Investing in the stock market can be an intimidating thing for those who have no prior experience. The good news is that today you can invest with absolutely no experience, and without having to pay for a costly advisor. In our beginners guide to investing in stocks, you'll learn some basic steps to getting started on the right path.
Choose Your Approach
Some people are more hands on than others, and others like to “set it and forget it.” To start off right, determine which approach fits best with you. We categorize the two different approaches as Passive Investing and Active Investing.
What Is Passive Investing?
This is the “set it and forget it” approach to investing. It works best for people who don't wish to get into the details of picking their own stocks. Rather, passive investing automatically spreads all your money among a fund of multiple investments.
To do this, you can invest in mutual funds, exchange traded funds (ETFs), invest using a robo advisor or create your own fund with M1 Finance, and automatically contribute to it on a regular basis.
A mutual fund is a basket of investments compiled by the fund manager. Each mutual fund has an objective such as growth, income, etc. Some funds are just a copy of a popular index such as the S&P 500, which tracks 500 of the largest companies in the US. When you contribute to a mutual fund, you contribute to the pile of money that the fund managers manage, rather than purchasing shares like a share of stock.
An ETF is similar to a mutual fund in that it's a basket of investments compiled into one fund, but it trades like a share of stock. Each share of an ETF is comprised of tens, hundreds or even thousands of stocks. Like a mutual fund, an ETF can also copy the a major index like the S&P 500.
A robo advisor is a modern investment app that creates a diversified portfolio for you after asking a few questions about your style of investing. Once completing the questionnaire, you can invest in the portfolio automatically.
M1 Finance allows you to invest in stocks by building your own “pie” or fund. First you pick which stocks you wish to include. Then you determine what percentage each company makes up of your portfolio. After that, each deposit you make will be allocated among your customized portfolio!
These three approaches allow one to invest in a passive manner, with little management required. Simply open an account, pick a fund or build a “pie”, then set it and forget it!
Passive investing works best for those who have little time to manage their investments or simply aren't interested in becoming an investing expert.
What Is Active Investing?
An active investor is one who wishes to pick each individual investment for their portfolio based on fundamental analysis and economic activity. Your investment account will be comprised of only the companies that you personally have done your research on.
Active investing requires one to do their due diligence with each stock pick, analyzing the company financials, their management team, their sales growth and future company plans.
One can participate in active investing by opening up a regular investment account. You can do this through investment banks like Fidelity or TD Ameritrade, or by using a modern investing app like Cash App Invest, Robinhood or Stash.
Determine Your Risk Tolerance
Your risk tolerance refers to how comfortable you are with risk. In the stock market, your investments will increase and decrease in value in the short term, and some are more comfortable with this than others. How comfortable you are will determine your overall risk tolerance.
In order to discover your risk tolerance, you need to ask yourself a few questions such as:
- How old are you?How soon will you need your invested money?
- How comfortable are you with market fluctuations?
- Do you have other investments?
- What will your invested money be used for? (retirement, large purchase, etc.)
Your answers to these questions will be telling in what types of investments you should put your money into. For an example of different risk tolerances and their respective suggested portfolio allocations, take a look at Vanguard's investor profile questionnaire here.
Open An Account
Once you've determined your management approach to investing, your appropriate risk tolerance, next you need to open your investment account to get started!
There are hundreds of options to begin with which can cause confusion and “analysis paralysis.” The following suggestions below have zero minimum opening balance, zero commission fees on trades, and have user friendly apps to access your portfolio from your smartphone.
Fidelity: Fidelity is an investment bank with investment accounts ranging from individual broker accounts, to IRA retirement accounts, minor accounts for your children, and even college savings accounts.
Acorns: Acorns is as simple as it gets to putting your investments on autopilot. They ask you a few questions, open your account and build you a customized portfolio based on your risk tolerance. You can invest how ever often you want.
Their main feature are the round ups. You link your bank debit card and each purchase you make every day is rounded up to the next whole dollar, and the change is invested for you. You get a $5 for free when setting up an Acorns account with this link here.
Robinhood: Robinhood is considered the “pioneer of commission free trading.” They let you invest in multiple assets including cryptocurrency. They allow “fractional trading” which allows you to invest based on dollar amounts rather than whole shares. Robinhood offers a free share of stock if you sign up here.
Cash App Invest: Cash App is a peer to peer payments platform similar to PayPal, except they also allow you to invest for free. They are as simple as investing gets to invest in fractional shares at no cost. Cash App offers you $5 when signing up for free through this link.
M1 Finance: A free investing platform that allows you to create your own fund or “pie” and automatically invest in that pie and the percentage allocations you set for each company included. M1 Finance will give you $10 for free when signing up through out link here.
Keep A Long Term Mindset
Perhaps the best advice I've ever followed was keeping a long term mindset when investing in the stock market. Warren Buffett himself said “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”
The stock market has a continual upward trend over time, with spikes and dips along the way. If you buy and hold for the long run, the short term volatility will have little affect on your overall performance.
You Don't Have To Be An Expert To Invest In Stocks!
Its too common that people believe they need to be an expert to invest in the stock market. The fact is that this belief just isn't true…at all! That's why I created this course on investing in the stock market without any experience. Learn more about our course “You Don't Have To Be An Expert To Invest In Stocks” here.