Last Updated on April 23, 2021
Investing in stock market is not that difficult and anyone can do it. What you will learn in this post is how in a few simple steps you can start investing.
One of the best ways to build wealth and create passive income is to invest in stock market. Also, it is a great way to beat inflation and even earn a nice sum of money. No wonder you are interested in investing when there are so many positive things.
However, you should keep in mind that investing in stocks can be volatile and a significant amount of money can be lost.
If you decide to invest, be sure to start with the smaller amounts you can lose to learn how investing in stock market works.
Let’s see how you can start investing.
1. Choose Your Investment Strategy
An investment strategy is actually a plan which guides you to achieve your financial goals. In the investment strategy, you can ask yourself what kind of investor do you want to be.
You can choose between the following investing strategies:
If you choose this investment strategy you should know which stocks are cheap to buy. What you should definitely do is choose stocks from companies from your areas of interest. In this case, you have a comparative advantage over those who do not know that area. Additionally, you should know how to do a fundamental stock analysis to know if the stocks are really worth buying at a given time.
This type of strategy involves buying securities that return steady income. In other words, you would focus on generating cash income from dividends and fixed interest income from bonds. This strategy has lower risk and steady returns. On the other hand, it could potentially have lower returns than other strategies and potentially higher tax payments.
An investment strategy that focuses on increasing an investor’s capital. What is common with this strategy is investing in smaller companies that have great potential for growth compared to that industry. If you choose quality stocks that show growth, you can make a lot of money on this strategy. But the risk is high stock volatility and misjudgment.
It is the strategy of making regular investments in the market over a certain period of time. This is a disciplined approach to investing in which you don’t think much and don’t want to. You know the market is volatile and if you invest every month (or quarterly, yearly), you know you’ll catch those good days, but also the bad ones.
In short, the best investing strategy is the one with which you can maximize your returns with minimal risk. Which of these strategies is best for you depends on your knowledge, skills, and willingness to learn.
2. Decide on the Approach to Investing in Stock Market
This is an essential step for investing in the stock market. You need to ask yourself a question about whether you will buy securities on your own or you want an expert to manage the process for you. To clarify, you have 3 options available:
Option 1 – Pick your own securities
This option is good if you have extra time that you are willing to spend on investing. With this option you will be able to have everything in your hands, but learning to invest is a demanding and time-consuming process.
Option 2 – Let experts manage the process for you
You can leave your investment to a professional who will invest for you. Although this option saves you the most time, fees from management funds can be quite high. However, you can invest in passively managed funds and robo-advisors which have lower fees.
Option 3 – Invest on your own but passively
With this option, you are able to make your own decision, but you are not willing to invest so much time in learning. Let’s say you have more important things in life that you want to focus your time and energy on. Therefore, investments that suit this option are investments in indexes, ETFs.
When you have chosen the approach, the next step you need to do is choose your stockbroker.
3. Choose Your Stockbroker With Whom You Will Invest in Stock Market
To invest you have to choose a stockbroker through whom you will invest the money. A stockbroker is a licensed professional with the authority to buy and sell securities for investors. It is easiest to choose an online broker.
There are plenty of stockbrokers who suit the different needs of investors. Above all, I would choose a broker that has educational resources, easy navigation, clear commission, and a high level of customer service for the beginning.
Here you have two main options to choose from:
Active investing in stock market
If you want to start actively investing in stock market, an online broker is an easiest and simplest way to do that. There are plenty of online brokerage accounts available. When you open an account and transfer your money, you will be able to buy and sell investments through the broker’s website.
Passive investing in stock market
In this case you can either choose a brokerage account that comes with human investment advisor or a robo-advisor.
The human investment advisor is a professional who manages investment in your name. He will choose the best investments depending on what will suit your goals. However, you should do research to choose someone who will work solely in your best interest.
A robo-advisor account is a low-cost service offered by investment management. What a Robo-advisor does is help you choose an investment based on the data you make available to him. You may show him your financial situation and financial goals on which he will choose investments. Robo-advisor charge fees from 0.25% to 0.50%
If you decide to go passive investing, then your steps end here, where your investment will be taken care of by an investment advisor. On the other hand, if you are interested in how to build a portfolio and maintain it keep reading.
4. Create Your Portfolio for Investing in Stock Market
Decide how much money you can put into investing. I note that the money you set aside for investing should be forgotten for at least 5 years if you are investing in the stock market. The reason for this is the high volatility that can cause you to lose money in the short term. It is recommended to invest for 10 or more years.
Since you can decide on your investment strategy in step 1, and approach in step 2, here are some additional tips that you need to consider when creating a portfolio.
Create your financial goals. You can read more about this in the article Create Your Financial Goals With These Simple Steps.
Use more valuation methods when evaluating stocks. In order to get a broader view of the value of security, you need to look at it from multiple angles.
Diversify. Diversification is essential to reduce the risk of loss of money. Diversify in types of assets, in exchange rates, in countries, companies.
Investment horizon. if you have decided to buy a stock and hold it for 5 years, know that in those 5 years there will be ups and downs. As a result, emotions will overwhelm you to sell or buy at the wrong times. Be aware of this.
5. Rebalance Your Portfolio
This step comes after you have done your homework and you know exactly how you will invest in the market and in which asset classes.
Rebalance means the purchase or sale of assets in a portfolio to maintain the original or desired level of asset allocation or risk.
To do this, you need to assess the risk of your portfolio at a given time. For example, let’s say the portfolio strategy is to invest 60% in stocks and 40% in bonds. After a while, the stock price has risen and the stocks now contain 80% of the portfolio. Therefore, it may be time to rebalance your portfolio to maintain your risk.
The portfolio is usually rebalanced every year.
If you have gone through all the steps, you now know where to start and what investing in stock market means.
You need to ask yourself the following questions before investing in stock market:
What investment strategy will you use?
What approach is most suitable for you?
Do you plan on active or passive investing in stock market?
Have you covered all the important things when creating a portfolio?
How often do you plan to rebalance your portfolio?
These are just some of the issues that are important when investing in the stock market.
What matters is getting started because that’s the only way you’ll learn and have a nice financial future.