested in crypto investing, I would recommend only allocating a small amount of your overall portfolio to it, say 1%. This way, any potential fallout in the crypto market won’t devastate your returns.
Open an Investment Account
Now that you know the basics of investing, you’ll need to open an investment account. There are hundreds of accounts available, all offering different tools and perks, so be sure to do your research before choosing. Some popular accounts you can consider are Vanguard, Fidelity, Charles Schwab, and eToro.
Choosing Stocks
If you choose to go down the route of most retail investors and select stocks as your main asset, setting up your portfolio will be key to your success. Understanding these elements will have a big impact on your performance as an investor.
Diversify
Make sure you diversify your portfolio, which means investing in a wide variety of stocks. This is a simple one, but can sometimes be overlooked. Investing in companies that vary in size, industry, and country can boost your chances of success.
If for some reason, one industry starts to decline, the negative effect on your portfolio is kept to a minimum. If stocks in China start to fall, your overall portfolio won’t be affected if you have diversified your portfolio and bought stocks in multiple countries.
Dividends
When you buy a share in a company, you can also be entitled to receive dividends. Dividends are a form of shareholder returns and are your share of that company’s profits.
Dividends can be paid out monthly, quarterly or yearly, and the amount you get varies from company to company. Make sure to take dividends into consideration when building your portfolio.
Invest in Well-known Companies
A simple trick to minimize risk is to invest in big, well-known companies. Apple or Coca-Cola, for example, will have less volatility than many small companies simply because of the volume of cash being invested and the way the market moves stock prices.
Conclusion
You now have all the tools required to start your investing journey and begin building your wealth. This is a varied and complex industry, so continue your education and ensure you are ready before investing real cash. Remember, the best asset you can add to your portfolio is knowledge!
