For many investors, one of the biggest hurdles is just getting started. It can be hard for a novice to know how to put money in the stock market or what makes a company a good investment.
The best way to start, says Maggie Germano, CEO and founder of Maggie Germano Financial Coaching in the District of Columbia, is to begin investing money in small amounts.
“You don’t have to have lots of money to start investing,” she says. “If you choose a small monthly amount at first and increase it over time, you’ll be able to start a lot earlier.”
It also helps to understand the basics of investing. According to recent survey conducted by Stash, a digital SEC registered investment advisor that polled more than 26,000 its investors and 1,100 people from the general population, 41 percent of respondents did not understand that a diversified portfolio is a safer investment than a single stock.
The survey also found that although women have longer life expectancy, they usually invest smaller sums of money at a time when compared to men and there’s a huge gap between experienced and inexperienced investors.
Martin A. Smith, president of Wealthcare Financial Group in Bethesda, Maryland, tells first-timers not to become emotional about investing in a company because greed and fear impacts day-to-day volatility of the stock market, despite more substantive economic news that typically has a more direct influence on a company.
Smith says that people should do some research before starting to invest. Here are steps to take so you can navigate the world of trading stock.
Hire a financial advisor. Think of investing as a marathon. You want a good coach who can train you for the financial journey. The market goes up and it goes down. Either way it can be an emotional roller coaster with some risk involved.
Hiring an advisor can help to keep a watchful eye on your stock investments and save you from getting too caught up in sudden extreme changes. Having an advisor can also keep you accountable and provides a holistic viewpoint on all aspects of your finances, says Andrew Rafal, president Bayntree Wealth Advisors in Scottsdale, Arizona.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Consider your employer. Start investing by looking within your employer’s sponsored retirement plan and contribute to a 401(k), Roth 401(k), 403(b) or Thrift Savings Plan at least until you’ve reached your full matching benefit.
Most employer-sponsored retirement plans will include a 3 to 6 percent company match on pre-tax dollars that is invested and the funds will grow on a tax-deferred basis, Smith says. Therefore, for most individuals it is convenient for them to have their income deducted out of their paycheck and invested in a diversified portfolio that includes stock.
“When you systematically deduct money from your paycheck each month to contribute to the plan, it makes it easy to set it and forget it,” says Clint Thomas, principal of Integrity Wealth Solutions in Greenwood Village, Colorado. “The natural dollar-cost-averaging that happens with monthly contributions to a retirement plan has a huge effect on wealth accumulation over time.”
Invest in a mutual fund. Think of it as a collection of professionally managed stock, bonds and other securities that are pooled together and spread out across multiple sectors. Each investor has a share of this larger holding and can earn interest on bonds and dividends on stocks.
Mutual funds are bought and sold when the market closes at the end of the day or the next day if the sale is done after the market has closed. Unlike like exchange-traded funds, mutual funds are sold or redeemed on the net asset value of the fund’s overall price.
You can make a lot of money by investing in mutual funds if the price of a share increases and it is sold for a profit, when the fund holdings increase but aren’t sold, or if the fund sells securities it owns for a higher price and the capital gains made on these sales are passed along to investors.
Look at ETFs. Unlike mutual funds, ETFs can be traded — bought and sold — at any time throughout the day whenever the market is open. ETFs are usually passively managed, which typically makes them cheaper and they track stock and bond indices such as Standard and Poor’s 500.
Matt Goren an adjunct assistant professor in the University of Georgia’s financial planning program in Athens, Georgia, says for many millennials who are investing for the first time, loading money into a total stock market ETF is an easy first choice. “These ETFs cover the world market and generally have very low fees,” Goren says. “You won’t max out a return or beat the market, but that’s not the point for first-time investors. As your personal investment safety net grows, try investing in more specific market sectors. And, make sure to slowly shift into more conservative investments like bonds to avoid taking the brunt of a market downturn.”
[See: 7 of the Best ETFs to Own in 2017.]
Do-it-yourself apps and investing websites. Brandon Yahn CEO of Student Loans Guy in San Francisco, suggests looking at no-fee stock trading with apps like Robinhood that allows users to trade for free or put their money into online savings accounts, such as GS Bank or Ally Bank, which usually generates 1 percent annual interest as opposed to an in-branch savings accounts which typically generate less than 0.1 percent.
Consider free apps and investing websites like Personal Capital, a free finance tracking app to manage your money and accounts and Credit Karma for your credit report, says Yahn, whose company compares student loan repayment plans.
Another option to invest in stocks is Acorns, an investment app that rounds up all credit card transactions to the next dollar and deposits the spare change into your investment account. “This makes the auto-additions to your account much easier and forces one to save and contribute to their retirement,” says Parker Lenz Director of Wealth Management, Partner, Fox River Capital in Appleton, Wisconsin. “The company also automatically invests the money for you into a portfolio of ETFs and uses fractional shares, so even $5 is able to be invested from day one.”
There’s also automatic digital investing platforms for investing in stock, known as robo advisors like Betterment and Ellevest and Wealthfront that charge a small fee to manage your money.
While learning to invest is an important aspect of saving for retirement, “managing debt is equally as important as growing money through investments,” Yahn says. Investors should consider their debt-to-income ratio.
[Read: How to Invest in Retirement.]
Contributing to a retirement account may not make the most sense if your debt interest rate is higher than 8 percent, because your stock market returns likely won’t be able to keep up the interest you are paying, Lenz says.
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How to Invest in Stocks originally appeared on usnews.com
