Learning to invest in the stock market can benefit you financially, as long as you understand how to manage potential risk and keep the odds in your favor. For many people, the stock market is confusing and overwhelming, but it doesn’t have to be. Use this guide to learn more about investing and how you can make it work for your financial situation.
How Do I Invest in the Stock Market?
Wondering how to invest in stocks? Then you’re on your way to increasing your chances of creating long-term wealth by investing in companies. Over extended periods of time, stocks produce about 10% in annualized returns. Based on that estimate, investing $2,000 in the stock market today, could be worth over $13,000 in 20 years. If the stocks you invest in perform better than the 10% average, you could receive even higher returns on your investments.
A common question people have about investing in stocks is whether or not you must have a lot of money to invest initially. Thanks to recent drops in stock trading commissions and user-friendly mobile apps and websites, you don’t need to have a lot of money to get involved in the stock market. In fact, you could probably buy your first stock with a few hundred dollars. Penny stocks are some of the most affordable options you’ll find. The phrase “penny stock” refers to any stock that typically trades for $5 or less per share.
Some first-time investors choose to set aside a set amount of money to invest each month. Budgeting your money can help you make sure you always have that amount available to buy stocks, creating an automatic habit that can also help you level out in a market that may go up and down. Before you determine how much you can spend on investments each month, make sure you have an emergency fund that you could use to cover any necessary expenses. It’s also smart to pay off high-interest debt so you can make the most of your money.
- Investing in the stock market offers the potential for high returns on investments
- Creating a budget for investing – determine how much you can afford to invest after paying off high-interest debt and establishing an emergency fund
- Where to invest in stocks – over the counter and major U.S. stock exchanges
- Working with a stockbroker to get started
- Timing the stock market and looking at the best times of day, days of the week, and months of the year to buy
- How to choose stocks to invest in – review news updates, predictions from experts, and other helpful resources to determine which companies may offer high returns on stock purchases
Where Can I Invest in Stocks?
The three major securities markets in the United States are:
- National Association of Securities Dealers Automated Quotation System (Nasdaq)
- New York Stock Exchange (NYSE)
- American Stock Exchange (AMEX)
The Nasdaq is the largest screen-based electronic market in the U.S. It also has lower listing fees than the NYSE, so smaller companies often list their stocks on this exchange because it’s more affordable. The NYSE is the major market, while the AMEX focuses mainly on exchange-traded funds (EFTs). Some major cities have their own stock exchanges as well.
When you are investing smaller amounts in stocks, you may want to consider trading over the counter. An over the counter market is decentralized, allowing individuals to trade stocks, currencies, commodities, or other assets without a broker or central exchange. All OTC trading takes place electronically. Dealers provide pricing for buying and selling assets and individuals can purchase those assets. The risk of trading over the counter is a bit higher because these markets are not as heavily regulated as major markets. The deals and financial details also aren’t as transparent.
Working With a Stockbroker
You may choose to work with a stockbroker to get started, which is often recommended for beginning investors. Many brokers now provide EFT options that don’t require you to pay any commissions, so you can start investing in stocks without having to pay more than you can afford. Depending on how you choose to invest, you can decide if it makes sense for you to work with a broker. When you plan to trade over the counter, you likely won’t work with a broker.
Timing the Stock Market
Although it’s impossible to time the stock market perfectly, you can use some tried-and-true methods to improve your odds of buying low and selling high. It’s important to learn how to look for trends and changes as they emerge in the market. When you spot these trends, you can put yourself in a position to increase the returns on your investments and keep your gains, even when the market turns downward, as it inevitably will do.
As you assess the timing of the stock market, it’s helpful to look at the best times of day, days of the week, and months of the year to invest. If you’re new to the stock-trading world, you may want to avoid trading first thing in the morning. Stock markets are most volatile within the first few trading hours due to corporate news releases, geopolitical events, and other situations that occurred after the market closed for the day. As you become more experienced, you can start to identify which of these factors are just noise and which could actually impact the value of certain stocks.
If you’d like to keep your risk low, wait until about 11:30 a.m. to start investing. By this point, the prices are more stable and the volatility has plateaued, in most cases. Try to wrap up your trading by about 3:00 p.m. In the final hour that the markets are open, volatility tends to ramp back up as the trading volume increases. If you wait too long to invest, you could end up in a momentum shift that is harder to predict and could impact your success rate.
According to some experts, the best day of the week to buy stocks is Monday. During the weekend, negative news may spread, resulting in lower market levels on Monday. If you end up buying a stock when it’s at a lower value because of the news over the weekend, you may watch it go back up in price through the week. The best day to sell stock is on Friday, prior to the weekend effect taking hold of the market.
Some traders employ a strategy that involves investing through May, and then waiting until later in the year to begin buying and selling again. Between October and December, the values tend to be a bit better as well, since other investors may be stepping back to prepare for the upcoming tax season. As you become more experienced in the trading world, you can establish your own trading timeline and strategy for bouncing back when you make trades that aren’t as profitable as you might have hoped.
How to Choose Stocks to Invest In
Another important aspect of investing in the stock market is deciding how you want to invest your money and which stocks are most appealing to you. You’ll have to determine your tolerance for risk, as certain industries and companies come with higher risk. If you can ride out some major price shifts, you could achieve greater long-term gains, but some people are too anxious for this type of investment strategy. The stock market has a wide range of options, whether you’re risk-averse or risk-tolerant. You can also watch news sites for trends and potential shifts in the market.
The major securities exchanges in the U.S. include more than just stocks. You can trade currency, active or passive funds, bonds, ETFs, and other assets, depending on your overall goals and strategy. Investors have more choices than ever before. If you don’t have a lot of time to devote to your investment portfolio, you may want to stick with investments that are a bit easier to manage. Stocks offer the potential for high returns, but they require more of a time investment, as you’ll need to watch market swings and trends.
It’s also helpful to understand some of the basic terms of investing. When you read a quote for a stock, you’ll see three prices which are the last trade price, the bid, and the ask. The ask price is the lowest price someone is willing to sell that stock for, while the bid is the highest price someone will pay. EPS stands for earnings per share, it will give you insights into the valuation of the company. The market capitalization is the combined value of all the outstanding shares of a company’s common stock.
When you’re first getting involved in the stock market, it is always helpful to get as much information as possible and use any available resources. Before you begin, our expert trainers at Raging Bull can introduce you to the world of trading during a free training session or webinar. You can also download a complimentary e-book to get started.