At 9:30 am, Monday – Friday, the proverbial ringing of the bell signifies the opening of the stock market and it’s off to the races. So if you’re ready to get started, but feel intimidated by the technicalities involved or are simply unsure where to begin… Worry no more, as you've come to the right place! Educating yourself on where to put your money is the first step to a successful investment.
Now, investing comes with risks and uncertainties. However, starting somewhere is a must, as even the most iconic investors had to start from scratch, which is learning. So let's lay the foundation and start your investing journey.
What are Stocks?
A stock or share is a financial instrument that represents ownership in a company or corporation. It represents a proportionate claim on the company's assets (what it owns) and earnings (what it generates in profits). Stock ownership implies that the shareholder owns a slice of the company.
Now, your slice is equal to the number of shares held, in proportion to the company's total outstanding shares. For example, an individual or entity that owns 1,000 shares of a company with 10,000 outstanding shares would have a 10% ownership stake. Just know most companies have outstanding shares that run into the millions or billions.
In the basic premise, stocks are a means of building wealth. You purchase shares of a company, thereby becoming an owner, with the goal being to increase your wealth via share appreciation and/or dividend payouts.
Companies need funds for growth investment, new product launchings, and expansion. Issuing shares is one of the ways companies meet this need, and that's where you, as an investor, come in.
Steps for Starting Your Investment Journey
1) Determining your Goals and Risk Tolerance
Risk tolerance is critical, as it's the ability to withstand losses when your investments perform poorly. Ask yourself…how much of a drop in the market can I stomach? If your tolerance is low, you should consider a conservative investing approach. For example, a greater portion of your portfolio might be in low-risk bonds and a smaller portion in higher-risk stocks. Knowing your risk tolerance helps create a game plan, which will in many ways, lead your investment journey.
Remember to set realistic goals, not comparing yourself to others. Investing is a marathon, not a sprint.
2) Choosing an Account
To invest in stocks, you need a brokerage account, and there are different types to choose from. If your focus is retirement, an IRA is generally your best bet. However, if you want the freedom to withdraw funds as needed, you likely want a traditional brokerage account. And of course, you can open multiple accounts to fit your varied needs.
When evaluating your future broker of choice, compare pricing (trading commissions and account fees), investment selection, and investor research tools. Each plays a pivotal role in your investing experience, so do your research and ask questions. Several brokers even have a demo version of their respective trading platform, which allows you to make the best decision possible.
3) Investing in What you Understand
Choose your stocks wisely to avoid disappointments. Thus, a great way to start is by evaluating where you spend your money. Is there a particular service or product you find yourself regularly purchasing? Do you have a keen interest or above-average knowledge of the automotive, video gaming, or any other industries? Take time to evaluate your answers to each of these questions.
Now it's time to do the research, as you want to develop an intimate understanding of the companies you choose to invest in. Remember when you purchase a slice of the pie, you're instantly a proportional owner of the company – it's important to understand where you place your money. Educate yourself by visiting the company website, reviewing the financial statements, and reading various articles to determine if the company is worthy of your investment dollars.
4) Knowing When to Buy or Sell
Buying low and selling high is a fundamental rule of investing. However, many fall victim to the herd mentality. This is why it's important you do the homework and identify what you perceive a company to be worth or simply the valuation of the respective stock (a stock's price target). Aside from doing your research, relying on analysts' price targets or the recommendations of financial newsletters can be good starting points, as long as you remember, these are only the opinions of others.
Knowing when to buy or sell is a personal decision, made easier when you've done the homework and continue to educate yourself upon your current or future company.
Conclusion
Investing in the stock market has contributed to generational wealth for numerous families. If you’re willing to set aside the time, why should it be any different for you and your family? The key is getting started, so use the above steps to start or improve your investment journey.
Don’t let fear delay your journey to financial freedom! We believe the only difference in guru investors and ordinary people, is the know how to take capital small or large and multiple it with compounding returns. The purpose of Brown Investors is Bridging the Gap in financial literacy.
If you plan to invest, or you're already investing in stocks, but need more advice, feel free to contact us today, and we will be more than willing to assist.