Getting started in the stock market does not need to be difficult or complicated. Everyone has to begin somewhere; every expert was once a novice.
One thing that separates the wealthy from the not wealthy is stock investments. The wealthy overwhelmingly tend to have them, while the not wealthy — overwhelmingly — do not. Stock market investments are a part of the path to wealth. In today’s America, they are also an essential for most Americans to build a secure retirement.
Begin Investing With Your Purpose
When getting started in the stock market, your purpose — the “why” you are investing — drives what is appropriate for you to invest into. Generally, it is not a good idea to invest in any volatile investment if you might need the funds in the short term. Typically that would mean within five years.
Your purpose will tell you how much you need and when you need it; both of these help you decide where is best to invest.
The purpose also drives the type of account that might be most appropriate. For example, retirement accounts have tax benefits but are generally not the best place for money you would need before retirement.
Select the Appropriate Investment Account Type
If your purpose is to grow money for retirement, then a retirement account is probably a good choice. Generally, investors should give first consideration to any retirement plans available through work, as they may have matching contributions or other features that make them more desirable than other alternatives.
There is a trade-off for using a retirement account: You get tax deferral, and possibly tax deductibility, but in exchange, you don’t have access to the funds before retirement without a significant penalty.
For accounts other than those available through work, you will generally need a brokerage account. There are some exceptions, which we’ll touch on shortly.
The big differences among brokerage accounts are costs and service.
A full-service brokerage will provide you with advice and guidance, but it will come at a cost. And you will typically need a significant initial investment. Discount brokerages are less expensive, but don’t offer much in the way of service. Be sure to compare fees at a few options; trade costs erode returns.
Robo-advisors are also an option. Many provide portfolio management for a fee, typically a lower fee than you would get through a financial advisor. And many do not have account minimums; when they do, the minimums tend to be low.
If you want a lot of direction and advice, you will need to consider a financial advisor or a full-service brokerage. If you are more DIY or comfortable with technology, you can consider a discount brokerage or a robo-advisor.
Select Your Investment Types
A share of stock is simply a representation of ownership in a company. You can purchase shares in individual companies or you can purchase shares of funds that invest into many companies. The latter involves less risk, as you are not exposed to the risk of a single company suffering a significant decline. You still have risk; all investments have risk of some form.
Stock investments have more risk than more stable investments. Stock market investments have also historically performed better than other investments. Most investors need to be invested into the market, to some degree, to have a realistic chance of achieving their long-term goals.
Funds can be broken down as either mutual funds or exchange-traded funds (ETFs). Both types of funds are managed by professional managers, who direct the fund toward a specific objective. They provide a degree of diversification, which varies from fund to fund. Both types have costs associated with them.
Mutual funds are issued by fund companies and have costs that may include a sales or acquisition charge, as well as ongoing expenses, typically expressed as an annual expense ratio.
Some funds are referred to as no-load funds. These funds typically do not have a sales charge, but do have ongoing expenses; you can determine these by looking at the expense ratio. You can buy mutual funds through many brokerages, but can also purchase many directly from the fund families.
Buying directly eliminates the need for a brokerage account.
ETFs are traded on an exchange, much like stock. You pay a transaction cost for the purchase of a fund as well as for the sale of a fund. Unlike with mutual funds, which are traded only once a day, you can get into or out of an ETF any time the market is open.
Beginning investors should consider using equity index funds to get started. These funds track an established index, such as the S&P 500. They are passively managed and typically have lower fees than other, actively managed, funds. They’re a great way to gain some experience in the market with some diversification and relatively low costs.
The Bottom Line on Getting Started in the Stock Market
The stock market is absolutely an appropriate place for beginning investors who approach it thoughtfully and prudently. Investors need to consider their objectives and match their investments and accounts to facilitate what they most want to accomplish.
DIY investors may choose to use a discount brokerage or a robo-advisor.
It is still generally a good idea to start relatively small and relatively conservatively.
Those who desire more guidance should consider working with a professional. A financial advisor can help you clarify your future needs and guide appropriate investment decisions.
Either approach can work well for getting started in the stock market; some people have the time and inclination to do it themselves, others do not. You just have to do you.
Most people will need to be in the market if they want to build a solid financial future and fund a comfortable retirement. There just isn’t really a viable alternative. Education is key; the more you understand about investing, the more likely you will be to avoid the pitfalls. You can build money in the market, but you should do so thoughtfully and carefully.