What is one of the best ways to put your money to work, grow your savings, and generate a source of income? Easy: investing in the stock market. If you’ve never heard about it and it’s your first time reading something related to this topic, it probably sounds a bit complicated, but in reality, it is much simpler.
Investing in the stock market is not as difficult as it seems. One of the hardest parts is just getting started. Don’t get us wrong, you do require some kind of preparation and that’s why you are reading this article. But from that point on, it is just a matter of gaining enough confidence in the court. Here you’ll find everything you need to know how to invest in stocks.
Before we start, we need to set the base and understand that investments in stocks have risk. It is a HUGE mistake to think that investing in the stock market is a quick way to make a ton of cash.
As with every type of investment, your capital is at risk because the values can decrease and you could get back much less money than your initial amount. The good news is that, if you are wise and play your cards right, your investments can also increase in value and bring benefits for you.
What is investing in the first place?
First of all, we need to get on the same page about the basic concept of investing. Investing is putting your money to work with the hopes of earning some more money in the future.
As we said earlier, investing involves the risk of losing money depending on the outcome, but it also can be the complete opposite scenario where you can benefit and earn more than your initial investment.
Ok, sounds great. But why should I invest in stocks?
At the end of the day, it’s a personal decision. It is not like the world will end if you decide not to invest; however, you are losing a great opportunity of improving your financial life if you don’t.
As harsh as it may sound, keeping your money in your savings account is not the best option to grow your money. In a world that’s constantly changing, the economy can vary a lot, and this all affects your finances at some point.
Just think about it, the $2,500 you have in your account today don’t have the same value as a couple of months ago. Instead of keeping that money just sitting in the bank getting hit by the effects of inflation, you can take a portion of it and start investing in stocks. This way, your money can be working and making more money for you.
What are stocks?
Now let’s get a level deeper and try to understand what stocks are.
Stocks are portions of the ownership of a company. When you buy shares of a company you become a shareholder and you take part in the good and bad times of the business.
Think of it as a pizza at a family dinner party. When you take a slice of the Hawaiian pizza, you become a partial owner of the entire pizza. Whether you like pineapple or not, you get to take part in all the ingredients the pizza has to offer.
In exchange for the money shareholders invest, the company rewards their trust with a portion of its profits, also known as dividends. Consequently, shareholders with the most stocks of a specific company are usually able to participate in the decision-making process for the future of the business.
What is the stock market?
Chances are that when you hear about the stock market you think of a big room with green and red lights flashing, gentlemen in suits shouting, and papers flying around.
In reality, the stock market is not a physical space (sorry to bring your daydreaming down). An easy way to understand it is to think of it as a network of exchanges where buyers and sellers trade the stocks of different companies around the world.
How to invest in stocks
Now that we are on the same page with all the basic concepts, let’s move on and take a look at the process of how to invest in stocks.
These are the basic steps you would need to follow to get started:
- Set your investment goals
- Define your risk tolerance
- Set your investment strategy
- Pick your investments
- Get to know your investments
- Buy your first share
1. Set your investment goals
Before embarking on your investment journey, it is a must to get clear on the goals you are going after. Some of your financial goals may include being prepared for an emergency, making a big purchase like a car or a house, or just having enough money for your retirement.
Whatever your goals are, it is important to define them because they will be the starting point for your investing strategy. For example, if you are looking to get some quick gains, chances are you would be ok with risking your money in more volatile investments. On the other hand, a much more conservative investor may focus on safer stocks that help him to build up his portfolio for the long term.
2. Define your risk tolerance
Once you have your goals on point, you need to think about how comfortable you feel with risking your money. The easiest way to determine your level of risk tolerance is to think about what amount of money you would be ok losing for the chance of getting some profits. Keep in mind that, no matter the risk level, sometimes you win and sometimes you lose.
While you are doing this, consider your own financial situation. This means that, if you don’t have enough money just sitting in your savings account, it is completely normal that you don’t want to take much of a risk.
Before you start to invest in stocks, make sure to think about the amount of money you will be investing, the period of time through which you will keep your investment, and if you have enough cash to cover the expenses that you may face during that time. Also, remember that it is recommended that you invest only the money that you are willing to lose.
3. Set your investment strategy
As we mentioned earlier, every person may face a different situation with their own financial goals and needs. This is why investment strategies will also be different for each investor.
Passive vs active investing
Experienced investors usually keep an active or a passive investing strategy, and sometimes both. What is the difference?
The goal of active investing is to outperform the market. To reach this objective, investors spend time looking for companies to build a portfolio whose value would increase quicker than the market. This strategy is usually more expensive, as the individual investor needs to spend a considerable amount of their time and money on market research and trading transactions.
On the other hand, a passive investing strategy aims at mimicking the performance of an index. Instead of investing in individual stocks, passive investors purchase shares of investment funds, such as index funds and ETFs, that track the performance of an index. Besides diversifying your portfolio, keeping a passive strategy is usually cheaper as your transactions are not that frequent.
Investing vs trading
Investing and trading have something in common: Both are based on buying stocks. Nevertheless, they have several differences that may be game changers depending on your investing strategy.
The point of investing is buying stocks to hold them for quite some time and make your money grow in the long run, 1 year or more. Something important to consider here is not the moment in which the investment started, but for how long the investment is kept. The longer your investments have to grow, the more profits they will generate thanks to compound interest.
As we mentioned before, the value of your investments may go up or down, depending on the conditions of the market. When this happens, you may feel afraid of losing your money and tempted to sell everything. No need to worry, as it has been proven that long-term investments usually have good returns despite short-term fluctuations.
In contrast, stock trading is more focused on short-term benefits. The ideal scenario for any investor with this strategy is to buy stocks at a low price and sell them higher. Yes, you may get some great profits by trading in short-term transactions, but getting in and out of the market may cost you the focus on your long-term financial goals.
Keep in mind that there’s no right or wrong here; there’s not a mistake-proof method for everyone. Picking the right investment strategy depends on your financial goals and risk tolerance.
4. Pick your investments
Stocks
As we know already, stocks represent the percentage of ownership of a company. By acquiring stocks, you can turn into a partial owner of the most important companies in the world or small companies in their stage of growth.
We get it, it may seem intimidating to look at the stocks of large companies and find prices of hundreds of dollars. Don’t worry though, there’s a perfect solution for that. Nowadays, you can invest with as little as $10 in big stocks with fractional shares. Fractional shares are portions of a whole share that carry the same proportional benefits.
To understand it better, imagine you want to purchase a stock of a tech company that is priced at $1,200, but you have only $300 to invest. You can buy a fraction of that share and receive 25% of the dividends per share, for example. This makes fractional shares one of the best ways to invest with little money.
ETFs
ETF stands for Exchange-Traded Funds. They are bundles of stocks in which you can invest all at once. You can find ETFs composed of stocks from different companies and sectors, but most of them mimic the performance of market indices.
You can invest in an ETF if what you are looking for is investing in more than one stock. For instance, acquiring shares of an ETF that tracks the Dow Jones Industrial Average would be a very convenient way of investing in the 30 most prominent companies in the US economy all at the same time. You would save some precious time and money!
Additionally, if you are not much of a risk taker, ETFs can help you to lower the risk of losing. Say one of the companies didn’t have a good performance and its stock went down, those losses would be compensated by a better performance from the rest of the companies in the fund, avoiding you to lose what you invested.
5. Get to know your investments
The great Warren Buffet once said: “Never invest in a business you can not understand”. Before investing in stocks, ETFs, or whatever it is, it is important you know what you are putting your money into.
It would be a good idea to get to know what the company does, its business model, how it makes money, who they serve, etc. Once you know all these details, ask yourself if you believe enough in what it does so you can trust it with your hard-earned cash. Every investor has a different point of view about all this, but part of it will depend on your financial goals.
6. Buy your first share
Once you’ve picked what stocks to invest in, it’s time to purchase your first share. To get access to the stock market and trade stocks from any company, you need the help of a broker. A stock broker is a person or an entity that works as a mediator amongst the transactions you want to make in the stock market. They will help you complete your purchase of any stock.
Nowadays, several digital platforms let any beginner investor purchase some shares from the palm of their hand. One of the most secure and easiest to use is FlexInvest. After opening your account in a matter of minutes, you will have access to the stocks of hundreds of the most important companies in the world. Besides, you can start investing for as little as $5 with fractional shares.
How to make money from your investments
Great! You are a brand new shareholder of an important company! Now what?
Here are some ways in which you can make a profit from your investments and enjoy the fruits of your effort.
Capital gains
Selling your stocks at a higher price than the one you paid for them may be the easiest (and quickest) way of making money out of your investments. These earnings are also known as capital gains.
Earn some dividends
Some companies use to reward the investors who trusted them by sharing with them a portion of their profits. These payments are called dividends.
Normally, dividends are paid every year, semester, or quarter. The amount of money you would receive from them depends on the number of shares you own. This means that the more stocks you own of a specific company, the more dividends you receive whenever they are paid.
Important: The fact that a company pays dividends doesn’t make it a better investment. Several big companies don’t pay dividends.
Compound your earnings
This is not a way to earn money per se, but compound interest is an important concept to understand to maximize your profits.
The process of compounding interest refers to making your money grow by adding the returns (in this case, the dividends) you earned to the initial investment amount.
For instance, let’s say you invested $1,000 in the stocks of a transportation company. By the end of the year, you will earn $2.50 in dividends thanks to the shares you own. Instead of cashing out those $2.50 and buying some treats, you decide to add it to the initial $1,000. For the next period, your initial investment would be $1,002.50; this means that the dividends you will earn in a couple of months will be greater.
Yes, $2.50 may not seem like much of a difference, but if you keep on adding (or compounding) these dividend payments to your initial investment you will earn some significant rewards over time.
Investing best practices
By this point, you may be wondering: What is the best way to build an investment portfolio that is safe and brings back results?
When you dive into the world of investing, it is important to understand there is no beginner’s manual or a one-size-fits-all solution to being a successful investor. However, there are some common practices that you may apply to help you along the way.
Diversify your portfolio
Have you ever heard the saying “Don’t put all your eggs in one basket”? This is what diversifying your investments means.
Applying diversification to your investment portfolio means avoiding getting stuck with investing only in one company. It would be a good idea to look for a second option that works in a sector completely different from your first pick.
For example, imagine what would have happened to your investment portfolio during the Covid lockdown if it was completely built out of airline stocks. You would have had some big losses! Nevertheless, if in addition to the airlines you had some tech companies and restaurant chains, your portfolio would have been able to stay afloat.
By diversifying your investment, you will not depend exclusively on the performance of one single company or sector. If one of them doesn’t perform well during a certain period, the rest of the companies in your portfolio may help to ease the damage and compensate for the loss.
Make investing a habit
One of the most significant moves you can make while investing in stocks is doing it frequently. Make sure to develop the habit of setting apart a portion of your income to put into your investments every month.
By following the principle of paying yourself first and investing consistently, your investments will grow more and more over time and eventually reap greater returns down the line.
Remember that there is not a single investment strategy that works for everyone, so make sure to take these guidelines as popular suggestions instead of rules.
Conclusion
Expert investors say that the best moment to invest was yesterday and the second best is right now, so what are you waiting for? Feel free to head over to the FlexInvest platform and buy your first stock.
However, if you don’t feel quite ready yet, make sure to take a look at the rest of our articles to learn more about investment strategies and useful tips that will help you have a head start. Happy investing!
