Money spent on stocks can be a wonderful way to build wealth for the future. Starting early is critical as many of us are also starting small. In addition to starting early with your investment portfolio, it’s a good idea to know your risk tolerance.
Check Your Comfort Level
If you have a 401(k) through your job, the investment process is so simple that you will probably be quite comfortable with it. Money comes out of your check before you see it and goes into market funds that are likely high, moderate, or low risk.
Investing post-tax dollars with a broker can be a much more worrying activity. When considering investing for beginners, try to use an app that allows you to buy fractional shares of larger stocks that are established and profitable.
Buy Just a Bit of Large Stocks
A stock is a certificate of ownership in a business. When an owner chooses to expand their business, selling shares in the business is a wonderful way to raise money for improvements.
Depending on the growth pattern of the business, your stock purchase will grow or drop in value. Penny stocks offer some options for growth but are so volatile as to be too risky for most investors. Extremely expensive stocks, such as Amazon, offer the chance of steady growth but are out of reach for many investors. The ability to buy fractional shares means that you can buy a tiny portion of a $3,000 stock.
Investing Vs. Trading
Investing is a buy and hold strategy while trading is more active. While trading can be more interesting, it’s not a great way to make money in the stock market. The ability to be patient and let your stock value grow over time will actually do more for your financial future than actively moving money around.
Why? Humans are prone to responding more intensely to a negative event. If you have a stock that is humming along and suddenly drops in value, the temptation to dump it can be almost overwhelming. Unfortunately, this means that you lose any difference between your initial purchase price and what you reap when you sell the stock.
To buy low and sell high as an active trader means that you have to time the market. To time it, you have to know it and keep studying it before you make any buy. As there are professionals who spend their lives learning the market and still struggle to time the market, buying and holding is the best method for beginners.
The Power of Index
Once you can buy fractional shares, check out index funds. An index fund is the slice of a collection of businesses or stocks. The S&P 500 is an index that offers a fund, as is the FTSE 100 in Great Britain.
By buying partial or fractional shares of index funds, you own the power of the market as a whole. While corrections can be tough on your balance for a time, index funds are built to grow. You don’t have to pick and choose companies to buy and hold; instead, you own a slice of many companies, all of which are working to improve their bottom line.
Carefully Consider Your Situation
While putting away money in investment funds, it’s also critically important to take a look at your personal financial situation. Paying 20% interest on a credit card and earning 6% interest on your investments is not a good long-term strategy. This is not to say that you shouldn’t start investing in the stock market. However, you may want to limit your investment dollars for a time while you wipe out high-interest debt, then increase your investment contributions.
Make sure that any investment dividends go right back into the market for the time being. If your budget allows you the cash to invest in the market, the dividends become your employees. Those dollars can then go back into the same index funds, or you can route your dividends into higher-risk funds for the chance of greater gains.
The ability to turn your money into more money is easier today than it ever has been. Unless you really know an industry and the players in a company, avoid making a lot of trades that can lead to excessive fees. Buy and hold for the long term.