Investing in stocks is a great way to build wealth. However, having the right strategy is just as important as investing itself.
While investing may seem like a complicated game only rich people can play, that isn’t usually the case.
The reality is that, while investing in stocks can be complicated, that isn’t a necessity. In fact, unless you’re a day trader, the goal should be to keep things as simple as possible.
Thus, this article will help you understand a basic, step-by-step approach to investing in stocks.
Without further ado, let’s take a look at the steps you need to start investing in stocks.
Choose Your Strategy
These days, there are many different ways to buy stocks. For the purpose of this article, we are going to assume you’ll buy your own, individual stocks.
However, investing can take many forms:
- Mutual funds in a retirement account
- Exchange-traded funds (ETFs) in a brokerage account
- Using a robo-advisor
These are just a few of the ways to invest.
Determining which strategy works best for you depends on a few key factors: time, fees, investing knowledge, and your goals.
For instance, one of the reasons people invest in individual stocks is that returns can be greater than with mutual funds or ETFs. Plus, more and more brokerages have commission-free trading these days, meaning it’s free to buy stocks.
However, in doing so, you increase your risk, and potentially the time needed to research companies.
Are you willing to take on greater risk for the chance of greater reward? Are you willing to spend more time managing your investments to avoid fees?
These are the questions that will help formulate your strategy – questions only you can answer.
For now, we’re going to keep it simple and walk through the process of opening a brokerage account and purchasing individual stocks.
Open an Account
If the plan is to trade individual stocks, all you have to do is open a brokerage account. The process only takes a few minutes, and you can use any broker you choose.
Yet again, you have many choices. You can hire a human stockbroker, buy your own stocks through a brokerage like Schwab or Fidelity, or use a tool such as M1 Finance.
For the purposes of this article, we’ll assume you will open your own brokerage account.
The process is quick: it only takes a few minutes, and anyone can open an account. It’s not like opening a credit card, which can sometimes have stringent approval criteria.
All you have to do is fill out the application and wait for approval, which is usually immediate. Then, link your bank account and transfer money in.
Once that is done, you are ready to start trading.
The next step in the process is to research which investments you will buy. Don’t overthink it: oftentimes, the companies you know of are some of the best investments. Think Apple, Amazon, and Tesla.
How you will research companies will also depend upon your preferences. If you’re more of a DIYer, you can pore over documents like annual reports.
There’s nothing wrong with doing things this way if that is your style. However, there are also much easier ways, such as using tips from The Motley Fool.
The Motley Fool is a financial advice company that regularly gives its best picks for individual stocks. While that is never a sure thing, it can save a lot of time.
Decide How Much to Invest
Deciding how much to invest is a very personal decision. It can also be a very arbitrary one without specific goals in mind.
Needless to say, it may be difficult to stay on track if you are saving “just because.” That why tools like Betterment have goal tracking to track specific goals.
The most common goal is probably retirement, but you can also save for goals like a major purchase or vacation. It then helps you determine how much you have to save in order to meet those goals.
Of course, return on investment is impossible to predict with 100% accuracy. Thus, they’ll tell you how likely you are to meet your goals by a certain date with your current investments.
There are other systematic ways to save, too. Some people enjoy challenges such as the one percent challenge.
The concept is simple: each month, save one percent more than you usually would. If you usually save nothing, start with one percent of your income. Then, every month, increase it by an additional one percent.
By the end of the year, you’ll have an extra 12 percent saved – something you can repeat every year, or increase to 15-20 percent.
Indeed, there are various ways to increase your savings, but having a specific goal in mind is critical.
Set it Up for the Long Haul
One of the biggest keys to investing success is growing your money over years – or even decades. Most brokerages and investing tools support auto-investing to allow you to add money without even thinking about it.
And if you use a robo-advisor, like Betterment or M1 Finance, your money will even be invested automatically. That means you don’t have to purchase shares each time money comes in.
However, arguably the most important reason to invest for the long run is the magic of compounding. To illustrate this point, consider that a $10,000 investment, with no additional contributions, will grow to over $200,000 with 8 percent interest.
If you’re lucky enough to see 9 percent interest on average, it will be over $300,000 after 40 years.
To give another example, if you invest the same $10,000 but contribute $500 monthly, you’ll have a whopping $1.7 million after 40 years.
But here’s the crazy part: only $244,000 of that is your contributions. I used the calculator on Investor.gov to find these numbers:
Keep in mind that 8 percent is considered quite optimistic by most standards. You’ll often see 7 percent mentioned as a more “realistic” return.
Regardless, sticking to your goals is critical. As you can see from the above graph, returns are quite flat for the first 15 years or so.
This can be discouraging or even make investing seem like it isn’t worth it. But compounding rewards those who remain committed.
Remaining committed is key. In fact, Fidelity found that the most successful investors were forgetful – or dead.
Why? Because these are the investors least likely to make constant changes to their portfolios. While it is natural for us to incessantly be tempted to tweak our portfolios, the reality is that we do so at our own peril.
So, if you really want to be a successful investor – set it and forget it.