Investing in the stock market is one of the most common ways you're likely to invest your savings, especially for retirement. Beginners trying out the stock market will often be looking for investment tips, so the goal of this post is to point you in the right direction to get started.
More often than not, if you're a complete newbie you will end up losing money the first time you try to purchase stock in a company. You might even make good picks, but there is more to the market than that. The hidden side only presents itself to you as a hard lesson resulting in lost money. I want to help save you from those likely losses by giving you some pointers to avoid common pitfalls.
Starting a Brokerage Account
You need a brokerage account before you can start buying stocks. There are a lot of different options for you out there such as Robinhood or Fidelity (I do not recommend Charles Schwab). You'll be able to deposit money there, which can be done manually or automatically on some type of set schedule. You can then use those funds to purchase stock on the market.
It won't really matter too much where you create a broker account. The type of account you create will matter a lot though. In general, there are two main types of brokerage accounts you can use - a standard brokerage account or retirement accounts.
You can deposit funds, trade stock and withdraw funds whenever you want and without limits from standard accounts. However, earnings from these accounts are taxed like income. Retirement accounts such as traditional IRA, rollover IRA and 401k accounts offer tax-free growth and tax deductions on contributions.
Determine Your Investment Goals
You need to understand the purpose of your investments before getting started. This will determine the type of brokerage account you create, your investment strategies and maybe even the specific companies you'll buy.
Anyone that wants to try day trading for a living will need a standard brokerage account to be able to withdraw profits. Saving for retirement is best done with a traditional IRA or 401k plan. Ultimately, ask yourself if you will need the money in the near future or if you're saving long-term.
It can be tempting just to use a normal brokerage account, but if you're considering that, I strongly urge you to also open a traditional IRA and make contributions to both. One will allow you to "play" on the stock market short-term and the other will be working to build you a retirement nest egg.
See a related article for more information: Should I Day Trade or Hold Stocks.
Invest Slowly & Cautiously
Unfortunately, you can easily lose on initial trades in the stock market as a beginner. My #1 tip to you when getting started is to take it slow. If you put $1,000 into an account to use for trades, don't invest it all on your first day.
For lower balances of a couple thousand dollars, try not to invest more than 10% of your bank each day. If you can help it, wait multiple days or even a week between each of those investments too. Much higher balances should be even more cautious - aim for 1-2% a day.
The goal of being cautious is to limit your risk when you're likely to make bad choices or decisions simply because you're a beginner. It's not your fault, you're just not experienced yet. Even after trading on the market for a couple of years, you can still be surprised and feel like a complete beginner.
No Fee Index Funds for Beginners
One of the best tips for you if you have zero stock market experience is to utilize index funds and ETFs. Most brokerages will offer you no-fee index funds that are excellent for beginners.
Index funds allow you to invest in the market as a whole and to have this investment managed for you. You can consider it to be a hands-off way of investing. This means you can rely on it to use for automatic investing from your paycheck when building a retirement account.
ETFs are similar to index funds in many ways, but they usually target a smaller segment of the market or a specific industry. You can find basic tech ETFs, ETFs for options, marketing shorting ETFs, and even cannabis or bitcoin ETFs. The funds manage the individual companies, and you just buy the ETF fund shares. ETFs usually charge you fees while you can find no fee index funds.
Bull & Bear Markets
Try to figure out the general direction the market is heading before you begin investing. This can drastically help you to avoid substantial losses from the start. Make sure you explore short-term trends as well as longer trends to avoid surprises.
It's important to always keep bear and bull markets in mind. If you're investing for retirement, your portfolio will experience recessions. You need to keep your cool and try to avoid selling your stocks when the prices are low to cut your losses. Especially when investing in index funds, the market should go back up over time and return your profits.
Panic selling is one of the biggest reasons why beginners lose money. They see the prices plummeting and their balance declining rapidly, so they sell everything. Not long after, the prices usually rebound, and they have to buy back in at a higher price than they sold. This panic selling simply decreases your overall investment amount and makes it take longer to reach your goals.
Benefit from Compounding Interest
Day traders will lose out on one key benefit to investing in the stock market: compounding interest. When you start investing from a young age, like in your early 20s, you'll have many extra years of compounding interest compared with someone that begins in their 40s. These extra years of interest will be key to help you build a large retirement fund. Otherwise you'll have to contribute a huge portion of your monthly income.
You should reinvest earnings that pay out interest or dividends to help your balance grow faster over time. You should also continue to add to your account each month through automatic or manual deposits.
How much you save each month can also heavily determine how long it will take to build a respectable retirement fund. This fund should be around 25 times your annual income. Assuming a retirement age of 67, if you start at 24 years old then you should save 15% of your income each month. If you wait until you're 35, you'll need to contribute 25% of your monthly income to reach that goal by retirement age.