A Beginner’s Guide to Investing in the Stock Market

A Beginner’s Guide to Investing in the Stock Market
  • Opening Intro -

    The world of investing can be extremely confusing, in part because the variety of investment vehicles is constantly changing.

    To start, you may be happiest with a simple brokerage account that allows you to buy fractional shares of index funds so you can profit from the full power of the market.

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Before you start studying up on those terms, you need to take a look at your risk tolerance.

What Is My Risk Tolerance?

How much can you afford to invest before you panic and bail after a loss? Determining this is the first thing that you have to do before you put any money in any market.

If you have plenty of time to make money on your money and can recover from a loss, you may have a higher risk tolerance. Cryptocurrencies can make huge returns, but when they drop, you may lose your nerve.

If you have less time or are anxious about how to invest in the stock market, seek out index funds and large funds that are at low risk of volatility. There is nothing wrong with having a low-risk tolerance, but investing in crypto if you cannot stand the thought of losing money will create too much stress.

What Is A Stock?

A stock is an investment in a company. Technically, it is part ownership, but you have no voting rights or power.

To determine the best stocks to buy, you will want to check out the history of the company. You will want to know about the

  1. company governance
  2. history of profit
  3. future plans

If a company has been producing well for years, it may be a good investment if they have a strong bench. A profitable company with a strong figurehead who is 75 years old may have a great history but an uncertain future.

If you plan to buy stocks of individual companies, carefully review their history and leadership to get consistent dividends from your investments.

What Is A Dividend?

A dividend is your payout. Be aware that these payouts do not necessarily reflect the profits of the company. For example, if a company is planning on expanding, your dividends may come to you as a stock instead of cash.

If you get a stock dividend, the company is likely planning an expansion. Over time, the stock will be worth more. Should you need regular cash dividends to provide you with an income in retirement, consider investing in a Real Estate Investment Trust. If you have time to let your dollars grow, consider investing in index funds.

What Is An Index?

The Dow Jones is an index, as is the S&P 500. When you buy an index fund, you are betting on that entire market to go up. Historically, we find that these funds are indeed a good bet. Again, check your risk tolerance and your timeline.

Unless you have the time to research individual companies, index funds offer decent security for future earnings. Of course, there will always be market drops. However, over time, index funds will allow your earnings to grow with the least amount of research.

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Start With Retirement

If you are looking at stock investments for retirement, carefully review any offerings made by your employer. For example, your employer may offer a 401(k) with a match. Start there, and make sure your personal contribution is large enough to take advantage of the whole match offered by your employer.

Part of the reason that your 401(k) will grow quickly is that all of your dividends go back into your investing pool. You cannot get your money out of your 401(k) until you turn 59 and 1/2 without a penalty, and you will have to pay taxes on this money any time you take it out.

A traditional IRA is also a pre-tax investment that you cannot take out until 59 and 1/2. Your gains will be taxable at that point. A Roth IRA is funded with post-tax dollars and your gains are not taxable when you withdraw money.

Put your money in funds that will grow over time. If you do not mind the roller coaster, consider putting a little money into higher-risk investments, such as high-tech and energy funds.

Image Credit: beginners guide to investing in the stock market by envato.com

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