How to invest in stocks: An easy-to-understand explanation
Investing in stocks is a great way to earn with your investment. Being a beginner, you may find it hard, but the truth is, it is not that much challenging as you think. You can start by opening an account through a website or an application. There are also stock market courses which will help you to have a knowledge how to invest in stocks.
Let’s learn in detail how to invest in stocks?
What is a stock?
Stock represents an ownership share in a company. You invest in a company considering the company will grow in value, and the price of your stocks will also rise simultaneously. You can call it equity or fractional ownership in a company.
Investing vs. trading stocks
Investing and trading stocks are different things.
- Trading involves short-term approaches in which traders make a transaction to take advantage of market fluctuations and earn profits daily, monthly, and quarterly basis.
- Investing is a long-term approach to earn returns over an extended period with less active involvement. According to The Street Walls Journals, most of the wealthiest people own stocks, and the prices of their shares have been growing.
How to make money by investing in stocks?
Unlike the traditional approach of “buy and hold,” by investing in stocks, you invest in a growing economy of a company that will likely have more sales and profits over time. Meanwhile, the prices of your stocks will also increase. It will be more than the price at which you bought them.
In simple words, buy low, sell high and make profits out of it.
How to invest in stocks?
To start investing in stocks, you need to follow the following five steps.
1-Decide how do you want to invest in the stock market
Making this decision at the start is very important because there are several approaches to make an investment. Mainly the choice will be between,
- Choose stocks on your own.
- Go for an expert to manage the process for you. Several firms offer this service in which they invest your money on your behalf to help you achieve your goals.
- Invest in your employer’s 401(k) by making small contributions and focusing on long-term goals.
2-Choose an account
You need an investment account to start investing in stocks. You have two choices,
- Open a brokerage account. It offers the quickest and cost-effective way to buy stocks, funds, etc. You can open an individual retirement account or a taxable brokerage account.
- Open a Robo-advisor account. In this account, a company will set your portfolio according to your goal, and you will not have to pick individual investments.
You have to pay a small number of fees to open an investment account.
3-Set a budget for your investment
In the beginning, you may have two questions in your mind. How much money do you need to start investing, and how much money should you invest in stocks?
The answer is, the amount of money you need to buy a stock may ranges from few dollars to thousands of dollars, depending on how expensive the shares are. However, at the start, it is better to invest a small portion of your funds.
4-Focus on long-term investment
Stocks are one of the best investments to grow wealth. No matter what is happening day-to-day, the good strategy when investing in stocks is to focus on long-term returns. After investing, avoid checking on how stocks are doing daily. Just do not look at them and let them do their part.
5-Manage your stocks portfolio
It is recommended not to check your portfolio’s health daily, but you need to check them a few times a year to make sure they are still in line with your investment goals or not. Try to diversify your portfolio instead of putting all investments in one stock.
How to choose an investment?
Check the metrics of a company to get an insight into how it is performing. If the price-to-sale ratio is increasing, you can consider it a good choice for investment.
Is it risky to invest in stocks?
Investing in stocks is riskier than that buying bonds or putting your money in a saving account. Overall, companies tend to grow, and stock market prices generally rise over time. But sometimes, the individual company can lose value, and, in this case, if you invest in such a company, your stocks will be worth zero.
If you want to make money on your stock investment, you must learn to trust your stocks. The best practice is to buy and hold your stocks for a longer period, at least ten years, instead of selling and purchasing them constantly. A beginner should prefer to invest in mutual funds and ETFs instead of investing in individual stocks.
You can choose to invest on your own or have an expert do it for you. But whatever the way you choose, give it a try, and only go for the investing style that works for you.