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Investing

How to Invest in Stocks in 4 Steps

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

hundred-dollar bills in a jar

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

There are a few ways you can start investing in stocks — namely, robo-advisors and online brokerages. Which you choose comes down to personal preference.

Robo-advisors

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.

Online brokerages

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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dori Zinn
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Dori Zinn is a writer at MagnifyMoney. You can email Dori here

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Should You Pay Off Debt or Save Your Money?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

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Investing

How to Make Money in Stocks

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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