Written by: Daniel Gleich
When someone buys shares of stocks, they are buying small pieces of ownership in a company that is publicly owned and traded. People purchase stock in companies they believe will grow and become more profitable in the coming days, weeks, months, or years. When companies become more valuable, their share price goes up, meaning that those who bought the shares earlier can make money by selling their shares. Buying and holding stocks is a great way to ensure growth in an investment portfolio.
Once someone decides they want to buy stock, they need to decide how they would like to start investing. Many people want to do this on their own. Luckily, there are many resources available to help them DIY their first stock portfolio. People who want to manage their own portfolios will need to decide on an investment strategy. Another option is to use a Robo-advisor. These accounts are very low-cost. The customer typically answers a series of questions online that identifies things like their age, income, financial goals, and risk tolerance. Other people choose to open a traditional account at a brokerage so they can take advantage of knowledgeable stock brokers. The fees for these accounts are usually higher. Another way to start investing is to do it through a retirement account. These accounts can be employer directed, like a 401(k), or directed by an individual, like an IRA. Both of these options focus on making regular contributions and focusing on mutual or index funds versus individual shares of stock.
The next step after deciding the preferred way to invest in the stock market is to open an account that matches that preference. People who want to actively manage their own accounts typically choose to open an internet-based brokerage account. Typically, these have very low fees and it's possible to open them with very little money. Most online brokerages also offer both Roth and traditional IRA accounts. Many of these brokerages also offer Robo-advisor accounts, sometimes for a slightly higher fee, for those who want a little bit of support. Traditional brokerages offer investment advice from an experienced broker. No matter what sort of account used, the basics of opening the account are the same.
It usually takes less than twenty minutes to fill out the application paperwork online. Most brokerages will require uploading identification documents like a picture of a driver's license or passport. The next step is funding the account. Today, this is typically as easy as linking a bank account to the new brokerage account. It's not uncommon for the new account to make small deposits into the linked bank account that the account holder must verify before being able to finish linking the accounts. Some brokerages offer the option of a cash account or a margin account. A cash account means all investments are made with money the account holder has deposited into their brokerage accounts. Margin accounts let investors buy stocks on credit. These accounts require credit checks and are obviously riskier.
Once someone has figured out what sort of investor they'll be and opened their first account, it's time to decide what to buy! There are two basic options. When investing in the stock market, people either purchase shares in a fund or they purchase individual stock shares. There are two types of funds. Mutual funds often are designed around one type of industry or some sort of theme. For example, there are mutual funds that are devoted to investing in the stocks of alternative energy companies. Since these funds are actively managed, they typically charge higher fees. People who invest in these types of funds often purchase shares in several, like energy, healthcare, and financial to diversify their portfolios and their risk. Index funds, or exchange traded funds, also known as ETFs, mirror an index like NASDAQ or the S & P 500. They usually have lower fees. They are also diversified because they mirror the entire stock index.
People who want to buy stocks on their own can buy as many shares as they'd like and can afford. It's key to building a balanced portfolio, but doing this one stock at a time is a long process. Buying individual stocks also requires more active management than a brokerage account that mostly holds mutual funds.
How much someone needs to start investing depends somewhat on how they want to invest. It's possible to start investing in ETFs with as little as $100. Actively managed mutual funds typically have buy-ins as low as $1000. It's harder to say with stocks. Some stocks are quite cheap! Shares of other companies can cost thousands of dollars each. Never invest all of their savings in the stock market.
Most new investors want to check the stock app on their phone multiple times a day and adjust their holding accordingly. For most people, this is a bad idea. The stock market fluctuates every day in ways that don't matter very much in the end. It is important to check accounts to make sure everything is chugging along, look for unauthorized transactions, et cetera. It's also a good idea to re-balance portfolios from time to time. Especially as people age, the conventional wisdom is to slowly reduce the amount of risk in their portfolio.