Investing can be a risky business with no guarantees, but it can be a way to grow your wealth. If you’re wondering how to start investing in stocks, don’t stress. Here is some simple advice and questions you should ask yourself before you begin investing.
Speak with an experienced financial advisor at the Templeton Group of Cornerstone Financial Management today to review your financial plan and investment strategy.
What are Your Investment Goals?
Having a clear understanding of your investment goals is critical. Beginning investors should decide how much they are able to invest, how long they plan to invest, and their individual risk preferences. Investing always bears the risk of a loss, so all investors should understand their own risk profile (how comfortable they are with the risk they assume in their investments). Once you understand your investment goals and your comfort level with respect to risk, figuring out what to invest in and how to invest is a much simpler prospect.
How Do You Want to Invest?
There are many methods for investing in stocks, each with their own advantages and disadvantages. Here’s what you need to know:
Know Your Options
Many investors choose traditional brokerages, research the market, and “hand-select” their stock choices. Others choose a brokerage and put their money into mutual funds hoping to grow their wealth along with the market. Still others choose to select a robo-advisor service that uses an algorithm to make investments for you, considering things like your risk preferences and tax-loss harvesting.
While a robo-advisor service offers you less control over your investments, it takes into account your investment goals at the start, makes investment decisions to work toward those goals, and allows you to “set it and forget it.” For the hands-off investor, this is a viable choice.
If you want more control over your investment strategy, a traditional brokerage is a good option and offers you the ability to trade in a variety of different securities. Individuals who are just starting to invest with a small amount of capital are usually better off investing in ETFs or mutual funds. ETFs are a viable choice for those looking to invest hundreds of dollars, while mutual funds can require a minimum purchase of $1,000 or more.
ETFs and Mutual Funds
Mutual funds and ETFs are common beginner options, since they bundle a wide range of stocks into a single fund. Because these funds group many stocks into a single package, mutual funds and ETFs are inherently diversified and offer you relatively low risk on your investment (though all investing bears risk of loss).
ETFs and mutual funds also allow for dollar-cost averaging or investing a specific amount of money periodically to avoid buying at the top of the market. The downside of mutual funds and ETFs, however, is that the return on your investment is typically very modest. These investments are generally more suitable as part of a long-term strategy for more risk-averse investors.
Investing in Individual Stocks
For those who want to maximize their return quickly and are not afraid of assuming a high-risk position, consider investing in individual stocks. Individual stock trading can be very profitable, but it carries a much greater risk compared to ETFs and mutual funds due to the inherent lack of diversification. If the company you’ve invested in takes a huge loss, so will you.
While mutual funds are more likely to steadily increase your investment over a long period, individual stocks can see huge increases in value in a short amount of time. However, if you only have a small amount of money to invest, you risk being unable to salvage your position if your selected stocks suffer a major loss.
Managing Fees and Commissions
While the growth in competition between brokers has led to lower commissions on trading, most brokerages still charge you every time you trade stock. Even those brokers who do not charge commissions are likely to charge you fees for using their service. No matter how you decide to make your investments, be sure that you understand any fees involved. Look for a broker whose fee structure fits your trading profile.
Most trading fees tend to range between a few dollars per trade to upwards of ten dollars per trade, and many services charge additional account fees. Compared to traditional brokers, robo-advisors typically charge a smaller management fee, somewhere around 0.25% percent of your balance. For those who want to avoid commission fees and are not intending to trade frequently, commission-free ETFs are a viable choice. Individuals with only a small amount to invest should also keep in mind that many brokers apply additional fees if you do not maintain a minimum account balance.
Ready to Invest? Request a Consultation Today
The experienced financial advisors at The Templeton Group of Cornerstone Financial Management can help you build an investment strategy that aligns with your goals and risk preferences. Get in touch today to request a consultation.