In 2020, around 55% of American adults invest in the stock market. That’s down from a peak of 65% in 2007 but around the average over the past 10 years. Do you want to get a piece of the action? Before you jump all in, make sure you know the basics of how to invest in stocks.
A quick note before we dive in: we’re not investment experts or advisors. So if you’re seriously considering investing, you should work with professional brokers, financial advisors or other knowledgeable experts when you invest. That’s especially true if you plan on investing a lot.
1. Decide on a Budget for Investing
Start by deciding how much you want to use to invest in stocks. Here’s a good starting place—make the potential stocks you’d invest in a percentage of your portfolio. A rule of thumb that many advisors go by is to take 110 or 120 and subtract your age. That’s how much of your investment portfolio you should keep in stocks.
For example, if you’re 30, then you’d keep between 80 and 90% of your portfolio in stocks. If that feels a little aggressive for your financial goals, start with 100 and subtract your age from that.
You also need to decide how much you can invest overall. That depends on your own income, what financial obligations you have and your overall budget. While investing is important, you shouldn’t invest money at the sake of paying your bills, for example.
2. Open an Account for Making Your Investments.
Stocks aren’t like retail goods. You can’t just buy them here and there when you see one you like on display on an ecommerce site. You typically need an account to purchase your stocks through. Some options you can choose include:
- Opening a brokerage account. This lets you buy and sell stocks through a professional service. You can opt for a brokerage where you do your own research and push the buttons on buying and selling, or you can choose a managed option where someone provides advice or handles these things on your behalf.
- Using a robo-advisor. This is an app or software program that lets you set goals for your investments and uses machine learning, AI and algorithms to handle your investments. One popular robo-advisor is Acorns, which is an app that lets you round up your purchases with connected debit cards and put the change into investments. While you’re making many micro investments, the total can add up over time.
3. Get Help Creating an Investment Plan
An investment plan is a comprehensive approach to wealth building. Stocks may play an important part in that, but you typically want to ensure you’re well diversified. A diversified portfolio just means you have various types of investments. This way if one isn’t performing well, the others might offer some protection.
One option for getting investment advice is by signing up for an Ellevest account. You pay a monthly membership for this robo investment app, but you gain access to investment and other financial coaching and educational materials.
4. Learn More About Stocks
You don’t have to be a stock expert or financial advisor to have success investing in stocks. But you do have to know a bit about what you’re investing in, especially if you’re going to make very specific stock choices.
You might be familiar with the concept of buying and selling stocks as seen in television and movies. While you canbuy and sell specific stocks because you want to invest in a specific company, you don’t have to invest like that. You can also invest in groups of stocks via stock mutual funds. When you invest in a stock mutual fund, you’re actually buying many different stocks or pieces of stocks. That spreads your risk out over a wider range of assets.
You should also understand the trends associated with the stock market, at least in general. For example, stocks do tend to rise over time barring big economic downturns. On any particular day, the chance that stocks will rise is around 53%. The chance that they will fall is around 47%. But if you look at the long-term, such as a 12-month period, stocks typically have a chance of rising of 75%.
5. Use Other Tools to Make Investing Easy as You Get Started
Start by getting your immediate financial house in order. Understand what your budget is, and check your credit to ensure there are no surprises looming. You can sign up for ExtraCredit to get a comprehensive understanding of where your credit score is. Once you know where you stand, you can start creating an investment plan with confidence. You can even rely on ExtraCredit’s Reward It feature for cashback offers when signing up for Credit.com partners that provide investment apps and other financial services.
Start Investing in Stocks Today
So, should you invest? Honestly, that’s up to you. Take a good look at your finances and, if you need guidance, try working with a professional. If you do decide to start investing, start easy and slow. There’s no need to jump all in right at once. Hopefully, if investing works out, you’ll reap some serious rewards.