As I have shared before, I had the pleasure or mis-pleasure of working in the online brokerage industry for a number of years. I learned many things while in that role, but what I saw more than any circumstance or event was investors not knowing how to invest in stocks and ultimately derailing their investing goals or their retirement planning as a whole. I don’t necessarily blame investors for their ignorance. No matter what we know, there’s always more to learn when it comes to investing and, if you haven’t been fortunate to have a parent, relative or boss teach you how to invest in stocks, how would you know where to start? Lord knows I have my own weaknesses, so I can empathize with investors who just don’t know what they don’t know. However, I have come to realize that knowing how to invest in stocks is not really difficult, per se, but just requires a bit of homework. As I began writing this post, I realized that there’s more information than I can squeeze into one piece so I’ll likely turn this into a mini-series on how to invest in stocks. Whether you’re a seasoned veteran or are preparing to make your first stock trade, buckle in and hang on, because you’re guaranteed to learn something you didn’t know before.
Learning How to Invest in Stocks Starts With Education
The primary problem I saw with many retail investors was a lack of knowledge. Many peoples’ eyes glaze over when investing is mentioned, our society doesn’t really champion it and our primary and secondary schools don’t really teach it, so finding good and clear how-to’s on investing is vital. The first two places I point investors to when it comes to learning how to put their money in the stock market is two books – A Random Walk Down Wall Street by Burton Malkiel and The Essays of Warren Buffett. A Random Walk has been around for 40 years and is considered by many to be the source to go to for investing education. Malkiel breaks down many complex investing strategies and philosophies simply so that anyone can understand them. The second book is a collection of Warren Buffett’s annual letters organized thematically for easier reading. Buffett, as well, has a good style and talks in a way that makes investing easier for many to understand.
Open a Brokerage Account
Once you’ve educated yourself on how to invest in stocks and are ready to put some skin into the game, the next thing to do is to open an online brokerage account. It’s likely that you won’t be investing with a full service broker who’ll manage the funds for you and thus will need an avenue to do that yourself. There are many online brokerages out there and many will claim to be the best online brokerage but few actually fit that bill.
As someone who likes to be frugal, I am always mindful of the fees. You really should not be paying more than $7 per stock trade and you want to avoid any hidden fees. Many brokerages try to sell to you as it’s a very competitive market. Don’t allow yourself to get bamboozled into services you don’t need or products you don’t understand. If you’re new to investing in the stock market a nice bonus to get is using a brokerage that offers paper trading which will allow you to dabble in investing without using your own money. That is a great way to get your feet wet in the stock market and build up your confidence executing “practice trades” before you put your money on the line in real ones.
Look Around Your House and Daily Habits
If education is the primary problem of many retail investors, then knowing what stocks to invest in comes in as a close second. I assume that the two sort of go hand in hand, but I spoke with investors on a daily basis who did not know what stocks to invest in. This is actually a very easy problem to solve, generally speaking. Buffett argues that we should buy what we know and I could not agree more. Explore your house and examine your daily habits and you will find that many of the products you buy are made by generally very solid companies who have been around for decades.
Beyond that, many of those companies are likely strong dividend paying stocks which means you’ll have the opportunity to make a nice little return over time if you own their stocks. If you find yourself wanting to know how to invest in stocks, this is likely one of the easiest ways to determine which ones to invest in.
Invest With the Market
As you’re learning how to invest in stocks, you will find many who argue it’s possible to beat the market or at the very least time it. Let me spare you some pain by saying what proponents of that method won’t tell you – it’s a fool’s errand and will generally only result in you losing money either in the form of exorbitant trading costs or losses in your portfolio. In the end, the people who promise you their strategy will make you rich never tell you the secret to their success; it’s not timing the market or following the big boys, it’s taking your money and making you think you’ve gotten something valuable in return.
Instead of trying to time the market, or deal with the headache of determining what individual stocks to invest in, invest in index funds. An index fund is either an ETF (Exchange Traded Fund) or a mutual fund which is intended to track a number of indices such as the Dow Jones or the S & P. There is ongoing debate in terms of ETF vs mutual fund and at the end of the day a good ole’ index fund will meet the needs for many investors that want a hands off approach to their investing. They allow you, generally, to go with the market and not waste time and energy trying to beat it. If you do go this route, just make sure you are not paying more in fees than you ought be.
Set Your Goals and Check on them Regularly
As you’re learning how to invest in stocks, you’ll want to determine the goals you have for your investing. Is this the beginnings of you saving for retirement, or is this intended to start funding for children’s college education? Whatever your goal is, you want to make sure you stay on top of it. Make sure that you check on your investments on a regular basis, whether that be monthly, quarterly, or some other interval.
Find what works best for you and do it religiously. One of the greatest investing sins I saw many investors make was to invest in a certain stock or mutual fund only to then ignore it for years. I wish I had a dollar for every time I spoke to someone who invested in a stock and left it alone for 10+ years and ended up losing their shirt because they ignored it for so long. If you do one thing while investing in the stock market, please make sure you’re aware of what’s going on with your portfolio so you do not find yourself losing your shirt because of ignoring your money.
Are you looking for ways of how to invest in stocks? If not, how did you get started in investing?
Photo courtesy of: 401(k) 2013