How To Start Investing In The Stock Market (Even If You Think You Can’t)
Most millennials are intimidated by the stock market, and I don’t blame them. Many of us came of age during the 2008 Financial Crash, and have been struggling to gain a foothold in the aftermath. Most news stories over the past few years have focused on how the crash crippled the economy, and almost wholly neglected how strongly the market has rallied since. Some twenty-somethings may be surprised to learn that not only have stocks recovered since their tumble, the market is currently at an all-time high. Investors have seen double-digit returns over the past few years, and it’s true that the biggest risk to your long-term wealth isn’t volatile market cycles, but choosing not to invest at all.
But knowing that investing is essential to building long-term wealth doesn’t make financial jargon any easier to understand. The stock market is big, complex, and there’s no clear starting point. However, getting in the game is probably easier than you think!
First, develop a strategy. What are you trying to get out of investing in the stock market? That’s the only question you need to ask to determine your strategy. Some people see it as a long-term wealth building strategy, others are hoping to use the market to generate another source of income. What the money is for will direct what kind of stocks you buy, and how you trade them. If this is your retirement nest egg it’s important to play it safe, but if this is cash you can afford to lose, you can take some risks for higher returns.
I am largely an index investor, which means I purchase ETFs that track stock and bond indices. ETF stands for “exchange traded fund,” and represents a bundle of stocks from different companies that follow an index. For example, SPY, one of the largest ETFs available strives to mirror the S&P 500 index. This means if the index delivers 8% in one year, the shares in SPY will also deliver 8%. Index ETFs are an excellent way for a new trader to build a diversified portfolio with very little risk and without having to research and evaluate hundreds of companies.
I also selectively invest in blue-chip dividend stocks from companies I know and understand. I only choose stocks I am willing to hold 10 years or more, regardless of what the market does. I learned most of what I know about value investing from The Intelligent Investor by Benjamin Graham. It’s quite the tome to slug through, but it’s worthwhile to invest time in understanding stocks before you invest money. I encourage any aspiring investor to start reading investing websites like Investopedia and Yahoo! Finance to get an understanding of the market, but you can also just take look around you: what company makes your computer? Your soap and shampoo? Your clothing? Do you think they’ll still be in business 10 years from now? Do you think they’ll be more or less successful next year, in five years, in ten years? Many extraordinary companies that provide excellent value to customers, such as Disney or Pepsi, also deliver stellar returns to their shareholders.
Practice. One of the most useful strategies that I still employ when it comes to the stock market is creating a “mockfolio.” A mockfolio is practice portfolio that you create by following a number of different stocks over a period of time without actually investing any real money. Most major investing sites like MarketWatch or Seeking Alpha will let you create a portfolio with any stocks you want by just signing up for an account on the site.
I managed my pretend investment portfolio for an entire year before I put my own money into a brokerage account for investing. Part of this was because I wanted to take time to learn and understand the market, but an even larger part of it was because I didn’t have any money to invest. It took me a year while I was paying off my student loans to scrape together a spare $1,000 to get into the market.
Now, watching stocks and practicing trades is something I still do before I enter into a position. It helps me keep a clear head about my trading by drawing boundaries between logical and emotional trading. Even after years of investing in the stock market, I still tend to get excited on bullish stock market days and then immediately become certain we’re in another crash when the market goes down. Keeping my emotions out of my trading will always be challenging (it’s hard to watch your money go up and down!) but by planning my trades and getting a feeling for a stock in a practice portfolio, I can manage to remain objective about my investments.
Get some capital. It’s true that more is better, but don’t let having only a small amount of cash keep you out of the game. Before I started investing, I thought you needed tens of thousands of dollars to get into the stock market. In my mind, investments were for the wealthy, not for new college grads struggling under a mountain of student loan debt.
I began investing with only $1,000, which was enough to buy a handful of shares in General Electric (a well-diversified blue-chip stock that paid a good quarterly dividend) at $19 per share. I was instantly hooked. I started making monthly contributions to my investment account and reinvesting dividends, growing my portfolio year over year. What started out as small change eventually grew to a sizeable sum, and the more I diversified my investments, the safer my money became. Now my stock portfolio boasts double-digit returns and pays consistent dividends. I continue to contribute a few hundred dollars each month.
Open a discount brokerage account. If you don’t have a lot of money to invest and you’re new at this whole thing, it’s better to go with a discount brokerage rather than an expensive full-service brokerage. If you’re Canadian, Questrade is an excellent online brokerage to get in to the stock market. Trades start at only $4.95 (instead of $30 like at the big banks) and their IQ platform is pretty nice and straightforward to use. I’ve also found their customer service to be outstanding. If you’re American, a discount brokerage like E*Trade or Scottrade might be the right fit. There are a lot of options out there, so shop around and check customer reviews to find one that will best serve you.
When you’re just starting out, it’s important to keep your trading fees as low as possible. It costs the same amount to trade 10 shares of stock as it does to trade 100, so when you can’t afford big stock market plays, its important to lower your costs. If you’re paying $30 to buy $1,000 worth of stock, that’s already a 3% cost, whereas a $5 trading fee works out to only 0.5%. Don’t give up your profits to brokerage fees!
Start trading. You learn by doing. You won’t always make the best choices, sometimes you’ll even make mistakes. You have to be patient with yourself and your money. You can read all the tips and tricks and books you want, but a lot of the jargon doesn’t make sense until you see it in action. Even if you’ve spent months or years trading in the mockfolio like I suggested, you will find you treat your own money differently.
The stock market isn’t just for the rich, it’s for everyone. Don’t miss out on growing your wealth by being too afraid to try. If you’re saving money, you should be investing.