How to Start Investing in Stocks for Beginners

August 4, 2019 0 By Jacksonso
How to Start Investing in Stocks for Beginners

Neither one of my parents know how to invest in the stock market, and it wasn’t a part of my formal education. I had to learn how to invest on my own by trials and errors — so I know how intimidating it is for people who are new to investing. Where do I start? What do I invest in? How am I doing? There are just so many questions. In this article, I am going to try to make it as easy as possible for someone brand new to investing to get started.
How to Start Investing in Stocks for Beginners 1

Why is Investing Important

Investing is an essential ingredient if you want to achieve financial success. It is a proven way to grow your money and let compounding interest work for you.

The S&P 500 Index originally began in 1926 as the “Composite Index” comprised of only 90 stocks. According to historical records, the average annual return since its inception in 1926 through 2018 is approximately 10%. The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8% (7.96%).  — Investopedia

Our study shows that the S&P 500 Historical Return, which is indicative of the Stock Market overall return, is about 9%.

Without investing, it would be nearly impossible for anyone to break through the $1 million milestone just by working hard and saving your money. On the other hand, someone who invests as little as $100 a month for 45 years could become a millionaire.

Investing and Risks

Investing is not risk-free. Unlike putting money into a savings account or a certificate of deposit, there are risks involved.

You should only invest money that you can afford to lose. For example, if you owe any money — e.g., credit card debts, student loans, car loans, etc. — you need to pay these debts off first. The only exception to this rule is your mortgage.

The good news is the risk of losing your money goes down substantially with a long enough time horizon, e.g., more than five years — so investing is an excellent financial move in the long-term.

Getting Started with Investing

Before you jump in, there are a few questions you need to answer to help you start at the right place so you can get to your destination.

How to Start Investing in Stocks for Beginners 2

1. Do You Need this Money in the Next 5 Years?

If you need the money you plan to invest within the next 5 years, investing in the Stock Market is not ideal.

If your time horizon is less than 5 years, you need to save your money and not invest. Your main goal should be to protect your capital against loss and minimize the impact of inflation.

This means you should be using a high-interest savings account, high-yield checking, or certificates of deposit for your short-term money.

2. What is Your Goal? Long-Term Growth vs. Current Income

Do you mainly want your investment to grow in value or do you need monthly income from your investment?

Long-Term Growth

If your goal is to grow your money, then you should look at retirement accounts like 401(k) or IRA to enjoy some of the advantages. For example:

  • 401(k). You don’t have to pay Federal and State Income Taxes on your deposits and your employer might match your deposits, giving you an instant return on investment.
  • Traditional IRA – This account gives you income tax deductions similar to 401(k)
  • Roth IRA – You pay all the taxes on your deposits, however, your money grow completely tax-free. You do not have to pay any taxes on the withdrawal.

However, the main disadvantage with these accounts is that you cannot withdraw money until 59½. If you withdraw before you turn 59½, you’ll have to pay a 10% early withdrawal penalty. The one exception is you can withdraw the money you deposited into a Roth IRA any time, but not the gain.

For a more in-depth discussion, see the section below: Different Types of Investment Account.

Current Income

If your goal is for your investment to generate cash that you can use every month, then you have to invest your money in a taxable account so that you can actually get the money as needed.

There is no withdrawal restriction with a taxable account; however, you’ll be paying short-term capital gains tax on the dividend and interest income at your marginal tax rate.

Portfolio Design

So far so good. Now you know where you want to invest the money, e.g., 401(k), IRA, or taxable account; and you know why you’re investing the money. The next step is to design your portfolio.

Long-Term Growth with an Aggressive Portfolio

For this objective, you want a portfolio that grows in value. This means focusing on asset classes like Stocks and Real Estate. For the investment type, you will be using ETFs or mutual funds, and REITs (see below).

An example of a well-diversified long-term aggressive portfolio might look something like this:

  • US Stocks 60%
  • International Stocks 30%
  • Real Estate 10%

You could use as little as one ETF for each of the slices, for example:

  • Schwab U.S. Broad Market ETF (SCHB) ETF for US Stocks
  • Vanguard Total International Stock (VXUS) ETF for International Stocks
  • Vanguard Real Estate ETF (VNQ) ETF for Real Estate

Based on M1 Finance research tool, this portfolio would have grown 31.88% in the past 5 years and paid 2.324% dividend per year.

How to Start Investing in Stocks for Beginners 3

Current Income

For this objective, you want a portfolio that generates income consistently. This means focusing on asset classes like High-Dividend Stocks, Bonds, and Real Estate.

An example of a well-diversified income portfolio might look something like this:

  • High-Dividend US Stocks 30%
  • High-Dividend International Stocks 20%
  • Real Estate 25%
  • Bonds 25%

You could use as little as one ETF for each of the slices, for example:

  • Vanguard High Dividend Yield Index Fund (VYM) ETF for High-Dividend US Stocks
  • Vanguard International High Dividend Yield Index Fund (VYMI) ETF for High-Dividend International Stocks
  • Vanguard Total Bond Market Index Fund (BND) ETF for Bonds
  • Vanguard Real Estate ETF (VNQ) ETF for Real Estate 

Based on M1 Finance research tool, this portfolio would have grown 15.72% in the past 5 years and paid 3.423% dividend per year.

How to Start Investing in Stocks for Beginners 4

How to Set Up An Investing Account

1. Your Employer’s 401(k) Plan

The first place to look is your company’s 401(k) plan, especially if they provide matching contributions. If they do, you need to invest here first and try to take all the matching you can get. If your company matches up to 6% of your salary, then contribute 6%.

For example, if you make $50,000 and your company matches up to 6%, that’s $3,000  in matching. In this case, you should plan to contribute at least $3,000 per year to your 401(k) plan.

You’re automatically starting with a 100% gain on your investment! Moreover, your contributions will be tax-deductible.

To get started:

  1. Ask your HR or Plan Administrator about starting up your 401(k). They will help you set up an automatic deduction from your paychecks, and most likely, you will have access to a web portal to manage your account.
  2. Inside the portal, choose how your money will be invested — if you don’t, your money will sit in a cash account not doing much of anything.  For now, invest everything into an S&P 500 Index Fund, a Target Date Fund, or a US Large Cap Fund. If you have multiple funds to choose from, pick the one with the lowest expense ratio and no other fees.
  3. That’s it…everything should be on autopilot at this point.

For more information, see What Is a 401(k) Plan and How Does It Work.

2. Roth IRA

Second, you want to start a Roth IRA account where you can contribute the next $6,000 per year. You contribute after-tax money into your Roth IRA, meaning, you pay taxes on your contributions first…but the significant advantage is that your money grows tax-free!

To get started:

  1. Find a stock brokerage firm. I use Vanguard, Ally Invest, and TD Ameritrade, but I also hear a lot of good things about Fidelity.
  2. And ask them to help you set up a Roth IRA account.
  3. You can contribute up to $6,000 per year into the account. You can do this all at once, or set up an automatic investment to draw money from your bank account and invest automatically, e.g., $500 a month is a good amount.
  4. Again, I would start with a single S&P 500 Index Fund or ETF with the lowest expense ratio. A fund is usually better for an automatic investment plan where you can add more money regularly without incurring a trading fee, and an ETF is generally better if you contribute and trade only once a year.

3. Next Place to Invest

If you completed #1 and #2, and still have more money to invest, you can decide between these options:

  1. Max out your 401(k) – if you don’t have any short-term plan for your money, you can try to contribute the maximum $19,000 per year to your 401(k). If you’re in the position to max out both your 401(k) and Roth IRA, you may also want to consider starting a normal investment account and invest there as well.
  2. Save for a Down Payment – if you plan to buy a house within the next five years, you might want to consider saving the excess cash into a high yield savings account and let it accumulate toward your down payment.

4. Next Steps

Once you start to grow your investment accounts, you will want to start learning more about investing. Here are some of the key concepts to learn next.

  1. How expenses and fees impact your investment growth
  2. Asset Allocation, Diversification, and Rebalancing
  3. Timing the Market
  4. Tax-Loss Harvesting

Different Types of Investment Account

As mentioned earlier, there are three different types of investment accounts.

1. Taxable Account

This is similar to a bank account where you can invest your money instead of just saving it. You can use your money to buy different investments, and you can sell them at any time. Here, you invest with your after-tax money (i.e., there is no tax benefit).

When you sell, your gain will be taxed at your ordinary tax rate, unless you held the investment for more than one year. If you sell at a loss, you can use your loss to offset your investment gains and up to $3,000 of your other income.

2. Tax-Deferred Account

Investment accounts like 401(k) and Traditional IRA are tax-deferred. Money that goes into the account is tax-deductible in the year the money is added to the account, and your investment grows tax-deferred. When you reach your eligible withdrawal age at 59½, you pay the Federal and State Income Taxes at your marginal tax rate when you withdraw the money.

3. Tax-Free Account (Roth)

Investment accounts like Roth 401(k) and Roth IRA are tax-free. You contribute after-tax money into the account (i.e., you are taxed on your contributions) BUT your investment grows tax-free. You do not have to pay taxes on your withdrawal once you reach your eligible withdrawal age.

For both the tax-deferred and tax-free accounts, there is a 10% early withdrawal penalty if you withdraw money before the full retirement age.

Which one you choose will depend mainly on your situation.

Different Types of Investments

There are three primary types of investments that will allow you to invest in the Stock Market. As a first time investor, I would recommend that you start with either Exchange-Traded Funds (ETFs) and/or Mutual Funds. For now, avoid investing in individual stocks.

Let me briefly explains how each works:

1. Stocks

Each share represents part ownership in a company. For example, if you buy 100 shares of AAPL, you’ll own a tiny part of Apple Inc. (and I mean microscopically tiny). When you purchase shares, you have to pay the brokerage firm trade commissions (somewhere around $3 to $30 per trade). Usually, you’ll have to pay more if you purchase through a bank or a full-service brokerage firm.

2. Mutual Funds

Each mutual fund is a collection of many stocks. Throughout the year, the fund manager can buy and sell shares inside the fund on your behalf. In essence, you buy the underlying stocks and pay for the fund manager’s services.

When you buy shares of a mutual fund, you could potentially pay up to 4 kinds of fees: (1) Trade Commission, (2) Front-end load, (3) Back-end load (or redemption fee), and (4) Expense ratio.

The funds that you should invest in are low expense ratio, no load, and no transaction fee mutual funds — meaning you are not paying anything but the expense ratio.

3. ETFs

I believe this is by far, the best investment vehicle. Similar to mutual funds, an ETF is a collection of many stocks; however, they trade like a stock throughout the day. ETFs are generally more tax-efficient than mutual funds due to in-kind redemption mechanism. Likewise, there is an expense ratio, but it’s generally lower than a similar mutual fund. But like stocks, you have to pay a trade commission each time you buy and sell shares.

What’s Next?

Read as many books and web sites that you can to learn about investing for beginners. My caution is to avoid hot tips and hot stock picks. What you want to learn is how the market works, effects of taxes and expenses on investment performance, asset allocation, risk management, investing for specific goals, etc.

Source link

Please stop by and check out:

Lyfes Journee

Tech Journee





Start a website Today► Click here

Start your Online Business FOR FREE Click here

Become the next Affiliate Marketer► Click here

Learn The Law Of Attraction► Click here

Lose Weight Fast► Click here