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When properly executed, investing in stocks is probably among the most fruitful methods to generate a long-term and meaningful profit. However, it consists of a very elaborate process that you should know before fully venturing on it. To help you get the most out of it, here’s a guide detailing the pivotal steps you can take to make sure you invest in stocks the best way possible.
- Determine what type of investment is the best for you
There are many approaches one can take in their journey to become a stock market investor. Try to identify which one fits your kind of workflow and expectations because that choice will become crucial in determining what steps of the process will follow.
First, if you are patient and fond of doing exhaustive amounts of research, you could be investing in individual stocks. Your skills will be of use since you’ll need to investigate and evaluate any potential or already-bought stocks continually. If that’s no issue to you, it is highly recommended for you to venture into this type of investment.
Contrarily, if stuff like calculations and financial analysis doesn’t sound like your cup of tea, you can always take a passive approach. It’s normal; that’s why it’s there. It usually involves lesser returns than active forms of investing but comes with much less work and risk.
Between actively managed mutual funds and passive index funds, the latter is usually preferred among investors (with some exceptions). Index funds usually have lower costs and an even lower risk, practically guaranteed to meet performance expectations. The S&P 500 index has remained constant, at around 10% returns annually. Investing in consistent performing indexes can generate a substantial amount of money over time.
Finally, in recent years a new investment approach has taken the spotlight and become a trend by itself: robo-advisors. Robo-advisors are tools that essentially make the entire process of investing your money automatically, with little interaction on your part. It evaluates the best options for you based on your age, risk tolerance and defined goals, then makes a decision based on those criteria. It will even optimize the investment automatically based on any outside changes, such as taxes.
Within the robo-advisor option, there are many potential services to choose from, all with their own fees, a minimum amount of investments needed and specific services to differentiate them from the competition; it is highly recommended that research on the matter to find the best robo-advisor for your needs.
- Determine how much you are willing to invest with
The stock market is, without a doubt, one of the most reliable options to accumulate significant amounts of wealth. Nevertheless, it can also fluctuate unexpectedly, especially when dealing with stock prices in short periods of time. For that reason, you should be wary of how much money you are willing to invest and if said amounts of cash were initially intended for another personal need or goal.
Any emergency savings, money for your children’s ongoing education, or even money you have saved up for any house-related expenses are safer far away from the stock market. Try only to use savings without a crucial short-term cost in mind (short-term being for at least the next 5 years).
What’s the next step to follow now that you already have a separate amount of money specifically for investments?
There are many factors to consider when allocating your assets, the first being: age.
If you are still in your younger years, you have many decades to look forward to ups and downs in stock prices. Even if you were to lose money, you still have lots of time to see if any sudden growth comes into play at a later time, one that completely outshines your earlier losses. At this point, your priorities should be towards maximizing your growth and being patient.
On the other hand, if you are in your older years, you should now be thinking about retiring your investments from the stock market. The idea is, as you get older, your money has fewer reasons to stay in the market, as depending on your investment’s income at this point in life is a risk not worth taking. Try to sell your stocks partially or making fixed-income investments in exchange, little by little, as you get older.
A great tip you have at your disposal to better understand how much of your money you should keep investing in stocks and how much you shouldn’t is the following:
Subtract your age from 110; the amount left is the ideal amount you should keep investing in stock markets. The remainder should be within a fixed-income environment. Feel free to lightly change the numbers depending on how much risk you are willing to tolerate.
- Open an account
A brokerage account is a type of account made to allow you to buy and sell stocks. It easy to do, with little to no difficulty involved. Once you get set up, you can make investments via electronic transfer, via mailed check and wire transfer.
Still, as it is with many processes, there are many things you should take into account before choosing a particular provider.
First, there’s more than just one type of brokerage account available. Mainly, there are two of them: a standard account and an individual retirement account. Each one of them gives you the necessary functionalities regarding any stock market investment, with the main differences relating to why you are investing in the first place.
If you are just looking to save money in the long run with no specific goal in mind, you’ll probably be more comfortable having a standard account. Even if something unexpected happens that requires you to withdraw your money out of a sudden, quick and reliable access to this type of account easily allows for that.
If you are looking to save up for retirement instead, an IRA is your best bet, as if it provides many advantages over stock-involved taxes that increase your wealth long-term. However, in return, it becomes complicated to withdraw any amount of money before your retirement.
Equally as important, there’s the matter of cost and individual services that your potential provider offers. Some offer tools that enable you to investigate your investments better, and others provide tools to help beginners, among other possibilities. Try and look for one that makes you the most comfortable in terms of both price and features offered with it. The right choice could play a significant role in increasing your income.
- Choose your stocks wisely.
Out of the vast amount of choices available for your first investments, where should you start? Here are some tips so you can be even more sure which one is the one for you.
Try to keep a varied catalogue of stocks belonging to more than one company, not just a large amount belonging to a single one. If one were to fail, you still have a chance with the rest and minimize your losses.
Try to limit your investments to only those businesses you already have a clear understanding of how they work. Having this knowledge enables you to better predict future outcomes based on current information, helping you determine whether your investment should stay with the company you already chose and when it is okay to back out.
Avoid taking significant risks during your first steps into the world of investments. Try to leave those until you have a better grip on how everything works.
Always avoid buying stocks just because they’re “cheap”. Even if it doesn’t look as such at first, they can potentially become high-risk in the long run.
- Keep investing
You should always aim for investing in great businesses when their stock prices are at their most reasonable. Try to hold on to your investments as much as you can and as long as the company remains successful.
However, all companies have to face struggles along the way. If that’s the case, don’t worry if your investments look more like a loss than a profit; it’s all part of the stock investing process. Be patient, give it due time, and you’ll see how your investment becomes worthwhile along the way.
The process of investing will always favour those willing to make these kinds of choices.