If you have extra cash lying around, you could put it into a savings account and reserve it for a rainy day — or you could use it to earn even more money. That’s where investing comes in.
Saving money is a good habit, and you should set aside cash in an easily accessible account in case of an emergency. But investing the money you don’t immediately need will help you earn more money in the long run.
You can invest in almost anything, including property (think houses and condos), mutual funds and stocks. But if you’re just learning how to invest, let’s keep things simple to begin — here’s how to invest in stocks.
How to invest in stocks for beginners
“It all starts with budgeting,” said Justin Sullivan, a certified financial planner (CFP) and an investment market manager at PNC Wealth Management. “Before you invest, you need to make sure your everyday living expenses are secure and you have a safety net.”
Make sure you have a few months of expenses saved up before you begin, said Sullivan. Since investing always carries some risk, you don’t want to invest anything you’ll need for necessary living expenses.
After you’ve done that, you can start investing in the stock market. Here are a some steps to consider as you begin.
1. Decide how much to invest
“There is no minimum to begin investing,” said Sullivan. “The most important part is to start and to be consistent.”
How much you invest depends on how much money you have set aside. With some companies, there’s no minimum investment required to begin investing. A few dollars can get you started.
But your starting amount won’t be all you ever invest. Make it a habit to regularly contribute money to your investments. Many experts recommend putting 10% to 15% of your income into your investment portfolio. If you’re not able to contribute that much right away, start with a smaller amount and gradually increase it as you earn more money or pay off debt. That way, you’re always building your wealth.
2. Choose how to invest in the stock market
Robo-advisors are a great way to invest a little money using a hands-off approach. They tend to have low fees and can help you get started with a little cash.
They are best for investors who prefer automated help. When you sign up, the robo-advisor uses a questionnaire to get an idea of your risk tolerance and then recommends your investment path, executes that plan and manages it for you.
David Edwards, president of Heron Wealth, recommended robo-advisors for “younger investors with simple lives.”
“[But] extreme do-it-yourselfers also seem happy with robos,” said Edwards. “Most people turn to human advisors when their lives get complex, just as most people turn to human accountants when their lives get complex.”
Robo-advisors vary when it comes to their fees and minimum investments — there isn’t a benchmark or standard everyone follows. Many come with paid upgrades, such as talking to a CFP or another investment professional.
The downside of robo-advisors is that you may not be able to talk to a real person about your very real money. Not having a face-to-face meeting or even a phone call might make you uncomfortable.
You could try a hybrid approach. Take advantage of an account that mostly manages itself but gives you the option of talking to a financial professional.
The main difference between online brokerages and robo-advisors is that robo-advisors manage your money for you. With online brokerages, you can handpick the stocks, bonds and mutual funds you want to invest in.
Online brokerages are great if you’re interested in managing your own investments. If you’re the type of person who needs to see where every dollar goes or you like monitoring the stock market, this type of account will work for you.
Many online brokerages have low or no minimum amount requirements. This is great if you don’t have a lot of money and want to monitor your investments closely. If you feel confident that you can make responsible choices on which stocks, bonds and mutual funds to buy, then an online brokerage is a good option for you.
The downside is that online brokerages tend to charge more in fees. If there’s a transaction fee every time you sell or buy, you’ll think twice about making moves. When you’re evaluating online brokerages, see how much the company charges on top of transactions. Flat-fee options are a good idea, as percentages of purchases can get pricey.
3. Decide what to invest in
A wise approach to investing is to diversify. Don’t put all your cash into one company, even if you think that company is going to do great.
“Most people who are investing novices have limited resources,” said Sullivan. “It’s best to look into mutual funds and exchange-traded funds (ETFs) that will instantly give you diversification instead of choosing one to two stocks. You don’t want to put all your proverbial eggs in one basket.”
It can be hard to decide which companies to invest in and how many shares of each to buy. There are many kinds of companies: technology, health care, financial and so on. Sullivan suggested patience and growth stocks.
“Companies that would be labeled as growth stocks, like those in the information technology sector, would be something that’s considered appropriate for someone who is just starting out,” said Sullivan. “As long as their risk tolerance is high enough to go through ups and downs.”
4. Monitor your account
You’re doing it! You’ve saved up enough money, you’ve found the right investments and you’re starting to watch the stock market. But don’t get ahead of yourself. It’s easy to get caught up in the highs and lows of buying and selling, but try to remember that you’re in it for the long haul.
“Don’t chase returns,” said Sullivan. “New investors shouldn’t become overly sensationalized by the thought of market timing. Most investors are rewarded for holding investments long term and not getting seduced by the idea of a quick purchase or sale.”
To stay on top of your investments, Sullivan suggested doing a quarterly review. Companies report earnings on a quarterly basis, giving you a chance to see how they’re performing and decide whether they’re still worthy of your dollar.
It’s also important to continue adding money to your account when you get the chance. Regular contributions help grow your investment account, as they do for emergency and savings accounts. A little bit goes a long way.
“Set up regular deposits into your investment account, maybe once every paycheck or once every quarter.” said Sullivan.
If you have a robo-advisor but want to talk to someone, consider finding a CFP or registered investment advisor (RIA). These professionals can help you make the most of your investments.
“Hiring an investment professional can help in so many different ways,” said Sullivan. “Not just because of the experience and thoughts they bring to the table but also the psychological aspect of it. It’s important to have someone to bounce ideas off of instead of going at it alone.”
When you’re ready for stock market investing
As you move from general savings to the possibility of investing in stocks, make sure you’re looking for a robo-advisor or online brokerage that best represents you. Just like you would research buying a new car or home, you should devote as much time as you need to learning how to invest in stocks.