The other day I was having lunch with a friend and we had been talking sports or some such pedestrian topic and then somehow the conversation turned to finance and investing. He does not have a finance background. I’ve been immersed in the subject since college. He then asked “Well, I have an IRA through work, but how do I actually invest outside of that account?” That was the impetus for writing this post.
If you find yourself not knowing how to invest “in the stock market” then this post is for you. Before I go any further though, I strongly advise anyone not familiar with investing to first learn the basics. Whether this means talking to a financial advisor or doing your own research, that is up to you. I’m not a Certified Financial Planner nor do I hold any licenses that allow me to make recommendations on any particular securities. I simply do my own investing and write about it. It should not be taken as financial advice but instead as seeds for ideas that merit further research and verification.
Some of the basics include learning about the following:
stocks
bonds
index funds
financial statements (balance sheets, income statements & cash flow statements)
interest rates
the Fed/financial institutions
economic cycles (or economics in general- supply and demand, etc.)
A great resource to get started is one of my favorite books, “A Random Walk Down Wall Street” by Burton Malkiel. It teaches you basically all you need to know as an average investor to do well in the stock market in the long run. He advocates (1) investing in index funds and (2) dollar-cost averaging. The former eliminates the need for you to “stock pick” which is a time-intensive and laborious process, and one that isn’t guaranteed to generate returns above those of a broad-market index without you having to do any work (or a pay a portfolio manager to do that work for you). The latter eliminates the need for you to “time” the market. Say you have $100 to invest every month. You buy the same index every time. Some months you’ll buy less of the index because it’s more expensive and some months you’ll buy more of it because it’s less expensive. After a while, you’ll find that you’ve been participating in the stock market in both bull and bear markets and in the long run (after years, even decades of investing) you’ll have earned the same returns as say, the S&P 500 or Dow Jones indices, which historically have generated returns of 10-12%, on average. Generally that’s what you’re doing anyway with your IRA/retirement account, except that if you withdraw funds from those accounts, you’ll incur tax penalties. But I digress.
Once you’ve done your research and due diligence, the next step is opening a brokerage account. There’s many out there- E-Trade, Fidelity, Charles Schwab, and even RobinHood. Nerd Wallet does a good job of separating the wheat from the chaff, so take a look through their list and pick one that fits your needs. Chances are, whoever you bank with offers brokerage accounts, so check with them if you prefer banking in one place. It used to be that you’d have to pay a commission per trade- anywhere from $4.99 to $10 per transaction- but many major brokerages recently opted to eliminate these fees and have even begun to allow you to buy fractions of shares in an effort to remain relevant (and in business).
What I would advise against is blindly picking stocks and hope that they increase in price. I can’t iterate enough the need to learn as much as you can about this stuff if you want to do it on your own. Otherwise, speak with a financial advisor and let them guide you based on your situation, needs, financial goals, and risk appetite. Also, don’t think of investing as a way to get rich quick/overnight, but rather as a mechanism to preserve wealth. A portfolio comprised of bonds and index funds is a great way to do that. And if you can’t resist the urge to gamble and throw some $$$ on Tesla and “let it ride,” make sure the amounts you’re dealing with are amounts you’re willing to part with i.e., assume the worst with risky investments.
So that’s it. If you want to invest on your own, first learn about it, speak to a financial advisor, then open a brokerage account. Riskier investments have the potential for higher returns, but also steeper losses. You’ll know if you’re taking on an appropriate level of risk by whether or not you can sleep at night based on what’s in your portfolio. I wish you the best on your journey towards investing and making your money work for you.