How to invest in stocks?
You want to invest in the stock market, but don’t know where to start? Today is your lucky day because you came across the right article! Let me start by reassuring you, investing is much easier than you think and it’s a way to make money even while you’re asleep.
Step 1 : What type of investor are you?
Before investing in the stock market, it is important to adopt an investment strategy that is right for you and that takes into account your goals and the risks you are willing to take.
An active investment is when an investor actively participates in the management of a portfolio. This type of investment aims to generate short-term income by taking advantage of short-term market price fluctuations and beating average stock market returns. Active management requires extensive expertise and constant monitoring of the market. So an active investor is someone who has a lot of capital to invest, who likes to take risks and who wants to invest full time. A hedge fund manager is an example of an active investor (Krueger, 2020).
Passive management is more popular with investors. A passive investor invests for the long term and does not do a lot of buying and selling within his portfolio. One strategy of active management is to replicate the performance of a benchmark market. For example, a passive investor will buy an index fund that tracks indices like S&P 500 (Standard & Poor’s 500, the largest publicly traded companies in the United States) or the Dow Jones Industrial Average (DJIA, a stock market index of 30 industrial and financial companies from first order in the United States). Although passive management is more limited and requires patience, the latter requires less time and is less risky. In addition, it comes with lower costs and tax efficiency (Krueger, 2020).
Step 2 : Understand the different investment concepts
If you are interested in a particular company, buying a share represents fractional ownership of that company. There are several types of stocks, but the main ones are common stock and preferred stock. Buying a share means that you will be entitled to a portion of the company’s profits and, in the case of common shares, to a right to vote at shareholders’ meetings. Even though shareholders who hold preferred shares do not have the right to vote, they enjoy a higher claim on the assets and income of the company. To obtain a diversified portfolio, the capital invested must be high in order to realize the purchase of several shares in several companies. The risk is therefore higher but the return on investment also increases (Hayes, Stock, 2020).Saut de page
A mutual fund is a company that combines the money of several investors to invest them in stocks, bonds and other securities and assets. The advantage of a mutual fund is diversification, as it makes it possible to buy small shares of different stocks in a single transaction (O’Shea & Davis, 2021). A mutual fund allows small and individual investors to invest cheaply while minimizing risk (Hayes, 2020).
Exchange Traded Funds (ETF)
ETFs are a bit similar to mutual funds in that this title involves several underlying assets, but unlike mutual funds, ETFs trade on the stock exchange just like a stock. Additionally, mutual funds trade only once per day after the market closes while ETF prices fluctuate throughout the day. ETFs therefore offer diversification, lower risk in addition to low expense ratios and low brokerage commissions. ETFs can be managed passively or actively. An example of an ETF is the S&P 500 Index (Chen, 2020).
The index fund is a type of mutual fund or ETF. Built with a portfolio that replicates the constituents of a financial market index, Warren Buffet recommends index funds as a long-term investment. They allow lower costs, diversification and high returns on investment over the long term. S&P 500 are an example of an index fund (Fernando, Guide to Index Fund Investing, 2021).
The purchase of a bond represents a loan offered by an investor to a company. Bonds are a source of fixed income because they pay a fixed rate of interest (coupon) to debt holders. Of course, when the interest rate goes up, bond prices go down and vice versa. If the principal amount is not repaid before the due date, a default of payment penalty will apply. The government is an example of a bond issuer (Fernando, 2021).
Step 3 : Choose an account to invest
Now that you have some basic information on investing in the stock market, it’s time to choose an account to invest in!
Brokers offer a full service or a discount service. Full services are geared towards high net worth individuals seeking financial advice for retirement, health care, and all money related matters. Discount brokers offer online tools so you can make your own transactions and charge significantly lower fees than brokers who offer full services (Langager, 2021).
This new technology was developed following the financial crisis of 2008 and aims to reduce costs for investors and streamline investment advice. Robo-Advisor is becoming more and more popular and is often offered by discount brokers. If you want to generate long-term profit by entrusting your investment decisions to a sophisticated algorithm, the Robo-Advisor made for you (Langager, 2021)!
Invest in your employer’s 401 (k)
This type of investment allows you to plan for retirement by depositing as little as 1% of your salary. This contribution will be taken before taxes are calculated.
Step 4 : Continuously informing yourself and following the latest news
- Stock Investing for Dummies
- The Intelligent Investor – Benjamin Graham
- How to Make Money in Stocks – William O’Neil
- Rich Dad Poor Dad – Robert T. Kiyosaki
- The Little Book of Common Sense Investing – John C. Bogle
- One up on Wall Street – Peter Lynch
- The Essays of Warren Buffet
Read articles and follow the news
- Yahoo! Finance
- The Wall Street Journal App
- CNBC Breaking Business News App
- TheStreet App
- Bloomberg : Business News App
Learn from big investors
- Warren Buffet
- Peter Lynch
- Benjamin Graham
- Jesse Livermore
- George Soros
- Paul Tudor Jones
- John Templeton
Chen, J. (2020, Mars 16). Exchange Traded Fund (ETF). Récupéré sur Investopedia: https://www.investopedia.com/terms/e/etf.asp
Fernando, J. (2021, Février 2). Bond. Récupéré sur Investopedia: https://www.investopedia.com/terms/b/bond.asp
Fernando, J. (2021, Février 4). Guide to Index Fund Investing. Récupéré sur Investopedia: https://www.investopedia.com/terms/i/indexfund.asp#:~:text=An%20index%20fund%20is%20a,500%20Index%20(S%26P%20500).&text=These%20funds%20follow%20their%20benchmark,the%20state%20of%20the%20markets.
Hayes, A. (2020, Octobre 3). Mutual Fund. Récupéré sur Investopedia: https://www.investopedia.com/terms/m/mutualfund.asp
Hayes, A. (2020, Février 19). Stock. Récupéré sur Investopedia: https://www.investopedia.com/terms/s/stock.asp
Krueger, P. (2020, September 5). Active vs. Passive Investing: What’s the Difference? Récupéré sur Investopedia: https://www.investopedia.com/news/active-vs-passive-investing/
Langager, C. (2021, Janvier 28). How to Start Investing in Stocks: A Beginner’s Guide. Récupéré sur Investopedia: https://www.investopedia.com/articles/basics/06/invest1000.asp
O’Shea, A., & Davis, C. (2021, Février 4). How to Invest in Stocks. Récupéré sur nerdwallet: https://www.nerdwallet.com/article/investing/how-to-invest-in-stocks