How to Start Investing for Beginners
If I were to ask you what a successful investor looked like what image would pop into your head? Maybe someone in a suit and tie getting off the subway in NYC? Maybe a middle-aged man or woman checking their 401k balance? Or maybe a famous investor like Warren Buffet?
There is one thing all of those people have in common. They probably don’t look a lot like you.
Most people don't think of themselves as investors for one reason or another. They think they don't have the money or knowledge to tap into what is happening on Wall Street. Well, I’ve got news for you. It’s easier than ever to not only become an investor but to become a successful one. There are many investing platforms available to you and loads of knowledge online that will equip you to take advantage of the same things people like Warren Buffet and Ray Dalio do. We will discuss some of those things here.
Investing in the Stock Market
In this article, I want to focus on investing in the stock market. There are many other ways to invest, such as buying real estate or starting or buying a business, but investing in the stock market is what I would like to shed some light on here.
What is a Stock?
According to www.nerdwallet.com, “Stocks are securities that represent an ownership share in a company. For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time.”
“When you own stock in a company, you are called a shareholder because you share in the company’s profits.”
In short, when you buy stock in a company you are becoming part-owner of that company. Pretty cool right?
So naturally, when you are thinking of becoming part owner in a company you want to select good companies to become part-owner of. Maybe you want to own part of a large company that has grown steadily for a very long time. Maybe you want to invest in a smaller company that has a lot of promise and has big growth in its future. These are the types of questions investors ask themselves when they’re making their investment decisions.
Before you get too excited, I always want to make sure I say that there is always a level of risk when it comes to investing, especially if you do it without the proper education. What I would like to touch on are some ways you can invest in the market that decreases that risk.
Ways to Invest in the Stock Market
I’m the type of guy that likes a simple plan. I don’t want to have to sit in front of my screen all day like a day trader who is trying to time the market. I also don't want to spend hours reading financial reports trying to find good companies to invest in. I like to invest in ways that take that time burden off my shoulders. I look for easy ways to put money in the market consistently and leave it there. I am what you would call a long-term and passive investor in the market.
According to www.cnbc.com, “The average annualized total return for the S&P 500 index over the past 90 years is 9.8 percent.”
(The S&P 500 is the 500 largest U.S. publicly traded companies.)
What this tells us is, if I’m able to invest consistently in the market as a whole (see below for information on ETFs and Index Funds) for a long period of time I will most likely see good returns. History would tell us so.
Now the key here is “over time”. The market does go up and down. Crashes will happen. You have to be prepared for that, but what will separate you from the people who don't succeed is patience. If you can learn to hold firm when the market is going down and keep investing consistently, you will have a great chance of being successful. The challenge is, many people are undisciplined and operate out of fear. When they see the market going down they sell off their shares only to buy back in when the market is up again. Don’t be this person. You will miss out on tremendous growth opportunities.
Individual Stocks, Index Funds, and ETFs
Let’s talk about two ways you can invest in the market. There are many more than what is listed here, but these are two avenues I personally use.
Individual Stocks — I’m not a huge fan of investing in individual stocks, but I do it in moderation. Investing in individual stocks means you buy shares of one particular company. You can experience tremendous growth doing this, but you open yourself up to a lot of risk. What if this company doesn't grow? What happens if they close their doors? You can lose a lot of money. On the flip side, take a look at what the early investors made when they bought stocks of Apple and Amazon. Buying individual stocks can be profitable, but for me, they open me up to too much risk so I don't invest this way often.
Index Funds and ETFs — Index funds and ETFs are collections of different companies’ stocks that you can purchase in one simple package. These “packages” typically hold a group of companies that have something in common. As an example, the ETF VOO follows all of the companies in the S&P 500. What does this mean for you? With one simple purchase, you can buy a small piece of all of the companies in the S&P 500! Pretty cool right? This drastically decreases the risk of purchasing individual stocks. If one company’s stock loses value you won’t feel that loss quite as much because you don’t just own that one company. This is called diversification. And remember, the S&P 500 over the past 90 years has had an average annualized return of 9.8%. By buying ETFs or Index Funds that follow these companies you can experience this growth in your portfolio. So what’s the catch? Why wouldn't everyone invest in Index Funds or ETFs? That is a good question. Some people like to take chances with individual stocks so they can capitalize on the large gains some companies see throughout the years. I don't like exposing myself to this kind of risk often so I stay away from this investment strategy most of the time. Also, Index Funds and ETFs do come with fees, but those fees are very minimal. The VOO ETF has an expense ratio of 0.03%, meaning when you own VOO you will be charged 0.03% of the money you have invested there annually. To me, that is a small price to pay for the low risk, ease, and diversification these types of funds provide. You may also be asking, what is the difference between an ETF and an Index Fund is? According to www.money.usnews.com, “The key differences between index ETFs and index funds are: ETFs trade throughout the day while index funds trade once at market close. ETFs are often cheaper than index funds if bought commission-free. Index funds often have higher minimum investments than ETFs.” I recommend buying Index Funds and ETFs and holding them for quite a long time to take advantage of the growth they provide. With this in mind, I think the difference in Index Funds and ETFs is fairly negligible.
Now we know what a stock is, we know what ETFs and Index Funds are, and we know the power they have concerning growth over a long period of time.
The Power of Compound Interest
Before we talk about how you can purchase stocks, Index Funds, and ETFs I would first like to illustrate the power of compound interest to further cement the importance of investing regularly and for a long time to become financially successful.
In our below example, the compound interest calculator shows us how much money someone could accumulate by investing $1000 a month for 30 years while achieving an average annual interest rate of 8%.
In our example, this individual would have accumulated $1,359,398 in 30 years. This is the power of compound interest!
Definition
Compound Interest - Compound Interest is interest earned on interest.
How to Invest in the Stock Market in 2021
Now we need to talk about how to invest in the market. What platforms are available to you that will allow you to buy these stocks, ETFs, and Index Funds so you can start your investing journey.
There are many of these platforms or “brokerages” available to you. Too many to talk about here. I will outline two in particular that I personally use. One for beginners and one for people who are a little more advanced.
Beginner — Using Acorns is a phenomenal way to introduce yourself to investing. It is very user-friendly and makes investing your money easy and hands-off. Acorns has two key features, the round-up feature which rounds up every purchase you make and invests the spare change into your account, and the automated investing feature which allows you to schedule your investing on a recurring basis so you don't have to even think about it. Acorns’ fees are very minimal, starting at $1 a month, which in my opinion is well worth the investment. They offer many more features and products than listed here, but I haven’t found a service tailored to beginner investors quite like this one. When using Acorns, instead of picking individual stocks, Index Funds, or ETFs on your own you will select what type of pre-built portfolio you want your money to be invested in. Those portfolios are: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive. When selecting the portfolio you would like, Acorns gives you a breakdown of what each portfolio is made up of. All in all, I’ve used Acorns for over 6 years now. It’s my go-to recommendation when talking to beginner investors on how to get started. Investing doesn't have to be hard and complicated. Acorns is a great example of that.
Read our review on Acorns: Acorns Review 2021
Sign Up with Acorns and receive $5 added to your account: Get Started
Intermediate/Advanced — If you aren’t a complete beginner, opening a typical brokerage account might be a good fit for you. A brokerage account will allow you to buy things like individual stocks, Index Funds, and ETFs. I would recommend doing your research before going this route, and I would encourage you to have a good grasp of how to operate an account like this, how the markets work, and the tax implications involved. There are many brokerage accounts available to you, but the two I personally use are Webull and M1 Finance.
M1 Finance Review - M1 Finance Review 2021
Sign up with WeBull and receive two free stocks valued up to $1600! - Get Started
Sign up with M1 Finance and receive $30 when you fund your account! - Get Started
(Bonus) 401k — I would highly recommend investing in a 401k account for your retirement, particularly if your employer offers a company match for your contributions. This is free money that you should be taking advantage of! If you are investing in your 401k you are an investor. Congratulations!
I hope that after reading this you now have a different picture of what an investor looks like. An investor isn’t just someone on Wall Street and you don’t have to have thousands or millions of dollars to become one. Investors today look like you and me. Some of the same investing opportunities available to Warren Buffet are available to us all. If you have never invested before I would recommend you start. Continue building your knowledge base and make routine long-term investing a habit. Before you know it, you could find yourself building wealth and becoming very financially successful.
Continued Reading
How to Become Financially Successful in 2021
How to Buy Your First Home in 2021
How to Get Out of Debt in 2021
***This article was not written by a licensed professional and the information is for entertainment purposes only.***