I’ve been asked by numerous people in the past few months about how to start investing in the stock market, so I thought it would be as fitting a first post as any. Without further delay, see the four steps below to start investing in the stock market, to build wealth and improve your financial standing.
- Chose a low cost provider where all your investing will take place. It’s the same concept as opening a new bank account, you need to find a bank. If you want to invest you need to find a company to hold your money and buy and sell investments with. Companies like Vanguard, Fidelity, E-Trade, Charles Schwab are some of the more widely known low cost investment “Brokers. I personally use Fidelity. Accounts are easy to open, their app and website are easy to use, they have great customer service, and you can invest for practically free.
- Establish goals. What’s the purpose of investing? Saving for Retirement in 30 years, or saving for a home in five? Establishing goals helps you calculate how much you need to invest to reach your goal. It also helps with allocating money. Got a little extra you want to save for retirement? Transfer it to your IRA (Individual Retirement Account). Some account types may not be suitable for your intended purpose, and may have tax implications, so consult with an advisor if you have any questions relating to this.
- Understand your risk tolerance and time horizon. Only invest money if you are okay with losing it. Got extra cash you want to invest? Only invest it if you are cool with losing it all. Doing so will help you stomach any drop in value. The key with investing is having your money invested for the long term, and if you are investing money you are okay with losing, you will be less tempted to sell when the market drops. Investing for more near term events like a large purchase in 12 to 18 months? Maybe stick to more conservative investments, like cash or short-term bonds if you are more risk averse and don’t want to chance losing money.
- Choose your investments. Many people, as well as myself, recommend investing in index funds, especially for beginners. Investing in individual stocks is far too risky for the average person, which is why index funds are the perfect investments. These are Mutual Funds and Exchange Traded Funds (ETFs) that invest in the same stocks that comprise an “index”. An index is just a grouping of stocks who’s companies have similar size and characteristics. The low cost brokers mentioned above all offer index funds with minimal or now commissions and low management fees.
Vanguard Total Stock Market Index Fund Admiral Shares – VTSAX: Possibly the most popular index fund in the world. This fund tracks the entire US stock market. Investing in this fund buys you a little piece of every company in America.
Fidelity ZEROSM Large Cap Index Fund – FNILX: This fund tracks the S&P 500. Investing in this fund buys you a little piece of the 500 biggest companies in America.
Fidelity ZEROSM Total Market Index Fund –FZROX: This fund tracks the entire US stock market. Investing in this fund buys you a little piece of every company in America.
Fidelity ZEROSM Extended Market Index Fund – FZIPX: This fund tracks small and mid-size companies. Investing in this fund buys you a little piece of 2,000 small and mid-size US companies in America.
There are several other index funds out there that invest in the same companies, track the same indexes, and thus produce the same returns. Vanguard, iShares, Charles Schwab, Fidelity, and most other asset managers have their own lineup of broad based index funds.
As a closing remark, don’t start investing in the stock market until you have an emergency fund with at least 6-months of living expenses. This way if you have a job loss or other life event, you don’t have to touch your investments. The other note is to make sure you have paid off all high interest debt before you start investing. Paying off high interest debt saves you money on interest, and thus helps you build wealth in the same way as investing for a return does.
With all that said, let’s start investing.