Investing in the stock market can be for just about anyone. You can do this by investing a small amount of your paycheck regularly, or simply drawing money from a checking or savings account. Small investments can be made into stocks, bonds, mutual funds, ETFs or even CDs. Some investors may choose to do a combination of investments. For example, some individuals may want to buy stocks and bonds, but you don't have to.
- Skill level:
Determine why you are investing. Is it for a large purchase, such as a house? Is it for education, retirement or financial security? Keeping your goal in mind will help keep you focused. It will also ensure you make the correct investment. Someone who is looking to purchase a house in a year needs to be more conservative than someone who is investing for retirement and looking to retire in 20 years.
Determine for how long you want to invest. If you are looking to invest for less than a year you may have to pay short-term capital gains taxes, which can be higher than ordinary taxes. Some bonds and CDs, which are short, may have a lower interest rate than a high-yield savings account. These must be considered.
Determine what is your risk tolerance. Are you aggressive and can deal with 40 per cent decline in one quarter, or are you someone who wants to protect your principal?
How much are you looking to invest? If you are looking to invest very small amounts you need to consider what the expenses are. For example, if you are looking to invest £16 per month, a mutual funds may be the best option. CDs and bonds have a £650 minimum. If you buy £16 worth of stock, but have to pay a commission of £3, you have just lost 20 per cent of your investment. ETFs trade like stocks and so commissions will have the same impact.
If you are looking for diversification and investments in the market, you may want to look at a mutual fund or an exchange traded fund. These are baskets of stocks. Mutual funds are managed by portfolio managers and can have higher expenses, while exchange traded funds will mirror indexes and charge less internal expenses. These may be more appropriate for education accounts or retirement accounts, and for investors with longer time horizons.
If you are working for a company you like and is publicly traded you may want to buy shares of that stock. This is more aggressive than buying a mutual fund or an exchange traded fund since you are putting all your eggs in one basket. This will also be for long-term investors.
Are you looking to invest and save for a purchase? You may want to consider investing in a CD or bond that will mature on purchase date. This will ensure your capital is available when you need it.
Once you have figured out your time horizon, risk tolerance, and investment goals it's time to make the purchases. Write these down to ensure you are investing toward these goals.
Figure out how you want to invest. Do you want to invest online, if so, visit online trading companies and open an account. Do you want to be able to speak with someone regularly? In this case, you will need to contact a brokerage company. Are you looking to invest in a mutual fund or stock? You can visit publicly traded and mutual fund company websites and click the Investor Relations button to get directions on how to invest with them directly
Once you have decided how to invest you will want to invest systematically, or invest little by little monthly, this will help you buy more of the average price and make sure you are not investing all your assets at the top of the market.
Tips and warnings
- Due diligence is very important when making any investment. Speak with representatives who are available at publicly traded companies, mutual fund companies or exchange traded fund companies. Remember, when investing in bonds that although they are conservative they may still be tied to a publicly traded company if they are a corporate bond.
- Investing is a rewarding way to grow your assets. Before you make any investment make sure you are familiar with all the risks associated with them.
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