Intimidating as it may seem, investing is one of the premier ways to grow money over time. While the stock market attracts the most attention for those looking to build wealth, there are plenty of other investments to pick from, such as bonds, mutual funds and certificates of deposit (CDs). As a beginner, though, it can be hard to know where and how to get into investing. In the end, a determination of your long-term financial goals, like retirement, will dictate what types of investing strategies are best for you. It can also be helpful to enlist the help of a financial advisor to help you make smart investing decisions based on your specific needs.
When people talk about investing in stocks, they usually mean investing in common stock, which is another way to describe business ownership, or business equity. When you own equity in a business, you are entitled to a share of the profit or losses generated by that company's operating activity. On an aggregate basis, equities have historically been the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.
Most investment advisers recommend that you save at least ten times your peak salary for retirement. This will allow you to retire on about 40% of your peak pre-retirement annual income, using the 4% safe withdrawal rule. For example, if you retire at a salary of $80,000, you should strive for at least $800,000 saved by retirement, which will provide you with $32,000 annual income at retirement, then adjusted annually for inflation.
The easiest option is to buy what's known as an ETF (an exchange-traded fund) like SPY (SPY). It trades like a stock, but it means you own a basket of stocks. In the case of SPY, the basket is made up of 500 of America's largest companies. Sure, a few might struggle, but all 500 probably aren't going to tank at the same time, so it helps lower the risk.
An average expense ratio is around .6% — meaning, for every $100 you have invested, the fund rakes in 60 cents. Sounds small — but tiny fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is .12% — meaning, for every $100 you invest in a Vanguard mutual fund, they charge 12 cents. That’s much, much lower, and lets you keep more of your hard-earned money.
Typically, you put “pre-tax” money into these accounts, which means you don’t pay income tax on those dollars. Any money invested grows without tax until you ultimately withdraw it for living expenses in retirement. As you withdraw funds, you will pay income tax on the withdrawals. However, most people are in a lower tax bracket in retirement so pay lower rates.
To the inexperienced investor, investing may seem simple enough - all you need to do is go to a brokerage firm and open up an account, right? What you may not know, however, is that all financial institutions have minimum deposit requirements. In other words, they won't accept your account application unless you deposit a certain amount of money. With a sum as small as $1,000, some firms won't allow you to open an account.
Option trading entails a high level of risk and is not suitable for all investors. Certain requirements must be met to be approved for option trading. Those trading options (both Buyers and Sellers) should be familiar with the theory, strategy, pricing of options and related risk factors. Please read the Characteristics and Risks of Standardized Options before trading options.
Next, assuming you fall under the income limit eligibility requirements, you'll probably want to fund a Roth IRA up to the maximum contribution limits permissible. That is $5,500 for someone who is younger than 50 years old, and $6,500 for someone who is older than 50 years old ($5,500 base contribution + $1,000 catch-up contribution). If you are married, in most cases, you can each fund your own Roth IRA. Just make sure you invest the money you put in there — by default, IRA providers will park your money in a safe, low-return vehicle like a money market fund until you direct them otherwise, so decide on which mutual funds, ETFs, or other investments you want to put your money toward.
The solution to both is investing in stock index funds and ETFs. While mutual funds might require a $1,000 minimum or more, index fund minimums tend to be lower (and ETFs are purchased for a share price that could be lower still). Two brokers, Fidelity and Charles Schwab, offer index funds with no minimum at all. Index funds also cure the diversification issue because they hold many different stocks within a single fund.
Consider using the services of a financial planner or advisor. Many planners and advisors require that their clients have an investment portfolio of at least a minimum value, sometimes $100,000 or more. This means it could be hard to find an advisor willing to work with you if your portfolio isn't well established. In that case, look for an advisor interested in helping smaller investors.
Short selling can be dangerous, however, because it's not easy to predict a drop in price. If you use shorting for the purpose of speculation, be prepared to get burned sometimes. If the stock's price were to go up instead of down, you would be forced to buy the stock at a higher price than what was credited to you initially. If, on the other hand, you use shorting as a way to hedge your losses, it can actually be a good form of insurance.
Andrew: 01:08 Yeah, sure. So I think when you talk about stock picks from the past, it’s much more useful to talk about your mistakes rather than your successes. Um, we can, we can all buy stock. I can go out for a multitude of reasons, but you know, if you can look at how you kinda messed up and maybe you can avoid that in the future and maybe some people can kind of recognize a situation like this and maybe stay clear or in the case of, of my, like my personal kind of experience with this and the way that maybe I wish I would have played it is I would have waited longer to, to get into this stock because it was clear that the fallout from the stock hadn’t completely finished. And so I’m keeping this stock on my radar and I’m watching to see how it progresses.
One is Acorns, which rounds up your purchases on linked debit or credit cards and invests the change in a diversified portfolio of ETFs. On that end, it works like a robo-advisor, managing that portfolio for you. There is no minimum to open an Acorns account, and the service will start investing for you once you’ve accumulated at least $5 in round-ups. You can also make lump-sum deposits.
While you are accumulating money for investments and piling them into mutual funds and ETF’s, you should use this time to educate yourself about the game of investing. Read books, listen to CDs, read The Wall Street Journal, take a course or two at a brokerage firm or even a community college, join investment forums, and regularly visit investment websites, like InvestorJunkie.com.
It's crucial to educate yourself before you wade into any type of investment or investment strategy. This beginner's guide to online stock trading will give you a starting point and walk you through several processes: choosing a discount broker, the 12 types of stock trades you can make, how to select individual stocks, uncovering hidden fees, expenses, and commissions, and much more.
An important tip for investing for beginners with little money is to always keep an eye on costs! There can be costs associated when you buy or sell as well as annual costs from mutual funds or ETFs (Electronic Traded Funds). You will want to look at the expense ratio charged, which are the annual fees funds’ and ETFs charge. The lower the better! Also, only purchase mutual funds that do not have a purchase fee (load fee) when you buy a fund. Lastly, remember that some of the brokerage companies offer their own ETFs at very low or at transaction free costs. Check out Betterment or Future Advisor. The World's Worst Stock Investment Advice