Things to Know Before Investing in the Stock Market
Want to be the next Warren Buffett? Not so fast. If you want to make money investing in the stock market, you need to know a couple of things...
If you have ever watched The Wolf of Wall Street, then you're already well-aware that investing in the stock market can be the best way to make money out there. There's a reason why millionaires so often work in finance, after all.
These days, stock trading has become more inclusive than ever before. You no longer need a degree from Wharton and a special stock broker account in Manhattan to trade and make a profit. All you really need is a desire for knowledge and a willingness to take a risk.
That being said, there are some things you should know before you put down any cash in stocks, ETFs, or mutual funds. Here's what investors wish they knew before they started trading.
Once, not too long ago, it used to be that you would have to pay $10 to $20 per transaction in fees. Most brokerage accounts would also require you to have a minimum amount of money invested before you can do anything with stocks.
Nowadays, things have changed. A lot of online broker apps allow you to trade individual stocks for as little as $4 a pop. Some, like Robinhood, offer fee-free trades for a wide range of different stocks.
Other apps, like Stash, offer ETF portfolios with extremely low initial investments. When you can buy ETF slices for as little as $5, it just makes sense to try investing via an app.
When trading stocks, you should never trade what you can't afford to lose.
Investing in the stock market is risky, and that means that you can potentially lose everything. The biggest mistake newbie investors do is invest money that they can't actually afford to lose.
If you wouldn't be able to make ends meet without that money, make a point of setting up an emergency fund of $1,000. In many cases, that could actually yield a better effect on your personal finances than a new stock portfolio.
Trading in "real time" is not very doable with most traders. The truth is, we can't all be watching stock tickers 24/7—and it's not even healthy to do so. A better fix would be to learn about different ordering methods and work with them to maximize your profit.
Most stock trading apps, including ones like Stockpile, will allow you to choose the minimum price you'll sell at, the maximum price you'll buy at, and much more. Some even allow you to set a "stop loss" order once a stock dips below a certain level.
It's also important to learn about common forms of stock investments before you try investing in the stock market, too.
Part of investing in the stock market is realizing that not all investment options are individual shares of a company. Most people are aware of individual stocks like Apple or Microsoft—but there's more to stock trades than just that.
Some stocks being traded on exchanges are actually groups of stocks sold in bundles, all sliced into smaller, more buyable shares. These bundles allow you to increase portfolio diversity, reduce risk, and get better rewards. These kinds of investments include:
- Exchange Trade Funds (ETF). ETFs are excellent choices for people who want a professionally managed fund, a wide range of shares, and possibly a certain theme to the fund itself.
- Mutual Funds. These, too, are collections of investments. Sometimes, they will branch off from just stocks, into commodities, real estate, or fiat money. ETFs and Index Funds can also be mutual funds.
- Index Funds. These are "bundles" of stock slices that are based off major stock indexes like the Dow Jones or the S&P 500. The best S&P 500 index funds, for example, will often beat the market while containing a lot of top picks.
Investing in the stock market is a great option, sure, but you shouldn't have to stick solely to stocks. Real Estate Investment Trusts, or REITS, have been a great way to invest your money in a booming industry without having to "fix and flip" things on your own.
Crowdfunding platforms like Prosper or Lending Club can be a great route for your cash, if you like the idea of playing the role of a lender. The more time you spend trying to find some unique investment opportunities, the better you'll be at finding an opportunity that works well for you.
Long-term investing in the stock market is your best bet.
The stock market is risky, particularly when it comes to short term sales. It's possible for you to invest $10,000 in an index fund and have that money only be worth $6,000 in a couple of years. Bad years can and do happen.
The real payoff is what happens after a long while on the market. On average, you can expect around 7 percent annual returns, decade after decade. Since stock markets tend to bounce up higher with every single drop they make, it makes sense to act as a long-term investor.
Let's say that you're one of many who wants to invest in the stock market, but you don't really know what to buy. If you're not the kind of person who would just sock away money in an index fund, but you still want to have some kind of involvement, you may want to consider Betterment or Wealthfront.
These apps are robo-advisors that help match you with investments that would help you meet your goal. These kinds of apps also allow you to better plan your personal finances and give you valuable advice for newbies.
Your 401(k) is a great way to start investing in the stock market.
Want to have tax benefits and free retirement money thrown your way? Max out your 401(k) contribution. 401(k)s are company-managed stock portfolios that come with tax benefits. These unique retirement vehicles might also help you with employer contribution matching, too.
Roth IRA accounts offer similar benefits, and can be opened from a basic brokerage site. Either way, it's a better way to encourage savings for your future—and could help you be significantly richer, later.
Due diligence is a phrase you're going to hear a lot of when you start investing in the stock market. This is a phrase that tells you that you need to research the companies that you want to invest in.
Though the SEC does have some legal jurisdiction and works to keep us safe from scams, there's only so much regulations can do to protect us. If you want to make a profit, you will have to take a look the hard research behind your companies.
This can be difficult to do, but thankfully, technology has helped us here, too. An app like MarketSmith can help you determine whether or not you are making the right trades.
Just playing already puts you ahead of the game.
Believe it or not, the majority of people still do not take investing in the stock market seriously. In fact, only a quarter of all Millennials even invest their money into stocks at all.
By just participating in the stock market at all, you're making your own life better and giving your future a brighter outlook—and that's really nice to think about.