Overview
Investors have various reasons for investing in stocks rather than following alternative investing routes and the benefits of choosing to invest in stocks are numerous.
Whether starting with a small amount of capital to potentially grow larger wealth, keeping up with inflation rates, or due to the stock market being one of the financial markets that shows consistent growth, reasons vary from investor to investor.
Despite the ease with which investment can be made into the stock market, a methodical and disciplined approach is required as there are still risks involved in losing more than the initial capital invested.
There is a process involved with buying stocks and the approach may seem intimidating, especially to beginners, but when done correctly, can get investors started on building long-term wealth.
1. Determining what your investment goals are, and the type of investor you are
Before making a commitment towards investing in stocks, investors need to crucially evaluate what type of investor they are by evaluating their investment goals and what they are willing to risk and what their risk tolerance is.
By doing thorough research on the stock market and how it operates, it can provide the investor more clarity on what they stand to gain and to lose, how they can mitigate and minimize risks, especially when they cannot compensate for substantial losses.
Investors also need to determine whether they want to be active in managing their investments or whether they would like someone else managing and overseeing the process for them by using robo-advisors.
2. Decide on the stocks you want to invest in
There are numerous stocks that investors can choose, with some investors already having their sights on some of their favourite companies. Before simply investing, it is necessary to conduct thorough research on the financial performance of these companies.
Investors need to research these companies and spending some time watching the stocks and how they perform before buying them. By doing this, investors will be more prepared for what they can expect to see after they have bought the stock.
3. Set a budget for the stock investment
By conducting research into the different stock options, different companies and different brokers through which stocks can be bought, investors will have a clearer idea of the costs involved with stock investment.
Investors need to look at their capital and work according to a budget. Stocks vary in their prices and when on a small budget, exchange traded funds, or ETFs may be the best route to follow as mutual funds often have higher minimum requirements.
Diversification of a portfolio, meaning having several investments spread across assets, is not always possible for investors who are on a smaller budget as opposed to those who have access to larger funds.
4. Learn the difference between individual stocks and stock mutual funds
Individual stocks involve buying a single stock or a few stocks from a certain company and allows for a diversified portfolio when buying single stocks from more than one company, but to be able to do this, it requires substantial investment.
Mutual funds allow investors to buy small pieces of a variety of stocks in one transaction. Exchange traded funds and index funds such as the S&P 500 index allow investors to own small pieces of each company in that fund, building towards a diversified profile.
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5. Choosing a stock broker and opening an account
As soon as the investor has a better idea of what they set out to achieve in stock investment along with what their budgetary limitation or allowances are, the next step involves choosing a broker through which stocks can be bought.
Having a clearer idea of what the investor wants and what they have along with what they are willing to risk will make the process of finding a broker substantially easier.
There are numerous brokers through which stocks can be bought and although it comes down to preference, there are some important factors to consider when choosing a broker, such as:
- The broker needs to be well-regulated and client funds need to be secured in addition to provisions made for compensation should the broker become insolvent or be declared bankrupt.
- Consider the trading and non-trading fees along with additional charges on account maintenance and management, deposits, and withdrawals.
- The type of trading platform that the broker provides
- What educational and research tools and material is provided?
- With what ease can funds be deposited and withdrawn?
- Customer service, the availability and efficiency thereof
6. Make use of Robo-advisors
Depending on whether the investor wants to make their own investment decisions or have someone do it for them, the latter will need to consider this option and evaluate whether the broker they choose facilitates this efficiently.
Robo-advisors have the ability to not only make recommendations towards investments, but they can work to provide investors with the best possible outcome for both the investor and the investment.
Robo-advisors are what the name suggests, robots, that are programmed according to algorithms with set rules and parameters according to the needs and objectives of the investor, that work automatically without much input from the investor.
7. Diversify and reduce risks
Diversification allows investors to invest in a range of assets in addition to reducing the risk of poor performance deriving from one investment to affect the entire portfolio.
Diversification is, however, a double edged sword and a lot of professional investors such as Warren Buffet, warns against such as the risks of losses are greatly increased.
Although, these risks can be reduced by investing in mutual funds or exchange traded funds, or ETFs, which allows for portfolio diversification as they contain a large number of stocks within one fund while mitigating risks of losses through diversification.
8. Start investing
As with all other investments, there are certain strategies and approaches towards investing in stocks that need to be considered and will depend on the needs and objectives of the investors.
Stocks can be bought in a variety of ways by making use of orders. Investors can use market order in which they will purchase the stock at the best available current market price or by setting a price point that they are willing to pay, or a limit order.
These are options provided by a variety of brokers and in addition, these brokers provide not only the tools and platform for buying share, but also professional views and assistance through educational tools and research resources.
Final Thoughts
Buying stocks may seem very intimidating to beginnersand the process may seem tedious, but when considering the rewards that can be gained from doing it right from the start, it is worth the research, time, and dedication in thorough preparation.
Investors need to ensure that they first go over their finances as it will be the foundation that determines the rest of the process and it is crucial in avoiding the risk of incurring losses that exceed initial capital.