If you’ve proven that you have earned the right to invest by identifying, quantifying and prioritizing your goals, mastering cash flow and establishing a cash reserve then we can talk investments. If you haven’t then check out our Get #FinLit page.
Have you taken care of those things? Good, now we can talk investing. When asked about the best way to learn about investing, I say education is key. Before you start putting risk on your money, you need to understand what you are getting into.
Getting into investing involves learning about the relationship between risk and reward. How much money are you willing to lose by committing it to something that could generate a profit? Can you put your brain ahead of your emotions if things get rocky in the market?
How to Get Started with Investing
For those of you that are ready to learn how to invest and make money, you need some knowledge first. Before you even put money into an account to invest with, you need to understand what stocks and bonds are.
Stocks – Owning stock of a company means you own part of that company and are entitled to a portion of that company’s value and profits. You but stock in units called shares which are traded on exchanges. Stocks are seen as risky investments because no company is immune to going out of business. That risk can vary based on a number of factors such as financial risk, operational risk, compliance risk or reputational risk.
Bonds – Bonds are generally less risky that stocks. Owning a bond is like giving a loan to a company. The company you give your money to is responsible for paying interest on the loan and returning your money when the loan is due. They tend to be less risky because the income is more predictable.
Now that you understand what stocks and bonds are, we are going to explore getting started in the stock market. There are also mutual funds and ETFs that are vehicles for investing, however we will save those for another time. If you are looking to learn more about investing, check out The Millennial Money Fix. It has a chapter on investing that teaches you all the basics that won’t fit into this blog post.
How should beginners invest in stocks? Let’s break it down by the 5 W’s:
Who –You, of course!
What – In this scenario you are purchasing individual stocks. As described above, you will be buying shares of a company. It is your choice what stock you want to buy. Hopefully you have done some research and are educated about the stock you are buying.
Where – You will need to have an account open and contribute money to it. You can do this with a financial advisor or through any number of financial institutions. If you are doing it on your own, many places have the ability to open accounts online and buy stocks in the account.
When – If someone says, “I want to know when to start investing in stocks”, they are really trying to time the market. Timing the market is like predicting the future, you don’t know what is going to happen. You could pick a stock and buy it and sell it at the “right time” and make money or you could buy a different stock and buy and sell it at the “wrong time” and lose money. However, be aware that a cat and a monkey have managed investment portfolios better than professionals in the past. Any investing comes with risk. It’s more about what you can handle and what your goals dictate.
Why – You are probably investing in stocks because hopefully you want to make some money. Most people invest to grow their assets to reach a goal. If you aren’t sure what your goals are then go figure that out before you start buying stocks.
Hopefully that answers the questions of how you go about investing in stocks and how to get started in investing in general. If you are wondering “how much should I invest in stocks” then again, go back to that goal setting exercise. How much of your portfolio you should put into stocks versus bonds depends on a number of factors. When do you want to achieve your goal? How much money do you need to achieve your goal? How much risk can you tolerate?
If you still aren’t sure how to get into investing, then maybe working with a professional is right for you. You can either DIY it or work with a financial advisor and both of those choices have lots of sub-options as well. Investing can be complicated, but it doesn’t have to be. Educate yourself first. Knowledge is power. And being empowered is key to making informed financial decisions.