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Stock investing can seem daunting if you donâ€™t know what youâ€™re doing, especially during uncertain times. You may be asking yourself, â€œshould I buy stocks right now?â€ So hereâ€™s a tidbit, investing your money doesnâ€™t have to be as complicated rocket science. There are a few simple strategies you can use to safely and reliably invest your money.
While no investment is risk-free, investing in the stock market nets an average return of 7% each year after inflation, making it an attractive investment strategy for the long term. Whether youâ€™re new to investing or just curious about how to make the most of your money, understanding what to know before investing in stocks is critical.
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Getting started in the stock market
If youâ€™re interested in stock investing, there are a few things to keep in mind before you take the leap.
1. Investing in stocks is one of many options for investing your money.
Stocks are a popular avenue for investment, but itâ€™s far from the only option. Depending on your needs, income and when youâ€™ll need to access the money, you can take advantage of a variety of different investment strategies. These include putting money in a savings account, purchasing real estate or investing in bonds, precious metals and foreign currency. All of these investment strategies involve varying levels of risk and return.
2. Investing in stocks comes with substantial risk, especially in the short term.
While stocks are often viewed as a safe investment strategy in the long term, nothing is guaranteed. The stock market is volatile, especially in the short term, and can swing wildly in between extremes. If youâ€™re looking to invest your money in the short term, there are usually much more reliable, low-risk investment strategies available.
The stock market has historically grown at an average rate of about 7% per year. From year to year, however, the stock market can experience dramatic highs and lows. Even over a long period, a return on an investment in the stock market is never guaranteed. Investors should be cautious when it comes to investing in the stock market, and understand that nothing is a sure bet.
3. Most people invest in stocks by opening an account with a brokerage â€” today, thatâ€™s usually done online at the brokerageâ€™s website.
Investors generally invest in stocks through a brokerage firm. To do so, they must open an account and deposit money. Once youâ€™ve added money to your account, you can direct the brokerage to purchase a certain amount of stock. A brokerage usually charges a small fee for these services.
Now, an unpredictable stock market and stay-at-home restrictions are encouraging trading activity and new accounts on mobile devices. Take Robinhood, for example. Its simplicity has made its app and website reach 10 million accounts in 2019. Combine it with low trading costs, and youâ€™ve got an effective model for curious newcomers who arenâ€™t ready to trade large quantities yet.
Charles Schwab and E*TRADE, three of the largest online brokerages in the U.S., have also added hundreds of thousands of new accounts since January 2020.
4. Different brokerages have different strengths and weaknesses.
Not all brokerages are the same. Depending on your investing needs, you may want to pursue brokerages with different strengths and weaknesses. Some might have especially robust customer service, while others may offer low (or even no) fees. Which brokerage is right for you will depend on your investing goals and how much guidance you need when it comes to investing. There’s no one size fits all in investing, so you should explore the best stock broker for you.
5. Investing all of your money in the stock of a single corporation is very risky.
It can be tempting to go â€œall inâ€ on a promising young company that you think might turn into the next Apple or Amazon. However, investing all of your money in a single company is a risky proposition. Thereâ€™s no way of reliably predicting which companies will be an overnight success. If you guess wrong, you may lose some or all of your investment.
6. A good strategy for reducing risk is to spread out your investments.
A common investment strategy is to invest in many different companies to reduce risk. This spreads out your investment and protects it in the case that one companyâ€™s stock plummets. However, this strategy often involves additional brokerage fees, which can hamper your returns in the long run.
7. Most stocks pay your dividends, which provide a stream of income for you without having to sell the shares.
Dividends are small payments that companies distribute to shareholders, usually quarterly. If you own shares in a company, youâ€™ll usually be eligible for dividends. While dividends generally represent a small percentage of your overall investment, they can add up, especially if youâ€™ve invested a lot of money in the stock market. Companies can raise, lower or eliminate dividends depending on their financial health.
8. A mutual fund is just a collection of investments, often stocks.
Mutual funds are collections of investments. These funds can be composed entirely of stocks, but can also include other types of investments, such as bonds, precious metal and foreign currency. Mutual funds generally charge a small fee each year for maintenance and management costs. What exactly a mutual fund invests in and how it is operated varies from company to company, so be sure to do your research.
9. An index fund is a specific kind of mutual fund governed by very simple rules, which usually means the management costs are very low.
Index funds are a common type of mutual fund. They usually operate under a very simple set of parameters and often invest in shares represented in a stock market index like the S&P 500 or the Dow Jones Industrial Average. Because management is minimal, index funds typically have very low associated fees. Index funds are usually a good choice if youâ€™re trying to match the return of the stock market as a whole and diversify your investments as much as possible.
10. For most people, the smartest stock investment is index funds.
If youâ€™re not sure how you should be investing your money, index funds are usually a good option. Index funds might not see the dramatic returns that investing in an individual stock might, but theyâ€™re also a much lower risk investment. Index funds usually have low fees, which can have a significant impact on your investment over the long term. Theyâ€™re also a convenient investment since they match the market, reducing the need for research, studying and guesswork when it comes to investing.
[Read more: How to Get Started Investing in Index Funds]
11. Tax-deferred accounts like a 401(k) are a great option if youâ€™re investing for retirement.
If youâ€™re looking to invest money that youâ€™re saving for retirement, tax-advantaged retirement accounts are usually your best option. These can include 401(k)s, IRAs and other types of retirement savings accounts. In most cases, these accounts are tax-deferred, meaning you donâ€™t have to pay income tax on your money until you withdraw it during retirement. This can help your money to grow over time. A popular retirement investing option is a targeted retirement fund, which takes into account the time until you plan to retire and adjusts the level of risk in your investments accordingly.
12. Taxes on stocks arenâ€™t as scary as they might seem.
Many people worry about taxes when it comes to investments, but you shouldnâ€™t stress about them too much. When it comes to retirement investments, youâ€™ll pay regular income tax and tax-deferred investments, and your brokerage will usually help. If youâ€™re investing in a normal brokerage account, youâ€™ll only owe taxes on your gains and dividends. When transferring money from an investment into your bank account, you should always make sure to set aside a portion of your earnings for taxes â€“ 20% is usually a good rule of thumb, but check with a tax professional if youâ€™re not sure.
Stock investment FAQs
Investing in stocks can be a sound financial decision depending on your needs and circumstances. If youâ€™re looking to grow your savings over the long term (10+ years,) investing in stocks is a good option. If you think youâ€™ll need the money sooner, investing in stocks may not be your best option.
The typical advice when it comes to stocks is to buy low and sell high. In practice, however, it can be difficult to predict exactly what the market will do. If youâ€™re investing for the long term, it makes sense to continue to add to your investments regardless of what the market is like at any given time.
You donâ€™t need a lot of money to invest in stocks. Depending on what youâ€™re investing in and how much shares cost, you can dabble in investing with beer money or pocket change. Apps like Acorn and Robinhood make it even easier for you to invest a little extra spare cash in the stock market. You can also invest larger amounts, of course â€“ although we donâ€™t recommend investing the entirety of your savings in stocks.
In addition to investing in the stock market, itâ€™s often good financial sense to pursue a diverse array of other investments. These can include stashing money in high yield savings accounts, bonds and certificates of deposit. Investing your money in things besides the stock market can help to reduce your risk and protect your investment.
Too long, didn’t read?
Investing in the stock market can be a great way to grow your savings over time. Work with a brokerage to buy and sell stock investments and shop around for one that fits your specific needs.
You can reduce the risk of losing money by investing in multiple companies instead of a single company. A mutual fund can help you diversify your investments for low fees. If you’re looking to save for retirement, a 401(k) might be a better option. And your brokerage can be a useful resource when its time to handle the taxes from your investments.
While no investment is without risk, the stock market averages respectable returns in the long term. Whether youâ€™re saving for retirement, looking to grow your savings, or just want to learn more about the stock market, investing your money doesnâ€™t have to be a scary process. With a few simple strategies, you can invest in a financially responsible way that will benefit you over time.
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Andrea PerezPersonal Finance Editor
Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.