Investing In The Stock Market For Beginners

By Jennifer Gregory. May 7th 2016

Are you considering investing in the stock market, but aren’t quite sure where to start? The stock market can be a great place to invest your money and help meet your financial goals. But because there is significant risk associated with investing in stocks, stock market beginners should take time to learn about the market and get their feet wet slowly.

How Much Money Do You Need To Begin Investing?

Many people assume that you need to have a large amount of money set aside to begin investing in the stock market. This is simply not true. Instead, you can customize your investment plans based on the cash flow you have available.

Andrew Schrage, founder of MoneyCrashers.com, recommends being conservative at the beginning. “There’s no sense in diving in head first until you have a little experience under your belt,” said Schrage. “Keep your investments on the low side, at least until you fully understand the basics.”

Determine an amount that you can commit to invest each month after your bills are paid and your 401(k) is funded. Many people find that using an automatic transfer from their checking account or direct deposit helps them stick to an investment budget.

Should You Do It Yourself Or Use A Stockbroker?

The answer to this question depends on your level of confidence and experience. “If you already possess some investment knowledge, investing on your own might not be a bad option,” said Schrage. However, he recommends that true beginners without basic knowledge of the stock market use a professional stockbroker.

When selecting a stockbroker, you should get recommendations from friends and family. However, you should always interview the broker to make sure it is someone you trust and feel comfortable with. Be sure to ask about fees so you aren’t surprised later. You can also ask the broker if the he or she specializes in specific investment products.

If you decide that you need help investing, you might want to consider using an online broker service. The majority of the online services charge per trade with prices ranging from $4.95 to more than $10 per trade. Consumer Search.com provides detailed reviews on many of the top online brokers to help you find the one that is the best fit for your investment needs and strategy.

“If you're just beginning to invest, try to keep your investment expenses as low as possible by going with one of many discount online brokers that generally offer the lowest trading commissions,” said Schrage. (To learn more about online stock trading, see A Guide To Online Stock Trading.)

Where To Start?

You may be tempted to rush out and buy as many shares as you can of the latest “hot stock.” This is not a good idea. Instead, you should take some time to carefully research your investment opportunities.

Donald Mattersdorff, a chartered financial analyst and the founder of D. Mattersdorff LLC, recommends that beginners start their investing career with mutual funds, which are pooled investment funds consisting of multiple stocks and bonds. “Mutual funds are diversified, and novices should diversify their investments to decrease their risk," he said. "In mutual funds, the investor hands off the work of analyzing and choosing investments to a professional fund manager, which is appropriate for beginners.” He recommends people begin investing in mutual funds with a successful long-term track record.

If you want to invest in individual stocks right away, experts recommend starting with companies whose products you buy on a regular basis and are familiar with as a consumer. You should thoroughly research any stocks before placing your trade order. “When reviewing the performance of any stock, fund, bond or any other investment vehicle, you always want to look at the product’s long-term financial history,” Schrage said. “Do not go by its performance over the last six months. Instead, you should be looking at how the stock has performed over the past one to five years.”

How Can I Learn More About Investing In The Stock Market?

After buying their first shares, many people find themselves wanting to learn more about the stock market to enhance their portfolio. Many different sources of information are available. However, you need to be careful about where you get your information. Be wary about misinformation and sales pitches. Theodor Tonca, a principal at Graham, Theodor & Co., recommends consulting the least-biased sources available. “Unfortunately, this means that the local bank and financial adviser should be left out of the equation,” he said.

Once you have determined how much money to start with, what funds or stocks to invest in and which service or broker to use, you are ready to make your first investment. If you have done your homework, your transition into the stock market will hopefully be smooth.

Sources

  • Donald Mattersdorff, Founder of D. Mattersdorff LLC, Email interview on Jan. 4, 2012
  • Andrew Schrage, Co-owner of Money Crashers Personal Finance, Email interview on Jan. 10, 2012
  • Theodor Tonca, Principal at Graham Theodor & Co., Email interview on Jan. 4, 2012
  • Consumer Search

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