Basic Investing Guide
Stock Market Investing For Beginners
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Never before has ensuring you and your family's financial security been more important than during a global pandemic. One of the absolute greatest and consistent ways of accruing and compounding wealth safely has been the US stock market; from Wall Street bankers to families on Main Street, it seems that everyone is trying to get a piece of this pie.
To beginners, investing in the stock market seems to be a daunting task. Luckily investing today is easier than it has ever been with the rise of online brokers, making it one of the easiest ways to compound your wealth.
Before we begin with the stock market, it is important to acknowledge the other types of investment vehicles that exist. Depending on your situation, some of these may end up being a better option for you in the long-run than opening an account and trading stocks yourself.
Investing in a 401(k)
One of the best investment vehicles is a 401(k) if your employer provides one. 401(k)'s work by allocating a small "contribution" of each paycheck you get from your employer into mutual funds (a collection of stocks, bonds, and other assets), and occasionally the company's stock itself, if it's a public corporation. Your employer may even match these contributions up to a certain percent, giving you what is essentially free money.
Over time, these mutual funds combined with frequent contributions will compound based on the performance of the stock market and will be used to fund your ventures in retirement.
Investing in an IRA/Roth IRA
An IRA (Individual Retirement Account) functions very similarly to a 401(k), but instead of your employer managing your contributions, it's up to you. The benefit of going with an IRA is that you won't have to pay as much taxes as you would with a 401(k), the availability of opening one (all major brokerages and most banks offer IRA options.) The trade-off of an IRA is that you obviously don't have an employer to match your contributions.
You may have noticed that there are two types of IRAs. The difference between a Roth IRA and a Traditional IRA is how you pay taxes on it.
Roth IRA: Pay taxes on contributions; no tax when withdrawing.
Traditional IRA: No taxes on contributions; pay tax when withdrawing.
If you choose to go the IRA route, most economists suggest choosing a Roth IRA, as your contributions essentially get "locked" into your current tax rate, which is great considering that you'll likely pay more in taxes when you retire, as your income will have almost certainly increased by then.
Investing in the Stock Market (Brokerage Accounts)
Investing directly in the stock market has always been the most popular way of having personal control over your wealth. It allows you to have full control over how much risk you'd like to take on, what sectors, in particular, you want to invest in, and how you wish to diversify your money.
The modern way of investing in the stock market is to open what is called an "Individual Brokerage Account," a means of buying shares of certain stocks through an online brokerage. Many online brokerages exist, but among the popular ones are names that may be familiar: E-Trade, Fidelity, Charles Schwab, TD Ameritrade, and others that have gained favor with Millenials like Robinhood. The broker you go with depends on what benefits you like:
Fidelity
Pros: Puts your uninvested cash into a money-market fund to help build portfolio worth.
Cons: Not all advanced features available on mobile.
TD Ameritrade
Pros: Provides investing help with courses, and has a great mobile app.
Cons: No interest provided on uninvested cash.
Charles Schwab
Pros: Has a great screener for stocks, telling you their fundamentals and projections.
Cons: No interest provided on uninvested cash.
E-Trade
Pros: Has an extensive, feature-filled mobile app.
Cons: Charges money for options-trades.
Robinhood
Pros: Easy to use, free options-trading.
Cons: Not many features, problems with servers.
What to Invest In?
Many economists suggest starting your investment career with index funds such as the S&P 500. Index funds are simply a weighted average of how the stock market as a whole is doing, and the S&P 500, in particular, tracks the success of 500 of the largest companies in the United States. Investing in index funds incurs low-risk, as the companies listed among them are some of the highest-performing and profitable companies that exist, and the average return per year is around 8%-10%. They also incur less risk because if one company fails, it doesn't affect the index fund that much as there are hundreds of other companies that affect the price, so the one won't do as much harm as if you only bought the single company stock.
Alternatively, you could invest in stocks that you think have potential, but this isn't recommended for beginners to the stock market. However, if you do invest in individual stocks over an index fund, it is recommended that you choose what is known as "blue chip" stocks. Stocks that represent big companies like Google, Walmart, Nike, and Visa, for example, are considered blue-chip stocks because they are high-quality companies that consistently have profitable years and perform well in most economic conditions.
How to Invest In Index Funds
The S&P 500 is among the most popular index fund to track the stock market as a whole, but it's not technically possible to invest in an index fund. You can, however, invest in an ETF (a mutual fund that is only traded on the stock exchange) that represents the index fund. An ETF that represents the S&P 500 is SPY, one of the most bought and held stocks on the market. You buy an ETF the same way you would as any other stock, by buying the ticker. The ticker is one to five letters long and is what you buy on the market instead of the actual company name. (Apple Inc. is AAPL, etc.)
Buying a ticker is usually as easy as typing it in the search bar, selecting the stock, adding how many shares you want, and clicking 'buy.' (Though you can usually enter the company name on most brokers and it'll show the ticker regardless.)
Growth vs Value
A lot of investors think that SPY itself is bland and would like to diversify their investments in a few other areas. While I still think that index funds are the way to go for beginners, there are ways that you can do both while still staying with the index funds. You can invest in SPY targeted towards either 'growth' or 'value' stocks.
Growth: Stocks expected to grow a lot in the short term over a few years (SPYG)
Value: Stocks with traditional fundamentals, expected to grow consistently over the next decade. (SPYV)
The Benefits of Dollar-Cost Averaging
Dollar-cost averaging is one of the most frequently wrote about and praised investing strategies out there. The strategy involves investing a set amount of cash or shares at the start of each week, month, or whatever you decide, no matter what the market condition is. By doing this, you'll end up getting less volatility, facing lower risk, and getting more consistent returns than someone taking the risk of trying to time the market.
There's an adage that holds up to this day: "time in the market beats timing the market," meaning since stocks usually go up over time, you'll benefit from having your money invested over a long amount of time rather than buying and selling trying to buy the highs and lows.
Lessons In Holding
Investing is not trading, and trading is not investing.
Investing: Buying and holding stocks over long periods of time (usually years) in an attempt to "get rich slow."
Trading: Buying and selling stocks over short periods of time (days or weeks) in an attempt to "get rich quick."
Investing has proven to be a more reliable and consistent way of accruing wealth, even if it takes longer than trading. The buying and holding of stocks over long periods of time is always the way to go, which leads us to our crucial, final point. If you remember one thing from this article, remember this: DON'T SELL WHEN THINGS GET ROUGH. The one thing that people who lost money in the markets during the Great Depression, Recession, and COVID-19 Pandemic crash have in common is that they all sold AFTER the market crashed. The people who made money were the ones who took the opportunity to BUY more when the market was down and held the stocks they already had without selling in a panic.
Conclusions
There are many ways to choose where to put your money. Most of what you have to learn about stocks now comes with experience, something that can't be taught through an article. Make sure to do your own research, pick what investment vehicles you like the most, and make smart decisions based on your own risk tolerance.