In popular culture, the stock market is thought of as a machine for wealth creation. Many people know or have heard of someone who’s made a fortune buying and holding stocks. But finding the next Apple (ticker: AAPL) is harder than it seems.
Still, while no how-to list can show you definitively how to reap your riches in the stock market, if you go down this checklist you should know the absolute basics on how to invest in stocks.
Have enough money. Before you learn about how to invest in the stock market, you need to make sure you have enough money to begin with. After all, you can’t build an all-star portfolio if you’re up to your nose in debt.
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
“High interest credit cards should always be paid off first before investing in the market. Low interest loans such as student loans can be serviced on a longer-term basis, so long as your cash flow will allow it,” says Vic Patel, an experienced investor and the founder of Forex Training Group.
Not only will you want to pay off high-interest debt before you plow your money into stocks, you should also have a rainy day fund as an extra cushion. But how much money should you save up before you start investing?
“It really depends on your age and time, but if you’re a working professional and money’s constantly flowing in, having a reserve that would cover your expenses for six months makes a lot of sense for us,” says Chat Reynders, CEO of Reynders McVeigh Capital Management.
Make sure you’re investing already. So you’ve got no high-interest debt and a rainy day fund to boot … bravo!
The next thing you’ll want to do is make sure that you’re already contributing to an employer-matched defined contribution plan, if that’s an option. You should always contribute the maximum amount your employer will match, because it’s literally free money.
Investing in stocks can be exciting and can offer some killer returns, but Wall Street will never give you free money, so always go for the low-hanging fruit — like paying off high-interest debt and getting a free employer match — before trying to make your fortune finding the next company like Alphabet ( GOOG, GOOGL) or Tesla ( TSLA).
Find a broker. Now, finally, you can get to the “how” of how to invest in stocks. Logistically speaking, you’ll need to find a broker with whom you can place your trades. Thankfully, there are many options for online brokers that will allow small-time investors to build their portfolios easily.
Most online brokers allow you to place a trade for less than $10, while some new apps like Robinhood allow investors to trade stocks free of charge.
Before buying stocks, figure out your investing objective. Learning how to invest in stocks is a fruitless endeavor if the would-be investor doesn’t first figure out a few things about their own investment needs and objectives. The first thing you’ll want to know is how much work you’re willing or able to put into investing.
Many people simply don’t have enough free time to scour the stock market, study trends and find investments that will routinely outperform. If, understandably, you can’t find adequate time to devote to your portfolio, be frank with yourself about that from the get-go.
The good news for those people is this: You can still earn incredible returns in the stock market! All you have to do is buy a low-cost index fund that tracks the market, and you can expect to earn 9 or 10 percent a year over the long term, historically speaking.
“Most professional managers cannot manage to beat average market returns, so for the retail investor to do so is certainly uphill battle at best,” Patel says.
If you decide against index funds, then you’ve decided that you want to beat the market. Now you need to figure out your investing timeline and your risk tolerance.
“The longer the time horizon the better, but at the minimum an investor should have a five- to 10-year time horizon for optimal growth,” Patel says. Long-term, passive buy-and-hold investing has been shown to beat short-term frenetic trading time and time again, so investors with long time horizons will typically outperform their more myopic peers.
[See: 10 Long-Term Investing Strategies That Work.]
Figuring out your appetite for risk is also crucial, and can depend largely on where you are in life.
Are you looking for quick-hit, high-risk, high-return investments? Maybe you prefer dividend stocks, like the idea of value stocks, or enjoy the diversification of exchange-traded funds or mutual funds.
This — investment selection — is the essence of what most people want to know when they’re trying to figure out how to invest in the stock market.
Stock selection. If you’re willing to do some work and try to beat the market and low-cost index funds aren’t for you, it’s time to start picking stocks.
Many books have been written about this crucial step in investing; keep in mind, it separates the great investors from the rest of the pack, so you likely won’t be able to beat the crowd by simply reading a few hundred words. Read the classic books on the stock market written by the great authors in the area — the Peter Lynches, the Joel Greenblatts, the Benjamin Grahams and the Burton Malkiels.
There are also some best practices to follow when scouring the investment universe.
“Look for funds that have lower turnover, focus on companies that have less debt on their balance sheet that are in industries you’re interested in, and that stick to their discipline,” Reynders says.
“There is no silver bullet, but I would say first and foremost, diversify,” says Ken Staut, Founder and CEO of investing and crowdfunding platform GrowthFountain.
“When looking for investment opportunities, I’d start with companies you know,” Staut says. “Dig into a 10k and really understand what their business is and how it makes money. Read all of Warren Buffett’s letters to shareholders. Read Benjamin Graham’s “The Intelligent Investor.” Read Bruce Greenwald’s “Competition Demystified.” And have fun doing it! If you aren’t having fun, stick with the S&P and focus your attention on something you enjoy — it will save you time and money.”
[See: 7 of the Best Stocks to Buy for 2017.]
At the end of the day, investing in stocks isn’t a get-rich-quick scheme, and if someone tells you it is, run for the hills. Buying the entire stock market via an index fund is usually best for most people, but if you’re determined to try to beat the market, make sure you have the time and resources to do so, and take care to do plenty of studying up on the subject before you pull the trigger.
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How to Invest in Stocks originally appeared on usnews.com
