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Saving money and planning for the future are so important. One great way to grow your savings is by investing them in the stock market. But what does investing even mean?
Investing basically means putting your extra money to work in order to make more money over time. Instead of just letting cash sit in a boring savings account, you use it to buy parts of real companies. These parts are called “stocks.”
When you buy stock in a company, for instance, a company that lets customers invest in gold, you become a partial owner. If the company, probably the best company to buy gold from, does well and makes profits, the value of your stock should increase. And if the company pays out some of its earnings to stock owners, you will receive “dividends” on your shares. Over many years, the increasing value of your stocks combined with dividend payments can significantly boost your invested savings.
There are different ways to invest in stocks, but this guide will focus on how regular people can get started building their own portfolio of company ownership. We will cover opening an investment account, choosing between individual stocks and stock “funds,” researching companies, developing a balanced portfolio, and managing your investments after purchasing. Read on to learn the basics of participating in stock market growth!
Opening a Brokerage Account
One of the first steps to investing in stocks is setting up a brokerage account, which will be used to place trades and hold your investments. There are a few types of accounts to choose from.
Regular Taxable Brokerage Account
A regular taxable brokerage account is the most flexible type of account for stock investing. With this account, all capital gains, interest, and dividends earned are subject to taxation each year based on your income tax bracket. You will face no restrictions on when you can trade.
Brokerages like Fidelity, Vanguard, and Schwab are good options for opening a standard taxable account. Be sure to shop around, as account minimums and trading fees can vary between providers.
Individual Retirement Account (IRA)
An IRA is a tax-advantaged retirement account perfect for long-term stock investments. With a Traditional IRA, contributions may be tax-deductible, and growth may be tax-deferred. Earnings are taxed as ordinary income upon withdrawal after age 59.5.
A Roth IRA does not offer upfront tax breaks, but qualified withdrawals in retirement are completely tax-free. Both Traditional and Roth IRAs have an annual contribution limit of $6,000 or $7,500 if over age 50.
Online Account Registration and Funding
Once you select your account type, open an account directly on your broker’s website. Most require basic information like your Social Security number, address, and date of birth. Many allow funding via electronic bank transfer, while some may require an initial deposit by mailing a paper check. Be sure to have your bank account info and driver’s license on hand for verification.
Picking Stocks or Using Index Funds
Once you set up your brokerage, decide how to invest – stocks or funds.
- Stocks let you pick companies you think will do well in the long term. This is “active” investing, where you research firms. But it is hard to beat market averages over time. You also risk losing money if one stock does poorly.
- Index funds more easily track the market. They invest in hundreds of large, mid, and small companies. Popular indexes like the S&P 500 cover most big businesses.
- With an index fund, your money spreads across many companies. This “diversifies” your investments and lets you profit as markets rise. It is simpler than stock picking, too, since indexes automatically adjust.
- For beginners, starting with a total stock market index fund gives easy exposure to the market. It limits your risk while still allowing upside. Later on, you can add some individual stocks once you learn more.
See here to learn more about index funds.
Key Factors to Research for Individual Stocks
Doing research from multiple public sources will help you understand a company’s full story before investing your hard-earned money. You can identify strong businesses with promising long-term outlooks by analyzing both quantitative metrics and qualitative factors.
Company Background and Industry
Understand what the company does and who its customers are. Research trends in their industry – is it growing, stable, or facing disruption? Look at competitors and how the company differentiates itself. Check independent analysts’ reports on the strengths and weaknesses in their business model.
Financial Statements
The income statement shows profitability over time. Look for consistent, growing revenue and profits. The balance sheet lists assets, like cash, versus liabilities, like debt. Check that assets exceed liabilities, which means the company has financial flexibility.
Competitive Advantages
What unique qualities allow the company to compete? Proprietary technology, brand recognition, operational excellence, and economies of scale can provide an edge. Look for sustainable competitive advantages versus temporary benefits.
Management Team
Consider the experience and record of accomplishment of top executives. Review ownership stakes to ensure management interests line up with shareholders. Watch for red flags like frequent management turnover or legal/ethics issues.
Creating your Portfolio
Maintaining Diversity
Spreading out your money across various stocks, industries, and company sizes helps manage risk. Do not put all your eggs in one basket. Even successful companies can struggle, so diversification reduces your vulnerability if any one investment declines.
Setting Target Amounts
Decide roughly how much of your portfolio to dedicate to different market categories like large U.S. companies, international stocks, bonds, etc. Popular targets include 70% stocks and 30% bonds. Keep revising as your needs change over time.
Sectors and Industries
Within stocks, distribute your holdings among different sectors like tech, healthcare, and consumer goods. Also, various amounts are committed to industries such as software, biotech, and retail. This limits exposure if any one area suffers.
Company Size
Large, middle-sized, and small companies behave differently over the long run. Have positions in all to maximize returns during shifting economic cycles.
Rebalancing Periodically
As some holdings rise and others fall, your original mixes will shift. Sell high and buy low by reallocating back to your targets. This disciplines you to buy advantages when others are fearful and prevent over-concentrating on winners.
Monitoring and Managing Investments
Watchlist and Tracking Tools
To stay informed, set up a personal watchlist of your portfolio holdings in your brokerage account. Trackers also let you follow other businesses. Check performance regularly to spot any needing re-evaluation.
Re-Evaluate Periodically
Set aside time, like annually, to review each investment’s original thesis and updated fundamentals. Has the business model changed? Have expectations altered? It is okay to admit mistakes and sell weak positions.
Identify and Sell Underperformers
If a stock underperforms for years despite giving it time, or if new red flags appear in performance or management, it is best to cut losses and reinvest elsewhere.
Capitalize on Successes Responsibly
When a stock greatly exceeds your price target, sell partial holdings to lock in profits but keep the rest to benefit further. Rebalance back to target amounts with realized returns.
Capture Losses Strategically
If selling at a loss, consider waiting over 30 days, if possible, to offset future capital gains for tax benefits. But do not delay the necessary pruning.
Conclusion
Investing in stocks is a straightforward way for individuals to potentially grow their savings over many years. By following basic steps like opening an account, diversifying well among companies or funds, and maintaining your portfolio, you give your money opportunities to benefit from stock market returns.
Always remember – it is never too early or too late to start your investing journey. Whether you are just beginning or looking to refine an existing approach, applying the fundamental principles covered here can set the foundation for a bright financial future.
