I am interested in investing in the stock market, but I have no idea where to start. I understand how the stock market works, but how do I start investing in the stock market?
Congratulations on choosing to focus on investing. Countless studies show that people who put an investment plan in place are wealthier than people who do not.
There are several steps involved to start the process of investing. The first is to assess where you stand financially, and whether you are in a position to begin investing. The second step is determining your financial goal and strategy. Third, a great way to start is by taking a look at different mutual funds that fit your investment strategy. The first two components require a substantial amount of consideration on your part in order to help position yourself when you begin investing.
Before you invest in the market you should make sure that your finances are in line so that it makes sense to begin investing. A great way to start is to create a detailed budget for yourself to determine if your expenses are aligned with your income, you have money, and ultimately have money available to invest.If your expenses consume a substantial portion of your income and you have little left over for savings you should look into ways of cutting your expenses. If you find yourself with excessive amounts of debts, especially unsecured, with high interest rates your first task is to reduce those to a more manageable level. The less debt and expenses you have the better financial position you will be in to begin investing.
Next, if you work for a company that provides you with a 401(k) benefit plan or non-profit that offers a 403(b) you should take advantage of this opportunity. Contributions (called elective deferrals) to a 401(k) and 403(b) are pre-tax, and in many cases the employer will match an employee's contributions to the plan. If you are self employed there are other plans such as an IRA, which there are a few different types, or Roth 401(k).
The last step, when assessing your finances, would be to make sure you are putting aside for a "rainy day"; so to speak. Many financial planners recommend households save three to six months of your living expenses; for emergency reasons, such as job loss or similar unplanned but foreseeable calamity. Keep in mind that savings is different than investing, and you want to make sure that you have easy access to your savings in the event of an emergency. Savings are held in a liquid short-term account, such as a savings account, certificate of deposit (CD), money market account, or a savings bond.
When you place yourself in a financial position where you can invest, the next step would be to determine your goal, and your strategy or strategies to achieve that goal. Your goal and strategies should consider at least two important factors: Your age and when you want to access your investment. If your goal is to invest your money and pull out within five years you may want to consider money market accounts, bonds, or certificates of deposit. Investing in stocks is generally considered by experts to be for investments lasting five years or more. Investors tend to see positive returns in the stock market after this time frame.
Generally speaking, the younger you are the more aggressive (i.e., risky) the strategy you can take with your investments. On the other hand if you reaching an age where you are relatively close to retirement you may want to consider a conservative approach. These two approaches suggest the level of risk involved in investing your money. The more aggressive of an approach you take the more probable there can be a high return, or a large loss. The conservative approach would mean a modest return or a small loss.
Experts agree the best plan to investing is to diversify. For instance, if you have money in both stocks and bonds you will fare better than someone who invested money in just one. Normally, when the stock market is performing poorly the bond market performs well, and vice versa. So you may be able to offset your loss in one market with a gain in the other. It would be prudent that if you do decide to invest you make yourself as knowledgeable as possible to make sure that you are adapting your investment strategy according to what is happening in the market place and your overall personal life. Now, if all these factors are aligned correctly how and where do you begin investing?
A good place to start is by looking into mutual funds. Mutual funds pool money from investors. The money is then invested in stocks, bonds, short-term money market instruments, and/or other securities. This is a great vehicle for individuals who do not want to spend time doing market research and analysis to determine what stocks, bonds, or other securities to buy or sell. In this case the mutual fund manager will do the research for you. There are funds that are tailored for aggressive investors, conservative investors, and investors that find themselves somewhere in between these general categories. Mutual funds charge for their service and are typically spread across all the investors, which normally allows this to be less expensive than purchasing the securities on your own.
What mutual company should you choose to invest your money with? You should do extensive research before choosing a mutual fund company to work with. Firms such as Morningstar provide ratings on mutual fund companies. The ratings firms will typically provide information such as the cost of investing with a particular mutual fund, the year to date return, what the minimum amount is needed to start investing, analysis of different portfolios, and much more. As mentioned before mutual funds are not the only way to start investing, but they are generally a great way to start.
I strongly encourage you to consult a certified financial planner to discuss your goals, strategies, and options available for investing. I would also encourage you to ignore the television advertisements from companies that provide discount stock trading until you become more well-versed in investing in general and the stock market in particular. In my opinion, the advertising for some of the discount trading firms overemphasize the ease of stock trading and does not discuss the risks adequately.
To learn more about financial planning, see Help with Financial Planning. A common question many homeowners have is whether they should pay-off their mortgage early. See Should I Make Extra Payments to My 30-Year Fixed Mortgage?
I hope this information helps you Find, Save, and Learn.