Getting into the stock market is easier today than it’s ever been. So why do only half of Americans invest in it?
Having a limited budget is a fully understandable reason. Not knowing where to begin is another. But to us, fear of the unknown may be the strongest factor keeping beginning investors from taking the plunge. With all the multiple options you have to invest money for capital growth, it’s confusing to make a confident entry into stock market trading.
That’s why strategy is important for the beginning investor, or investors, of any stage. Developing a plan to support your investment goals, responsible oversight, and transactions helps frame your investment profile in meaningful ways.
If you’re a new investor who wants to jump into the stock market, take a little time to form a plan of action. Here are the steps for building an investing strategy for beginners.
Investing Strategy for Beginners
Take Care of Debts and Emergencies First
Before so much as looking at a stock ticker, the beginning investor needs to take care of fundamental financial needs. This may delay your entry into the securities market for a few months, but it’s worth taking care of now to save much more in time and expense down the road.
One matter to take care of first is setting up an emergency fund, a pool of cash on hand to pay for unexpected expenses, including health-related events, accidents, repairs, or any other event that can have a serious fiscal impact. Most experts recommend having at least three to six months of regular expenses set aside in an emergency fund. An interest-bearing savings account is usually the best mechanism for it, since it’s federally insured and won’t lose money.
Experts also recommend paying down outstanding debts with high interest rates. What constitutes a “high” rate depends largely on your financial situation, but in general, debts with the highest interest rates should be the first to get paid off. Some of the more common high-interest rates are attached to credit cards.
Many experts use the S&P 500’s annual return percentage as a dividing line for low and high interest rates, meaning that if the S&P 500 has returned 6.6% on investments over a year, debtors should pay off all debts with interest rates higher than 6.6% first. But as a rule of thumb, any debt with double-digit interest rates should be paid down as soon as possible.
Set Your Goals
We all have distinct reasons for long-term investing. Some simply seek to keep their money safe with modest but steady gains — they just want to have enough to draw modest income from their dividends and have a decent stash for the long haul. Others want to grow their capital investments more quickly, being more active traders who make more on sharp gains and time the stock market’s rise and fall.
The stock market has room for both these investing modes and all those in between. Timing also has a lot to do with setting up an investment strategy. A recent college graduate just entering the job market probably has more time to build up a nest egg, so they may use a combination of low-stress conservative investments and a few growth stocks. Someone older may wish to invest in profitable but volatile securities that can spur faster growth.
Decide what the overall objective is for your investments — a long-term retirement fund, a dividend-paying income machine, a quick burst in capital, or a combination of a few.
Measure Your Risk Tolerance
The stock market is comprised of thousands of companies in various stages of existence and financial solvency. Some are “blue-chip” stocks — long-existing companies that produce a reliable, consistent, if unexciting profit most years. Still others are smaller, maverick companies just gaining a foothold in the market that are prone to revenue swings in their first few years. They may provide a quick burst in profits — or quickly drop off.
Blue-chip stocks are sound investments for those with a lower tolerance for risk; they’re proven, dependable successes that investors can feel sure about. Smaller or new companies are much more volatile and cater to those who are comfortable with taking chances.
Before making any investments, try to calculate how much you can stomach the relative rise and decline of stock market value. Stock investments should be long-term strategies, so patience will always be a virtue whatever your risk tolerance level may be. Be prepared and realistic about what that level is for you.
Select a Brokerage
The modern investor has far more options for managing their investment accounts than they did just a quarter-century ago. Most brokerages have something to offer investors of all kinds: conservative and growth-centered, high- and low-risk, new and experienced.
All of them administer stock purchases, and most make it easy for private shareholders to manage their accounts. You may choose an online brokerage like Fidelity, TD Ameritrade, Robinhood, or one of the hundreds of others. It’s easy to manage your account online with any of those firms, and most of them have stopped charging per-transaction fees.
Other brokerages are more attuned to investors who hold mutual funds, IRAs, money market funds, and other security types. Choose one that gives you a satisfactory level of customer service, some degree of autonomy, and low fees.
Research Every Potential Investment
Buying commodities is easy. Knowing which ones to buy takes a little leg work. Investors should never enter into any kind of stock purchase agreement unless they’re fully informed about the business connected to it in advance. In the past, we relied on stockbrokers and other investment professionals to relay that info to us. Nowadays, we’re just as likely to get it ourselves.
Every company you invest in is required to submit its financial information to the Securities & Exchange Commission (SEC). This information is widely distributed to brokerage houses, online resources, and government websites. Anyone can access it in fairly short order. An average company’s annual report shows revenue, cash balances, price-to-earnings ratios, earnings per share, return on equity — virtually every metric you need to make a sound investment decision.
Use this research with enthusiasm. Take time with each report to understand what it shows. If you’re an ultimate beginner, use a resource like Investopedia or publications to guide you through the definitions you need to understand.
Diversify Your Portfolio
Finally, have it in mind to construct a portfolio with several positions covering multiple companies operating in as many business sectors as possible. Don’t wind up having all your money invested in a single stock, even something as profitable as Amazon. Try to have a portfolio with investments across several business disciplines: tech, healthcare, real estate, consumer goods, industrials, and so forth. Consider investing in companies with different market shares, and a mix of large-, medium-, and small-cap stocks.
The reason for diversifying your stock portfolio is to guard against too much across-the-board loss in case of a sector-wide bust. For example, the dot-com bust in 2002 resulted in an overall decline in most tech stocks. Shareholders with all their money tied up in tech stocks felt this pain, as their entire portfolios declined in value. But those who had a more proportionate portfolio, with positions in healthcare, industrials, utilities, and so forth, probably experienced fewer losses.
It should be fairly obvious why you wouldn’t want to invest in just one stock — you’re beholden entirely to a single company’s fortunes entirely. If that one stock was in Enron or Blockbuster Video, your investments are pretty much gone.
Diversification takes time, of course — don’t expect to land 25 different positions on your first deposit. But as your comfort level with trading and your research skills grow, it will be easier to add funds or shift existing investments around until you have a nicely diversified list of holdings.
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