Stock investing involves buying small portions (shares) of companies. Here are five crucial steps to stock investing.
Determine an investing approach
Depending on your personality will answer what approach you should take.
- An analytical person who enjoys doing research and number crunching. Individual stocks
- Dislikes math and wants to set it and forget it. Index funds (preferably passive) or Robo-advisors
- Has time to dedicate to stock investing. Individual stocks
- Likes to research companies but does not care for math. Robo advisor or index funds
- Busy professional with no time for investing research of any type. Robo, online, or private advisor (depends on needs available capital)
Individual stocks are for those with time and desire to research companies and evaluate the stock’s current price. You should evaluate your performance to determine if your investing strategy works and change if needed.
Index funds are investments that track a stock index like the S&P500. Passively managed funds have lower costs and no human involvement. These funds will nearly match the returns of their underlying index, which has averaged about 10% a year.
Robo-advisors are digital stock brokers that invest money based on answers to a computer questionnaire about age, life needs, investment goals, and risk tolerance.
Online or private advisor brokerage that adds a human touch, provides investment advice, and can be beneficial for specific needs. For those with more funds to invest.
Determine capital dedicated to stock investing
You must have a budget and determine how much can be dedicated to all investing. The invested money is usually that which is not needed for at least five years. Most people will dedicate 10-15% of their income to retirement investing. A rule of thumb is 110 minus your age is the percent of investment capital that should be in stocks.
Find an investment account (or stock broker)
Do your research and find a brokerage to invest with. Look at a company’s and or broker’s reviews. Make sure they match for your investing style. Compare costs and features (including support and availability) and make sure you understand the fees and the options available fit your needs.
Chose your investments
While thousands of books have been written on choosing investments, there are five key points to know.
- Only invest in what you understand
- Learn how to evaluate investments
- Avoid highly volatile stocks until you understand them
- Have an investing strategy and stick to it
- Have a diverse portfolio (different companies of different sizes from various sectors and even multiple nations)
Continue investing and evaluate investments regularly
Investing continuously, X dollars per paycheck, into great companies at a reasonable price and staying with them as long as they remain great is the key to success. If you regularly evaluate a company and its stock price, you will see some volatility but produce excellent returns over time. If a stock is no longer outstanding or its price is way higher than its valuation, you will want to reallocate some or all of those funds to a better choice. You can do the same with a broker, comparing them to the S&P500’s returns.
Follow these rules, and over time, you can be successful in your stock investing.