The stock market can seem like a scary place for beginners, but it doesn’t have to be. Investing in the stock market might take some time to get used to, but once you’ve got the hang of it, there are plenty of ways to make money and create wealth with just a little bit of knowledge and research. If you’re thinking about investing in the stock market but aren’t sure where to start, here are eight essential tips on how to invest in the stock market, including why stocks are good investments and where to look when it comes time to buy them.
1) Diversify, Diversify, Diversify
When investing in stocks, it’s important to take a look at your portfolio and identify any outliers or sectors that may be lacking. You can determine how diverse your portfolio is by breaking down your holdings into different categories (such as financial services, technology, retail or energy). If you are finding that a certain sector is taking up too much of your portfolio, diversify and purchase some shares of companies that operate in other sectors. By spreading out risk across several categories, you help ensure that you’re not putting all of your eggs in one basket. Having a diversified portfolio helps reduce market risk and gives you exposure to emerging trends. It may even save you money on trading fees.
2) Keep Fees Low
Many people new to investing opt for actively managed mutual funds, which can eat up a big chunk of your savings in fees. Generally speaking, mutual funds that track broad-market indexes charge lower fees and can produce better returns over time than most actively managed funds. The average annual fee for stock index funds is 0.84 percent as of June 2016, compared with 1.37 percent for actively managed U.S. stock funds, according to Morningstar Inc., a Chicago-based research firm whose fund ratings are often used by investors. Another advantage: Index mutual funds don't come with an exit fee should you want to sell your shares at some point—an added bonus if you're planning on holding onto these investments for many years or decades.
3) Put Your Money Where It Will Grows
If you want to start investing but aren’t sure where to begin, it’s time to read up on your retirement funds and consider an IRA. An Individual Retirement Account (IRA) is a way for you to invest money that won’t be taxed until retirement. Once it is no longer taxed, all of your earnings will grow tax-free until you are ready to retire! Talk with a financial advisor and learn about IRAs or other investment options today. There are many different types of IRAs available—make sure you choose one that works for your situation and goals!
4) Pick An Account Type That Suits You
There are several types of accounts to choose from when investing in stocks, but which one is right for you? Individual Retirement Accounts (IRAs) might be a great fit for you if you don’t mind taking a hit on your immediate returns. While traditional IRAs do have certain fees associated with them, they also offer tax advantages that won’t penalize your gains over time. At Vanguard we offer both Traditional and Roth IRA options—these options vary by how taxes are deducted. A Traditional IRA allows you to deduct investment income from your taxable income today, whereas Roth IRAs let investors pay for retirement using after-tax dollars—therefore offering tax-free growth on investments over time.
5) Track Investments
There are numerous tools out there to help you do that. Apps like Stash and Acorns make it easy to invest on a small scale with no or low fees. You can even use an automated investment service, like Wealthfront or Betterment, which will set aside money for you based on your goals and risk tolerance. At a minimum, though, it’s important to have a plan for investing—even if that just means putting a certain amount of money into a 401(k) every month. If you don’t have an employer retirement plan at work and don’t want to open one yourself, look into IRAs or other investment vehicles that let you save for retirement on your own terms. There are numerous tools out there to help you do that.
6) Research Potential Investments Beforehand
Some people dive right into investing without doing their homework, but it's an extremely risky move. Before you buy your first stock, be sure to research your potential investment thoroughly. Look at its historical performance, read up on related business news, and talk to financial experts who have already invested in that type of company. If a particular stock has impressed them enough to invest their own money in it, then it might impress you enough to do so as well. In addition to helping you choose wise investments, researching beforehand will also allow you some extra time to collect your funds before actually making a purchase—many online brokers require at least $50 or $100 before being able to trade stock.
7) Know How To Take A Loss
One of the most important things that you’ll learn about investing is that it’s not a one-way street. Some stocks will shoot up and some will drop, but part of becoming a successful investor is learning how to take a loss if necessary. By knowing how to cut your losses quickly, you can limit any damage done by bad decisions and potentially use those losses as a tax write-off for next year! Just keep in mind that every investor needs to learn how to cut their losses eventually, so don’t get discouraged if things don’t go perfectly from day one.
8) Don’t Ignore Tax Implications
If you sell your investment, you will have to pay capital gains tax on any increase in value since you bought it. If you hold for more than a year, you’ll only be taxed on half of your gain—the other half is considered a long-term capital gain, which means lower tax rates. Note that if you don’t hold for a year or more, but still sell at a profit, your gains are considered short-term capital gains. That means higher taxes and possible taxes on reinvested dividends. Consider investing in an IRA: Individual Retirement Accounts (IRAs) allow investors to save money for retirement with tax advantages that vary depending on whether they have an individual account or a traditional IRA versus a Roth IRA.
Conclusion
Before you even begin to think about investing in stocks, it’s imperative that you know what stocks are and how they work. Every stock represents a small ownership stake in a company—or even multiple companies if you own multiple stocks. Your main decision will be whether to invest in individual companies or through an index fund. There are many things to consider, including your financial goals, risk tolerance, and investment strategy. If you’re looking for more help with planning your stock portfolio, consider talking with a financial advisor who can help strategize based on your particular goals and situation.
