How to Start Investing in the Stock Market

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Mystified by the stock market? Well, no wonder. A quick glance at a stock chart, a glimpse at an altogether foreign ticker symbol (and the scary financial news about tumbling stock prices) is enough to scare away even the most fascinated up-and-coming investor.
But the beauty of the stock market is that anyone can invest in it — even if you’re carrying just $10 in your pocket.
One of the biggest myths about investing is that you must be rich to invest. Not the case at all. The stock market can turn your $10 into multiples of 10.
Let’s learn what it’s all about.

What is the Stock Market?

“Stock market” is kind of a misnomer because it actually refers to more than one index. You may have already heard about the major stock market indexes — the Dow Jones Industrial Average, for example, or the S&P 500. It’s impossible to track the entire market, so select stocks are chosen to represent the market through these indexes.
Stock market indexes move up and down and gain or lose value. When investors buy and sell stocks, your goal is to turn a profit through this stock price movement.

What Are the Options for Investing in the Stock Market?

You’ve got thousands of investment options — what should you choose? Here’s just a small sliver of popular investment options:

Stocks:

Stock shares all together form ownership in a company. A single share of stock represents one small portion of ownership of the corporation in proportion to the total number of shares.

Mutual funds:

Mutual funds pool money from many investors to buy bundles of securities — usually stocks and bonds.

Bonds:

The key thing to know about bonds is that you’re loaning an entity money — usually the government. This entity pays you the face value of the loan by a specific date and periodic interest payments along the way.

Annuities:

Annuities are contracts between you and an insurance company. You make payments to the insurance company and receive regular disbursements either immediately or at some point in the future.

Exchange-traded funds (ETFs):

ETFs are bundled baskets of securities that trade on an exchange, just like a stock. You can buy ETFs all day, whereas mutual funds can only trade once per day after the market closes.

Money market funds:

Money market funds are open-ended mutual funds that invest in short-term debt securities like U.S. Treasury bills.

U.S. Treasuries:

U.S. Treasuries include debt instruments like Treasury bonds, notes, bills, TIPS, and Floating Rate Notes (FRNs), and U.S. savings bonds.
Stocks, bonds, mutual funds, and ETFs are common and the types of investment products you’d probably choose when you want to invest in your retirement or a college savings plan.
Your options don’t end there. You can invest in gold, real estate, commodities, and the list goes on.

How to Invest in the Stock Market

Here are some steps you can take to invest in the stock market. These are general guidelines, assuming that you’ve chosen to DIY invest. If you choose to invest with a financial advisor, he or she will take these steps with you.

Step 1: Gauge your risk tolerance and timeframe.

What are the best saving and investment products? The answer depends on when you need the money and what your goals are.

Let’s say you have a 35-year time horizon before you retire. You may want to invest in stocks instead of bonds — a frequent mistake people make is putting the money they will not need for a very long time in investments that pay a low amount of interest. However, if you can’t sleep at night because your portfolio is on the risky side, you may need to adjust to what’s comfortable for you.
Are you saving for a short-term goal of five years or less? You may want to avoid risk (all individual stocks, for example) because you may have to take a loss.
Warren Buffett’s advice rings true for lots of investors. He once said, “Invest in stocks as you would in a farm. Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment for over 10 or 20 years.”
But here’s the beauty of personal finance: It’s up to you. You don’t need to automatically switch to T-bills just because you turn 65.
Same-o for younger folks. You may be okay with trading forex for a couple of years and living on the edge because you can afford to lose a bundle of money. It’s whatever you’re most comfortable with!

Step 2: Choose a broker.

Choosing a broker is one of the most important decisions you make as an investor. Unless you buy stocks directly from the company and bypass a broker altogether, that is. In most cases, you need a broker. The broker influences a lot:

  • What you pay
  • Your investment options
  • The tools available to you
  • The education options open to you
  • Your comfort with the investment options you’ve chosen (for example, if you choose to trade forex and barely know what a dividend is, you might be in over your head. Might.)
Certain brokers offer more assistance than others. Some hand-hold more, some hand-hold less. The right broker should give you exactly what you need whether you’re a beginning investor or an expert trader.
No matter what, don’t forget to understand the fees associated with buying, selling, and holding your investments.

Step 3: Open an account.

It’s easier than ever to open an account online. New accounts require you to fill out identifying information like your Social Security number and driver’s license. You may need to sign additional forms such as margin privileges, net worth, employment status, investable assets, and investment goals, and more. However, this process is usually quick!

Step 4: Fund your account.

Next, you’ll need to invoke a deposit or funds transfer. Your broker will guide you through the process. Once your account is fully funded, you can begin investing. Some brokerages require you to have a minimum amount in your account before you can invest.

You might be asked if you want a cash account or a margin account. A margin account lets you borrow money from your broker in order to make trades. It’s best to stick with a cash account at first because the margin is risky.

Step 5: Choose your investments.

It’s research time! Read everything you can your hands on about various ETFs, stocks, mutual funds, bonds, etc. Whatever type of instrument you think you might want to add to your portfolio, learn about its costs, prospectus (an information packet), and more. Learn which companies make up the ETF or mutual fund if you’re considering bundled investments.

Step 6: Check on it every once in a while and rebalance when necessary.

It’s a good idea to check in. Just like you wouldn’t want to drop your kid off at the babysitter’s house and never ask how things are going, you also don’t want to abandon checking your accounts. Over time, shifting markets can push your portfolio farther from your goals and risk level.

You might need to rebalance (rearrange your portfolio) to keep it headed in the right direction.

Tips for Getting Started

Need a few more tips to get you on your way? That’s perfectly natural if you’re a tentative beginner. Learning how to start investing can seem like learning Greek when you’re old — not easy to do.

Tip 1: Learn the lingo.

Speaking of learning Greek when you’re old — that’s actually an excellent first step. You need to learn the lingo of investing.

Know these basic terms:
  • Buy: Refers to buying shares or taking a position in a company.
  • Sell: Liquidating shares when you’ve made the money you want or want to cut down losses.
  • Ask: What people who are looking to sell their stocks are looking to get for their shares.
  • Bid: The amount of money you are willing to pay for a stock.
  • Bull: A market condition in which investors and traders expect prices to rise.
  • Bear: A market condition in which investors and traders expect prices to fall.
  • Limit order: An order type that executes at the price placed for buy or sell.
  • Market order: An order type that executes as quickly as possible at the market price.
  • Capitalization: What the market thinks a company’s value is.
  • Dividend: The portion of the company’s earnings paid to shareholders.
  • Broker: A broker buys and sells stocks on your behalf.
  • Exchange: A place where different types of investments get traded.
  • Portfolio: Your own personal collection of investments.
  • Margin: Borrowing money from the broker to buy shares.
  • Stock symbol: A one-to-three character alphabet root symbol that represents a company listed on the exchange.
You’ll need to know more terms as you become more familiar with investing and trading, but those terms should give you a good starting point!

Tip 2: Choose a brokerage you’re comfortable with.

Are you more comfortable with barebones Robinhood or a brokerage with all the bells and whistles, like TD Ameritrade? If you’re having a hard time deciding, consult Benzinga’s Best Investment Firms article for guidance.

Tip 3: If this all looks like Greek to you, get a financial advisor.

A financial advisor will lay it all out for you. Find an advisor who answers your questions, spends time with you during your first free consultation, listens to your risk tolerance, time horizon and concerns, and more. Ask around in your community for more.

Note that the wider market and indexes like the S&P 500 have outperformed most managed funds and the same may apply to managed portfolios. You may pay more for an advisor but getting one may come with untold perks, including advice about how to withdraw your money in retirement, college savings, and more.

Tip 4: Don’t forget to think of loved ones in the process.

As you invest, it’s a good idea to make sure you also set up the right protection for your family and yourself. Don’t forget about health insurance, disability insurance, and life insurance. Sproutt can help you cover your family when you die. Answer a few questions about yourself, select the right insurance plan for you, and apply online.

Invest in the Stock Market Like a Pro

You want to shoot for overall portfolio growth and capital preservation whether you choose a full-service investment firm or go the DIY route.

Take a careful look at your options and just get started. Even if you make a couple of small mistakes along the way, it’s best to get started now. The earlier, the better.
For more information about coverage, protecting your family, and the worldwide situation at hand check out our answers for crucial life insurance questions right here.

Get an instant online quote for life insurance.