Investing in stocks has been shown to be one of the best ways to increase wealth over a long period of time. But if you’re new to the concept, it probably seems a bit overwhelming. If that’s the case, no worries! This article will serve as your beginner’s guide to shares investment, so you can start your path to greater wealth.
What is a share?
First things first, you have to know what a share is if you plan on investing in one. To put it as simply as possible, a share is a unit that represents ownership in a company. A stock is an aggregate amount of shares. So you can own stock in a company, which also means you own shares in that company.
What is the stock market?
The stock market is where investors go to buy and sell stock in a company. The stock market works sort of like an auction house; where buyers and sellers can make trades and haggle or negotiate prices.
As mentioned above, one of the best ways to increase the amount of money you have is to invest it, but it’s also a good way to lose it if you aren’t cautious, especially at first. That’s why it’s important to ease yourself into the process of investing. Once of the best ways to start out is by investing in mutual funds. In fact, you may already be investing in mutual funds if your workplace provides you with a 401(k).
Pay off your debt
Before you start investing you should make sure that you’ve paid off any high-interest debt that you may have. High interest can be defined as having an interest rate of 10% or higher. Why should you pay down your high-interest debt? Because if you have $5,000 in debt when you are in your early 20s, at an interest rate of %10, it will turn into $500,000 in debt by the time you’re in your early 70s. What’s the point of investing if you’re just going to lose your money to debt along the road?
Make sure you have an emergency fund
An emergency savings account is essential before you begin investing. Young or old, you never know what kind of emergencies might pop up in life. You could lose your job, a storm could hit your home and your insurance may not cover all of the damages, or you could have a medical emergency. If unexpected expenses happen, you should be able to easily access your emergency funds in a high-yield savings account. If you are a single household, then your emergency fund should cover your living expenses for at least three months. So keep that in mind before you start investing. Similarly to unpaid debt, money that you need shouldn’t be invested in the stock market, due to the market’s volatility.
Decide how much
You may have a large sum available to invest, but if you’re just starting out, you probably want to start small and gradually increase. And starting small really does mean starting small. If you want to invest $10 per month, then that’s what you should begin setting aside. If you do begin with such a small amount, you’ll have to keep it in your savings account until it’s enough to open your actual investment account.
Think about your goals
Before you start investing, you should have some goals in mind. You’ll want to think about why you’re investing, what are your investment priorities, what your risk tolerance is, and how much time you actually want to spend investing.
Why are you investing?
When thinking about the why, consider if you’re saving for retirement, your kid’s college fund or you just want to have some extra money.
What is your risk tolerance?
Your reason for investing will affect how you invest. For example, if you’re investing for your kid’s college fund, you probably won’t take as many risks as you would if you were investing just to have some extra money around.
What are your priorities?
If you just want to focus on having more money, you won’t have to concentrate on stocks that pay dividends. But, if your investments will be providing future income, like in retirement, then you need to concentrate on investments with higher payouts.
How much time?
When it comes to investing styles, everyone is different. Some people want to really dive in and spend a good amount of their time at it, while others want a relatively hands-off approach. If you know you have enough time to evaluate stocks before buying them, then you can pick individual stocks. But if you know you don’t have a lot of time to dedicate to stock evaluation, you should choose index funds like ETFs and mutual funds.
When you open your brokerage account, you’ll also have to specify if you want an IRA or standard account.
A standard brokerage account allows you free access to your account. You can deposit and withdraw money as you please. With a standard account, you have to pay taxes, including taxes on dividends, taxes on capital gains, and taxes on interest income.
Individual retirement account
There are two types of individual retirement accounts: Roth and traditional. With a traditional IRA you get a deduction on your taxes. With a Roth IRA, you don’t have any taxes. The downside is that you have to wait until you are a certain age to be able to access your funds in these accounts.
Before choosing your broker, make sure to do plenty of online research, including reading independent reviews. If you’re just starting out, you may want to opt for a broker that provides free educational resources, and reports that will help you do research before investing. Another option to consider if you’re new, is a brokerage firm that has physical offices, so you can have face-to-face consultations. These of course will come with higher fees.
Practice makes perfect
Lastly, you may want to create a play account before investing in the real deal. There are plenty of sites that offer play accounts, so you can practice creating a portfolio and purchasing shares. This experience is risk-free and will help you feel prepared when it comes to investing actual money.