Neither one of my parents know how to invest in the stock market, nor was learning how to invest a part of my formal education, so I know how intimidating it is for people who are new to investing. Where do I start? What do I invest in? How am I doing? There are just so many questions. In this post, I am going to attempt to make it as easy as possible for someone brand new to investing to get started.
Investing is unlike putting money into savings or CDs, there is risk involved. So you need money that you can afford to lose. This means that if you owe any money that you are paying interest on — i.e., credit card debts, student loans, car loans, etc. — you need to pay these off first. The only exception is your mortgage.
You can invest through three main types of financial institutions: a bank, a discount brokerage firm, or a full service brokerage firm. Out of the three, I recommend discount brokerage firm, because banks and full service firms generally overcharge their client and push products that are not always the best. Personally, I use TD Ameritrade, but you can also use Charles Schwab. I have used them both and I am comfortable recommending them.
You can find a list of top 10 brokers on my site, Moolanomy.com.
You will also have to decide if you want to start a normal taxable account where you can liquidate your investment and get your money back at any time, or start a tax-advantage account like Roth IRA or Traditional IRA where you are investing long-term for your retirement. You will not be able to access this money without penalty until you turn 59 and a half — you can invest the money however you like, you just can’t withdraw the money.
I have over 10 years of experience and I have made my fair share of mistakes, so believe me when I say don’t start with individual stocks. As a first time investor, I would recommend that you start with exchange traded funds, or mutual funds, instead. Let me briefly explains how each works:
The strategy that I believe is best for new investors is to build a globally diversified portfolio of low expense passively managed ETFs. For example, if you have $6,000, you could potentially split it up in $2,000 chunks and buy 3 ETFs: Large US Stocks ETF, Small US Stocks ETF, and International Stocks ETF. The subject of asset allocation — i.e., how you should divide your money across multiple types of investment is fairly complex, and I will not be explaining it here. If you are interested, you can take a look at my 401k asset allocation to get a better idea.
There are several ways to do this. Brokerage firms like Charles Schwab and TD Ameritrade offer online tools where you can do your research. For example, you can use their online tools to find “low cost, Large US Stocks ETFs,” but it takes a bit of time to learn the web interface. The good news is that you can visit one of their branches and ask for help, or you can just ask one of the representatives to help you make the purchases. Remember, you are not looking for ETFs with the best performance (this is called chasing past performance), you are looking for ETFs that:
Once you identify which ETFs you will be buying, you will need their ticker symbols. For example:
At this point, you can enter a buy order through the online form, or ask the representative, to buy X shares of IVV, Y shares of VB, and Z shares of VEU. If you want to invest $2,000 in each, you just divide $2,000 by the latest ask price to get the number of shares.
Read as many books and web sites that you can to learn about investing. My caution is to avoid hot tips and hot stock picks. What you want to learn is how the market works, effect of expense on investment performance, asset allocation, risk management, investing for specific goals, etc. If you have any questions, please feel free to leave a comment and I will do the best I can to answer them. Please note that it’s also worthwhile to pay a fee-based financial advisor to help you through your first investing experience.
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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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