Investing is the act of putting your money at work to earn more money.
Put another way:
Investing is the process of making money from money.
In the modern world of 2020, investing has become a necessity rather than a choice and all the credit goes to inflation and uncertainties.
Stock investments are one such way to outpace inflation. In history, stock investing has proven to outperform most other investment options.
In this article, we will walk you through a complete guide of Stock Investing.
First and foremost, what are stocks?
Stocks primarily represent ownership shares in the assets and earnings of a company. In other words, stocks of a company represent possession on a fraction of that company. Here is a step-by-step guide for you to follow while investing in stocks.
Decide your investment route
The first step in starting your investing journey is to decide your approach towards investing. For most people, it is either Active Investing or Passive Investing.
As the name suggests, Active investing is when you or your portfolio manager take a hands-on approach to beat the stock markets’ average returns. Your goal in Active investing is to capitalize on markets’ short-term fluctuations. Hence, this approach takes a lot of time and costly also.
Conversely, Passive Investing is when you make a single effort in investing your money and leave it for the long-term. This makes passive investing a time-efficient and cost-efficient process.
Decide your investment capabilities
Before you approach a broker or robo-advisor, you need to decide your investment capabilities.
Determine your investment goals and your risk tolerance capabilities. Some investors can tolerate more risk if there is a prospect of higher returns whereas some investors want the risk to be minimized. Determine how much one-time investment you can make and how much monthly or annually you can afford to invest.
Broker vs Robo-Advisor
To start investing your money in stocks, you need to open an investment account. In general, you have two options:
- Brokerage account– A more traditional towards investing in stock is through a broker. Brokers are further divided into sub-categories like Full-Service broker or Discount brokers. Some brokers can offer you advice whereas some brokers will simply follow your commands. Their services will be determined by their fee-structure. Lastly, contact a suitable broker and he or she will open your investment account.
- Robo-advisors– Grown in recent years, Robo-advisors are a quick way to start your investment journey. They typically charge fewer fees and are time-efficient. They have a complex in-built algorithm to design your investment portfolio. If you are more towards passive investing, a Robo-advisor can be your friend.
Mutual Funds Vs Individual Stocks
For beginners, investing in mutual funds is generally a safer and easier option. Mutual funds instead of investing in one single stock or bond, your money gets distributed in various stocks, bonds, and short-term debts.
In other words, professionals decide your investment portfolio to minimize risk and maximize returns. Some examples of mutual funds are the S&P 500 and Exchange-traded funds (ETFs).
While mutual funds are better for beginners, it is not a bad idea to try out some individual stocks. From countless beginner-friendly, here are some of those.
- Amazon.com (NASDAQ: AMZN)
- Microsoft (NASDAQ: MSFT)
- Alphabet (NASDAQ: GOOG NASDAQ: GOOGL)
- Visa (NYSE: V)
- Disney (NYSE: DIS)
Diversifying your Portfolio
In a nutshell, diversifying your portfolio is one of the few ways to reduce risk. Diversifying your portfolio means instead of going all-in in a single stock, you invest in multiple stocks. This is because if one of your stock falls, you have other stocks to compensate for it. For instance, if you invested in 5 different stocks and one of those stocks completely failed. Although you will face a loss, you will still be making a profit because your other stocks are still increasing.
Even though this does not guarantee against loss, it still greatly reduces that.
If you are starting your investment journey, you might get bogged down with the information. It is not a piece of cake to dive into stock investing, but you can greatly improve your position by doing homework.
Read as many articles and books you can to understand the concepts of stocks, we recommend you to research for at least a month or so before actually investing your money.