By Kristina Russo | American Express Credit Intel Freelance Contributor
6 Min Read | March 5, 2021 in Money
Taking an inventory of your goals can help set your direction and keep you focused when you begin to invest in stocks.
Understanding your risk tolerance often determines your investments.
Beginners can take heart: Stock investing strategies considered among the most lucrative are also among the most basic.
If you want to join the 55% of Americans who invested in the stock market during 2020,1 it’s good to know that experts say it’s easier than ever to invest in stocks. It may be a good time to invest in stocks with simple beginner’s strategies.
What makes investing in stocks easy for beginners? Mainly, it’s that more and more institutions provide brokerage accounts – which let you buy and sell individual stocks, stock funds, and various other types of investments – along with multiple levels of services to guide you. But sometimes, all the choices can be overwhelming for a beginning investor. I’m going to take you through the practical steps to get started investing in stocks.
While you may be eager to jump in like a character from the 1987 movie “Wall Street” – one of my husband’s favorites – a good first step when investing in stocks is to take a step back. I mean, make a personal inventory of your goals, your tolerance for risk, and your investment budget. Sounds tedious, but these important personal characteristics can shape every subsequent decision an investor makes.
You’ll need to open a brokerage account to hold your stock investments and complete trades. Many people begin by opening a taxable brokerage account, unless their investment goal is for retirement. If that’s the case, tax-advantaged accounts like individual retirement arrangement (IRA) accounts may be more appropriate. Different types of tax-advantaged retirement accounts offer various kinds of tax benefits; some may be exempt from tax depending on certain circumstances, or defer taxation to a later time.
After selecting the right type of account for your goals, think about how much investing help you want and are willing to pay for. Managed accounts include advice and guidance from professionals, and generally come with higher trading and account fees. Some online brokerage accounts have robo-advisors, which are software programs that help you choose investments based on data you provide regarding your goals and risk tolerance. Or, you can opt for a no-frills self-managed brokerage account. In general, traditional brokers charge a management fee of 1% to 2% of the value of your portfolio in addition to trading commissions for purchases and sales. Most robo-advisors charge 0.25% to 0.50%. Most people who are learning how to invest in stocks choose a managed account or an online broker with a robo-advisor.
Other account features you might consider as a new investor are the availability of research tools, integration with your bank, and user-friendliness of online trading platforms. If you tend to manage your life from your mobile device, it’s especially important to try out a demo version before funding a new online brokerage account.
Many experts recommend a “set-it-and-forget-it” approach for beginners. Using the budget you established earlier, you can set up automatic transfers from your paycheck into your brokerage account. Regular, consistent investing habits help you stay on track to achieve your goals, support dollar-cost averaging, and reduce the emotion and stress of constant decision-making.
Before we discuss the mechanics of buying stocks, let’s review a few basic things for beginning investors:
When you begin to pick stocks, consider your level of risk tolerance. In general, stocks of large, well-established companies (aka “blue-chip”) carry less risk than those of smaller or high-growth companies. Blue-chip stocks tend to be from companies that are household names and are often cited as good starter stock picks for beginning investors. Blue-chip stocks tend to provide balance and stability with moderate growth and often pay dividend income. The definition of a blue-chip stock varies, but most often they are those companies included in the Dow Jones Industrial Average.
In general, experts suggest deferring investments in small company stocks, high-growth stocks, or penny stocks until you’ve become a more seasoned investor because they have higher volatility. Be mindful of diversification as you select your investments. It’s a long-honored strategy that lowers risk by spreading your investments among different industries.
Once you’ve picked the stocks you’re going to invest in, you will choose an order type to make the purchase. The two basic types are:
You can use both types of orders to sell stocks as well. With more experience, you can use more specialized orders; check with your brokerage to see which types of orders are available. Be aware, there likely are different fees associated with more specialized order types.
The good news for beginning investors is that often the most lucrative strategies are also the most basic. Taking a personal inventory of your goals and appetite for risk, together with setting up the right brokerage account, are important steps. Deciding which stocks to buy, how to buy them, and knowing when to sell, follow.