How to invest in stocks

Define your risk tolerance

The first thing that you need to do before stocks investing is to know what your tolerance for risk is. Your tolerance risk is the chance that you may lose money while investing. This is important to know because stocks are categorised in a variety of different ways. These can include large capitalisation stocks, small-cap stocks, aggressive growth stocks, and value stocks, and they all have different levels of risk. So, once you determine your risk tolerance level, you can set your sights on the stocks that suit your investment style well.

Decide on investment goals

You should also make sure to consider your investment goals. In fact, when opening a brokerage account, most online brokers will ask investors what their investment goals are (and the amount of risk that they are willing to take when investing).

If you are just beginning your investment career, an investment goal you may have might be to increase the amount of funds in your account. However, if you are older, you may want to protect your wealth instead.

Some popular investment goals include buying a house, saving for retirement, or saving for college and university tuition. Goals can also change over time, depending on your life situation. Just be sure that you periodically define and review them so that you can keep focusing on achieving your goals.

Choose how to invest

Nowadays, people have several options when it comes to investing their funds. As such, it is usually possible to match your investing style to your knowledge and how much time you wish to spend monitoring the markets and investing. Depending on your investing style, an investor can spend as little or as much time as they wish on investing.

One big decision point is how will your funds be managed. There are a few ways to do so:

A human professional: This option is great for those who only wish to spend a few minutes a year worrying about their investments. It is also a good choice for those with limited knowledge of investing, or who are not comfortable handling their portfolio by themselves.

A robo-advisor: Similar to the above, but instead of handing everything to another human professional, an automated program is the one managing your funds and portfolio. It is also less costly that having a human financial advisor. Using this, you can set up investment plans quickly, and the only thing you need to do is deposit funds into your account. The robo-advisor will do the rest of the job for you.

Self-managed: This is the do-it-yourself option. While it may be difficult, it can also be rewarding and is a great choice for those with a lot of financial knowledge who can devote a lot of time to making investing decisions. If an investor wishes to select their own stocks or funds to invest with, then they can do so through a brokerage account.

The choice an investor makes here will decide the type of account they will open later on.

Open an investment account

In order to actually start investing, investors will need to open an investment account. There are plenty of different types on the market, so be sure to do your research to make sure one fits your investing style. Below, we have listed and explained a few of your options:

Human financial advisor: A human financial advisor can help you to design a stock portfolio and help with other financial planning moves such as planning for university expenses or retirement. A human advisor typically charges a per-hour fee or at least 1% of your assets annually, and they also have a high investment minimum. A big advantage of using a human financial advisor is that they can help you to stick to your financial plans, so you will not be tempted to make risky investments.

Robo-advisor: A robo-advisor can help you to also design a stock portfolio that matches your risk tolerance level and time horizon. They are typically cheaper when compared to paying for a human advisor and are often a quarter of the price or less. In addition, many of them also offer services pertaining to optimising your funds.

Online brokers: This is a great choice if you are looking to manage your own investments in your own time. An online broker will allow investors to buy stock and various other financial instruments, including mutual funds, bonds, options, exchange-traded funds (ETFs), and more. The best brokers available tend to offer no-fee commissions on stocks, as well as a lot of free education research so that newbie investors can quickly get up to speed and catch up with professionals.

Set a budget for investment

New investors need to ask themselves a few questions when they reach this step and consider their investment budget:

How much do I need to start investing? The amount of money an investor needs to buy an individual stock will depend on how expensive its shares are (share prices can range from a few dollars to a few thousand dollars). So, if you have a small budget, exchange-traded funds (ETFs) may be the way to go.

How much money should I invest? If you are investing through funds, an investor can choose to allocate a large portion of their portfolio towards stock funds, especially if they have a long time horizon. For instance, a 30-year-old investing for retirement may have 80% of their portfolio in stock funds, and the rest in other financial instruments (such as bonds). On the other hand, individual stocks are another business altogether. A general rule of thumb is to keep them to a small portion of your investment portfolio.

Focus on the long-term

Unlike trading, investing mainly focuses on the long term. This means small market fluctuations should not really worry investors so much, because on the whole, investors should be looking at the stock’s long-term average. So, the best thing to do after investing in stocks or mutual funds is to not look at them. In fact, it is good to avoid compulsively checking how your stocks are doing several times a day, every day. There is a reason why most investors tend to use a buy-and-hold strategy, especially for many years!

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