By: Angela E. Matthews, Investment Coach and Founder of the Happy Investor Method
Want to invest in stocks but aren’t sure where to begin? Here’s a step-by-step guide to help.
Most people want to learn how to invest in the stock market. However, the trouble is figuring out where to start.
With so much information available, learning how to invest in stocks can seem overwhelming, tiring, and confusing! It’s no wonder most people don’t do it. That said, it is possible — and even simple — if you know what to do.
That’s why I sat down and put together this quick handbook to help you start investing in the stock market.
Background: What is the stock market?
The stock market is an exchange, both physical and electronic, where investors buy and sell shares of a company known as stocks.
Stocks equate to partial ownership of a company, where each person who owns at least one share is known as a shareholder.
Here’s a quick example.
Let’s say Example Entertainment Corp. has 1,000,000 shares of stock available for investors to buy. If I went out and bought 10,000 shares, I would own 10,000 / 1,000,000, or 1% of the company.
You can buy shares like this in any company that’s listed on a stock exchange.
From 9:30 AM EST until 4:00 PM EST, investors buy and sell shares on the stock exchanges.
Note: Stocks do trade outside of these hours with different rules. 9:30 AM – 4:00 PM are the main hours.
Each market (or exchange) is made up of thousands of participating investors at different levels. Individuals like you and me are known as retail investors. Large financial companies like Fidelity are known as institutional investors.
Reality: How do you make money in the stock market?
Investors make money in two ways in the stock market.
First, they buy shares at one price and sell them at a higher price. When they sell, the difference between these prices is their profit.
If I bought Example Entertainment Corp. shares at $100 and sold them at $110, I would have made a profit of $10 per share. If I owned 50 shares, my profit would be 50 x $10, or $500.
The second way to make money is through dividends. Dividends are payments made by the company on either a regular or one-time basis. These payments are a way of the company sending back profits to the shareholders, without the shareholders having to sell their shares.
You can evaluate the value of a dividend through the company’s “dividend yield.”
A dividend yield looks at the total dividends paid out to investors over the last year. That amount is then divided by the share price. Higher dividend yields mean you get a higher return on your investment in the form of dividends.
Note: Just because a company has a high dividend yield doesn’t mean it’s a great value. It could also mean investors don’t believe the company will continue paying its dividend at the same rate. (That might keep the share price low.)
In general, the stock market increases in value over time. However, there can and will be short-term drops. The longer you remain invested in the stock market (with diversified holdings), the more likely you are to make money.
Avoid one basket: A note about diversification.
The stock market is made up of thousands of stocks. Individually, each holds a certain amount of potential risk and reward.
Most investors hold multiple stocks to prevent any single stock from ruining their portfolio if it runs into trouble. This spreads the risk among their holdings.
Today, you can invest in an alternative to individual stocks through Exchange Traded Products (ETPs), which include Exchange Traded Funds (ETFs). These are baskets of stocks, similar to mutual funds, allowing an investor to own a variety of stocks with a smaller investment fund than larger investors would use to buy them individually.
For example, the S&P 500 ETF “SPY” matches the S&P 500 stock market. You can buy a share of theSPY ETF for a few hundred dollars. But buying each of the individual stocks in the right proportions to match the S&P 500 Index would require hundreds of thousands of dollars.
Know your style: What kind of investor are you?
Many people think of investing as something you have to do and monitor every day, at all hours of the day. However, people who invest on that level are considered traders. Personally, I find trading to be a style of investing that involves more risk and doesn’t lead to long-term wealth because your money is still tied to your actions (like a job), and not building passively on the actions of others.
True investors use compound interest to make their money grow while living a fabulous life and building their legacy.
The goal for a savvy individual investor is to start small and be consistent.
How to invest in the stock market – 7 Steps to getting started
To invest in the stock market, you will need to take the following steps.
- Determine how much you want to invest. Everyone needs to make a personal choice about how much they are willing to invest. Remember, investments come with risk.
- Select a stockbroker. Today, you can choose from a wide variety of reputable stockbrokers. Do your research and find one that meets your needs. Some brokers offer better customer service, while others are known for great education suites.
- Fund your account. Once you pick a broker, you will need to fund your account. Transfers may take several days to “settle” before you can use them.
- Select a stock. There are thousands of stocks from which to choose. Find those that interest you, where you believe you can profit.
- Size your position. You need to determine how much of your account you wish to invest in a given stock. Most investors choose a dollar amount and then divide the share price into that dollar amount. Then, round down to get the total number of shares to purchase.
- Place an order for the stock. Once you’re ready to go, you need to place an order with your broker to buy the stock. If you’re not comfortable using the system, most brokers offer simulated accounts and training to guide you through the process, so you can practice until you’re comfortable before you place a “real” order.
- Review your position regularly. Over time, you want to make sure your investment performs the way you expect, within reason. Not every stock will shoot straight up, so be patient.
Learning how to invest in the stock market doesn’t need to be a solo activity. There are dozens of training and educational programs across the web to help you understand the concepts better.
Always feel free to ask questions and get answers before you jump into any stock.
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