Over half of U.S. households are now invested in the stock market. That’s wonderful because investing is historically one of the surest ways to grow your wealth.
So what does it take to join their ranks? What do you do when you’re trying to figure out how to start investing in stocks?
Fortunately, we have a breakdown on how to get started, and the things you need to be aware of, so you can start investing in stocks in no time.
What Is Investing in Stocks?
When you buy a stock, you buy a piece of that company. When you own stock in Apple, you’re a shareholder. A stock investor is someone who buys a stock.
A stock’s value is a reflection on how well that company is doing in today’s market. If the company has amazing gains, the stock price goes up. Buyers believe that the company will continue to make more money, and provide more value.
But if the company does poorly, the stock typically drops in value. No one wants to be part of a failing company.
Of course, this is a simple overview of how stocks work. There are a lot more nuances that go into the price of a given stock, such as the overall economic health. But if you understand the core idea, that you’re buying a piece of the company, you can get started.
Isn’t Investing in the Stock Market Risky?
Yes, of course, it is. But your alternative is to hold onto your money, which loses value every year just due to inflation.
For example, if you saved a dollar in 1920, you could buy 14 loaves of bread. But today, that same dollar will only get you one loaf, if you’re lucky. That’s what it means when your money loses buying power.
On the other hand, the rate of inflation is typically about 3.22%. But stocks see an average return close to 10%. So if you want your money to grow, instead of withering away, you need to invest it somewhere, and stocks are a great option.
There are choices you can make to make your investments more or less risky. FOr example, buying and holding is typically considered the safest option. The market goes up and down every single day, and you may sell on a low point. But if you hold onto it for 20 years, you’re much more likely to see it go up.
You should also invest in reliable companies, or better yet, in an entire mutual fund.
What’s the Difference Between an Individual Stock and a Fund?
An individual stock is when you buy a single share of Apple, or Google, or Netflix, or whatever. If that company does well, the value goes up. But if the company goes under, you lose your entire investment in that company.
On the other hand, mutual funds or index funds buy into a portfolio of different investments. The idea is some companies will do well, some will tank, and some will stay steady. Hopefully, the companies that do well will balance out the companies that lose money. Overall, your investment should grow.
Mutual funds and index funds are similar. Some mutual funds are index funds and vice versa. The difference is index funds are a collection of stocks that reflect the overall market. On the other hand, mutual funds follow specific industries or investment strategies.
This is where stock market talk starts to get more complicated, and you can learn about it better as you start investing.
How Do You Make Money in the Stock Market?
When you invest in the stock market, your money gains value because the companies you invest in become more profitable. This is reflected in their stocks because more people want a share of the company, so the demand goes up.
Another way is to invest in companies that pay dividends to their shareholders. When a company makes a profit in a given quarter, they give back money to its shareholders. You can even learn how to live off dividends as your main source of income.
Investing in the Stock Market Is Only for the Super-Rich, Right?
Not so! Once upon a time that was true since you needed a thousand dollars or more to get your foot in the door. Today you can start investing with as little as $5.
That’s right! For the price of a Subway sandwich, you can be a stock investor.
There are several different apps available for the new investor. The most popular of these are Robinhood, Stash, and Acorns. Stash and Acorns are both similar products. With both of these, you’re investing in mutual or index funds that reflect your risk preference.
With Robinhood, you can choose the individual stocks you want to buy.
These apps have seen some criticism for their fees. For example, Stash charges a monthly subscription fee of $1. But for a beginner, their easy access is a great way to get your foot in the door.
If you want other options, consider companies like Vanguard or Fidelity. They typically have lower fees.
Now You Know How to Start Investing in Stocks
Learning how to start investing in stocks can be an intimidating process, but it’s typically a smart path to take with your money. Historically, the stock market has given the highest rates of returns for your dollar.
When you invest in the market, your money goes to work and earns more money for you. When you invest enough, you can retire off the dividends, or off 4% a year, and watch your money continue to grow.
Do you have more money questions? We have money answers. Keep exploring to find all your solutions.