How to start investing in stocks: a beginner’s guide

Investment is a way to save money in a busy life and let the money work for you so that you can fully reap the rewards of your labor in the future. Investment is a means of achieving a happier ending. Legendary investor Warren Buffett defines investment as “the process of investing money now to get more money in the future”. The goal of investing is to use your funds for one or more types of investment tools, with a view to increasing your funds over time.

Suppose you have prepared $1,000 and are ready to enter the investment field. Or maybe you only have $10 in extra income per week and you want to invest. In this article, we will guide you to start becoming an investor and show you how to maximize returns while minimizing costs.

Key points

  • Investment is defined as the act of investing money or capital in an effort to obtain additional income or profit.
  • Unlike consumption, investment is to reserve funds for the future, hoping that it will grow over time.
  • However, investment also comes with the risk of loss.
  • Investing in the stock market is the most common way for beginners to gain investment experience.

Click play to learn how to start investing in stocks

What type of investor are you?

Before you invest money, you need to answer this question: What kind of investor am I? When opening a brokerage account, online brokers such as Charles Schwab or Fidelity will ask about your investment goals and the level of risk you are willing to take.

Some investors want to actively participate in managing the growth of their funds, while others prefer to “get it right once and for all.” More “traditional” online brokers, such as the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETF), index funds, and mutual funds.

Online broker

Brokers either provide full service or offer discounts. As the name suggests, full-service brokers provide a full range of traditional brokerage services, including financial advice on retirement, healthcare, and all aspects related to money. They usually only deal with higher net worth clients, and they can charge high fees, including part of your transaction, part of the assets they manage, and sometimes an annual fee. Among the full-service brokers, it is common for the minimum account size to be USD 25,000 and above. Nevertheless, traditional brokers will provide detailed advice based on your needs to justify their high fees.

Discount brokers used to be an exception, but now they are the norm. Discount online brokers provide you with tools to select and place your own transactions, and many of them also offer bot advisory services to set and forget it. As the financial services sector advances in the 21st century, online brokers have added more features, including educational materials on their websites and mobile apps.

In addition, although there are many discount brokers that do not have (or very low) minimum deposit restrictions, you may face other restrictions and charge certain fees for accounts that do not have a minimum deposit. If investors want to invest in stocks, this is something they should consider.

Robot Advisor

After the 2008 financial crisis, a new type of investment advisor was born: robo-advisors. Betterment’s Jon Stein and Eli Broverman are generally considered the first in this field. Their mission is to use technology to reduce costs for investors and simplify investment advice.

Since the launch of Betterment, other robot-first companies have been established, and even mature online brokers like Charles Schwab have added robot-like consulting services. According to a report by Charles Schwab, 58% of Americans say they will use some kind of robot recommendation by 2025. If you want an algorithm to make investment decisions for you, including tax loss collection and rebalancing, then a robo-advisor may be for you. As the success of index investing shows, if your goal is to accumulate wealth over the long term, then using robo-advisors may do better.

Invest through your employer

If your budget is tight, try to invest 1% of your salary in a retirement plan that is available to you at work. The fact is, you might not even miss such a small contribution.

Work-based retirement plans deduct your contributions from your salary before calculating taxes, which will make the contributions more painful. When you are satisfied with the 1% contribution, maybe you can increase it when you get an annual salary increase. You are unlikely to miss additional contributions. If you have a 401(k) retirement account at work, you may already be investing in your future, allocated to mutual funds or even your own company’s stock.

Minimum requirements for opening an account

Many financial institutions have minimum deposit requirements. In other words, they will not accept your account application unless you deposit a certain amount of funds. Some companies don’t even allow you to open an account as small as $1,000.

Before deciding where to open an account, it pays to shop around and check our broker reviews. We have listed the minimum deposit at the top of each review. Some companies do not require a minimum deposit. If your balance exceeds a certain threshold, others may generally reduce costs, such as transaction fees and account management fees. Nevertheless, others may offer a certain amount of commission-free transactions to open an account.

Commissions and fees

As economists often say, there is no free lunch in the world. Although many brokers have recently competed to reduce or eliminate trading commissions, and ETFs provide index investments to everyone who can use basic brokerage accounts for trading, all brokers must make money from their customers in some way.

In most cases, your broker will charge a commission every time you trade stocks, whether through buying or selling. Transaction fees range from the low end of US$2 per transaction, but can be as high as US$10 for some discount brokers. Some brokers do not charge trading commissions at all, but they make up for it in other ways. There are no charitable organizations operating brokerage services.

Depending on the frequency of your transactions, these fees will add up and affect your profitability. If you frequently enter and exit positions, investing in stocks can be very expensive, especially when there is very little money available for investment.

Remember, a transaction is an order to buy or sell a company’s stock. If you want to buy five different stocks at the same time, this will be treated as five separate transactions, and you will pay for each transaction.

Now, suppose you decide to use your $1,000 to buy stocks in these five companies. For this, you will incur a transaction cost of $50 (assuming a fee of $10), which is equivalent to 5% of your $1,000. If you invest $1,000 in full, your account will be reduced to $950 after deducting transaction costs. This means losing 5% before your investment even has a chance to make a profit.

If you sell these five stocks, you will again bear the transaction costs, which is another $50. To make a round trip (buying and selling) of these five stocks, you will spend $100, or 10% of the initial deposit amount of $1,000. If your investment income is not enough to make up for this, you will lose money just by entering and exiting positions.

If you plan to trade frequently, please check our list of brokers for cost-conscious traders.

Mutual fund burden

In addition to the transaction fees for purchasing mutual funds, there are other costs associated with this type of investment. Mutual funds are professionally managed investor fund pools that invest in a centralized manner, such as large-cap U.S. stocks.

Investors incur many expenses when investing in mutual funds. One of the most important fees to consider is the Management Expense Ratio (MER), where the management team charges fees based on the number of assets in the fund each year. MER varies from 0.05% to 0.7% per year and varies by fund type. But the higher the MER, the greater the impact on the overall return of the fund.

When you buy a mutual fund, you may see some sales charges called loads. Some are front-end loading, but you will also see no-load and back-end loading funds. Before buying, make sure you understand whether the fund you are considering has a sales burden. If you want to avoid these additional costs, please check your broker’s list of no-load funds and no transaction fees funds.

For starters, mutual fund fees are actually an advantage compared to stock commissions. The reason for this is that no matter how much you invest, the cost is the same. Therefore, as long as you meet the minimum requirements for opening an account, you can invest as little as US$50 or US$100 in mutual funds every month. This term is called the dollar cost averaging method (DCA), and it may be a good way to start investing.

Diversification and risk reduction

Diversification is considered the only free lunch in investment. In short, by investing in a range of assets, you can reduce the risk that the performance of an investment will seriously damage the overall return on the investment. You can think of it as the financial term “don’t put all your eggs in one basket”.

In terms of diversification, the biggest difficulty in achieving this will come from stock investment. As mentioned earlier, the cost of investing in a large number of stocks can be detrimental to the portfolio. With a deposit of $1,000, it is almost impossible to have a diversified investment portfolio, so please note that you may need to invest (at most) in one or two companies first. This will increase your risk.

This is where the main advantages of mutual funds or ETFs come into focus. Both types of securities tend to have a large number of stocks and other investments in their funds, which makes them more diversified than a single stock.

Bottom line

If you are just starting to use a small amount of money, you can invest. This is more complicated than choosing the right investment (this feat itself is difficult enough), and you must be aware of the constraints you face as a new investor.

You have to do your homework to find the minimum deposit requirement and then compare the commission with other brokers. It is very likely that you will not be able to purchase individual stocks in a cost-effective manner and still diversify with a small amount of capital. You also need to choose the broker you want to open an account with.

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