Wow. This is a tough question to answer due to its very broad range of response material. But, let me list out a few things that I think might be helpful to you on this journey.
1. What is your overall knowledge level of stocks and the stock market? Before taking any action, I would recommend learning as much as you can on these topics. The best course of action would be to take some actual investment classes offered through an accredited program. I met a man once that took classes to obtain the ChFC (Chartered Financial Consultant) designation just to learn more about how to manage his own money. I think this would be the most ideal way to learn more aside from becoming securities licensed yourself. The American College is where I took many of the required courses my CERTIFIED FINANCIAL PLANNER™ designation.
2. As you do your own research, I would also encourage you to learn as much as you can about different investment philosophies (and there are lots of those out there). Learn why some prefer active management vs. passive management, why some like ETFs more than mutual funds, or individual stocks more than ETFs. Understand why some investors focus more on "mainstream" companies while others allocate more of their portfolio toward alternative investments. In other words, before you choose a strategy, you need to know what all of your options are.
3. Do a test run. It's hard to be patient when you have the itch to start investing money, but patience will be a major key of investing success. Start to map out a plan and track the performance of that plan. If you've done a good job in steps #1 and #2, you should hopefully have developed a fundamental investment approach that uses investment staples like diversification and cost reduction, but before you go all in, monitor how the day to day fluctuations would affect your bottom line. If you can't handle the volatility, you need to create a new strategy.
4. Consider hiring an advisor. Advisors come in all shapes and sizes in terms of investment philosophy and firm structure. Some advisors will give hourly advice to the "Do it yourself" type of investor. So, you don't HAVE to hire them full time in order to get your answers. Another option would be hiring them temporarily and trying to learn the ropes for a few years before trying it on your own. However, I will say that the world of investing is ever-changing and I personally believe that you should feel very confident and knowledgeable before making the decision to try and go at this alone. There is a lot to learn when it comes to buying stocks - so much so that many books have been written on the subject. Working with an advisor is a way to get the "cliff notes" version of many of these books in a shorter amount of time.
5. Know your limits. Look, if you know this isn't your cup of tea, then recognize that and don't dig yourself a hole. If you're wanting to buy stocks for entertainment, then perhaps you can open up a small stock account and commit the funds to "entertainment," understanding that you might win or might lose money, but either way, it won't derail your future. However, if this is something you want to have a significant impact in your life, then you'll have to make a significant investment into learning AND monitoring what goes on in the market. This is why many people choose not to do this on their own. The ones that do have the time, energy, and willingness to do the above-listed "leg work."
I'll close with "if it sounds too good to be true, then it probably is." I see stock recommendations all the time from various publications touting the "top reasons this stock will quadruple in the next 5 years". The truth is, most of the publications offering this kind of advice do not have your best interest at heart. They have their own interests in mind. So, don't blindly follow the next stock tip you see. Gain the knowledge to be able to evaluate investments on your own so that you can make an informed decision!
Good luck to you!
Joe Allaria, CFP®
Starting to invest in the market:
Investors use their money to acquire things that offer the potential for profitable returns, either through interest, income, or the appreciation of value.
As you approach managing money, you’ll want to devote your time & limited resources to things with the largest potential returns. Which may mean buying stocks & bonds.
Thanks to modern technology, the investing world offers enormous possibilities to anyone with a few dollars & an internet connection. But, you’ll need to learn the basics to make good investment decisions from the start.
There is a big difference between intelligent Investing & gambling.
Trading a few stocks without knowing what you’re doing is gambling. Purposely using your hard earned money in well researched investments for your goals and letting it ride for the long run is investing.
It you love researching stocks & day trading in search of short-term profits, ok. It certainly can be exciting, but I would not recommend doing it with more than 15% of your money.
To start buying stocks or bonds you’ll need to choose a platform to invest. Below are some options:
- Full-service Brokers/Financial advisors
- Online brokerages
- Direct mutual fund accounts
- Dividend reinvestment programs (DRIPs)
Next, you’ll need to choose your account type – Taxable account, Retirement account -(Traditional/Roth)
Finally, you’ll need to select your investments. My advice is to read as much as you can about investing in multiple assets classes before you begin. This is where it gets overwhelming.
To be a successful investor you need to avoid making terrible, emotionally-charged decisions. Don’t chase returns or try to time the market. Buy quality investments that will be around for a long time and hold them. Now, it’s time for you to get to work!
- Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. No strategy assures success or protects against loss.
In order to buy stocks, you need the assistance of a stockbroker who is licensed to purchase securities on your behalf. However, before you go looking in telephone or online directories for your nearest broker-dealer, you need to figure out what type of stockbroker is right for you.
There are four basic categories of stockbrokers available today, ranging from cheap and simple order-takers to the more expensive brokers who provide full-service, in-depth financial analysis, advice and recommendations: online/discount brokers, discount brokers with assistance, full-service brokers or money managers.
Online/discount brokers are basically just order-takers and provide the least expensive way to start investing since there is typically no office to visit and no certified financial planners or advisors to help you. The only interaction with an online broker is over the phone or via the internet. Cost is usually based on a per transaction or per share basis, allowing you to open an account with relatively little money. An account with an online broker allows you to buy and sell stocks/options instantly with just a few clicks. Since these types of brokers provide absolutely no investment advice, stock tips or any type of investment recommendations, you're on your own. The only assistance you'll get is technical support for the online trading system. However, online brokers typically offer investment-related website links, research and resources but these are usually third-party providers. If you feel you are knowledgeable enough to take on the responsibilities of directing your own investments or if you want to learn how to invest without making a large financial commitment, this is the way to go.
Discount brokers with assistance are basically the same as online brokers, with the difference being that they're likely to charge a very small account fee to pay for the extra assistance. This assistance, however, is usually nothing more than just providing a bit more information and resources to help you with your investing. They can be the same companies as your basic online/discount brokers that offer upgradeable accounts or services. However, they stop short of giving you any sort of investment advice or recommendations. For example, they may offer more in-house research and reports or publish investment newsletters with investment tips.
Full-service brokers are the traditional stockbrokers who take the time to sit down with you and get to know you personally and financially. They look at factors such as: marital status, lifestyle, personality, risk tolerance, age (time horizon), income, assets, debts and more. Full-service brokers then work with you to develop a financial plan best suited to your investment goals and objectives. They can also assist with estate planning, tax advice, retirement planning, budgeting and any other type of financial advice, hence the term "full service". They can help you manage all of your financial needs now and for the rest of your life, if need be. These types of brokers are for those who want everything in one package. In terms of fees, they are more expensive than discount brokers but the value in having a professional financial advisor by your side can be well worth the additional costs - accounts usually can be set up with as little as $1,000.
Money managers are somewhat like financial advisors but may take full discretion over a client's account (hence the term "manager"). These highly skilled investment professionals usually handle very large portfolios of money and thus, charge hefty management fees based on the assets under management and not per transaction. They are basically for those with substantial incomes, who would rather pay someone to fully manage their investments while they're out playing golf. Minimum account holdings can range from $100,000 to $250,000 or more.
For those keen to learn what stock trading is all about without spending hundreds or thousands of dollars, you can sign up for a free Investopedia Simulator account. It is a simulated online broker account for users, who are given US$100,000 in pretend money, to practice investing strategies or to simply learn how to trade stocks and options in real companies in the stock market. You should also sign up for our free Investing Basics newsletter to learn more about how to invest.
Are you looking to learn more about investing in stocks? Investopedia's Advisor Insights tackles the topic by answering one of our user questions.
There are several different ways to interpret your question. If you are looking to buy stocks of individual companies, I'd limit this to no more than 5% or 10% of your total investable assets. I personally do not buy individual stocks given that I view stock-picking as a full time job and one that only a very small number of investment advisors are successful at doing over a long-term period of time.
If you do still feel the need to do this, consider making sure that all of your other major saving and planning goals are covered first. These include, among other things, a full funded Emergency Fund, saving for your retirement, and a college savings account if you have children.
If you're like me and want to buy stocks by investing in a market index, then consider opening a brokerage account and purchasing low cost ETF's. Look for expense ratios of 0.25% or less because unnecessary high fees can really hamper your returns over the long run.
For a perspective on how fees can impact your returns over time, check out:
The article discusses high fees in 401(k) plans, but really applies to any type of investment account.
Whatever you decide, good luck getting started!
With Kind Regards,
You can start by opening up a brokerage account at a firm that offers individual brokerage accounts with lower costs for executing transactions. But first you may want to carefully think about your goals for the money you are investing, consider the time and the knowledge that is required to invest prudently as well as profitably net after taxes. You will want to understand the fundamentals of investing and how to evaluate the financial profile and performance of companies you wish to own.
Charlotte Dougherty is a registered representative of Lincoln Financial Advisors a broker/dealer (Member SIPC) and a registered investment advisor. CRN 1527162-061616