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Investing in stocks is one of the essential parts of building wealth over time. The primary key to wealth building is diversification, so you wouldn’t want to risk all your money on just a few investments! Allow this post to be a tool to help you invest in stocks efficiently and intelligently.
What is a Stock?
“A stock (or equity) is a share of ownership in a company. It represents a portion of the company’s assets. Companies issue stocks when they raise capital by selling new shares of stock to investors. Investors purchase those shares, hoping the company’s value will rise. If the company does well, then the price of its stock rises, and vice versa.”
I have been an active participant in the stock market for eight years, and I must tell you that money has been made. I’m not saying I’ve made millions, but I have seen a solid return over eight years of regular contributions. It doesn’t take much to get started because I didn’t have much. So it is simple as well; let’s get into it!
What Are The Risk Of Stocks
Firstly, let’s note we all have varying levels of risk, and the number of stocks we would hold would greatly depend on what stage you are in your life. For example, a portfolio with only stocks for people in their 20s may sound reasonable since they have more time ahead. Still, a portfolio such as this for an individual in their 80s would display ATROCIOUS!
A young person fresh out of high school, or college, has a more significant time horizon (the amount of time until retirement) to deal with the ups and downs of the market. As such, they would most likely not need to live on these funds at this point. That said, a retiree shouldn’t put their near fragile heart at risk from seeing a possible 30% drop in their stock value overnight!
Why should you Invest in Stocks?
Investing in stocks is a great way to build wealth over time. An index is a portfolio of stocks that measures a section of the market, and many indexes track the stock market, but I’ll use the most well-known S&P 500, which is comprised of the top 500 largest publicly traded companies in the US. According to a Berkshire Hathaway Study, the S&P 500 returned an average annual return of 10.5% between 1956-2021. Even better, over the latest ten years of the study, 2011-2021, the average yearly return was a whopping 14.7%!!!
When we put into perspective compounding returns of $1,000 at an annual 10.5%, this would be $2,714 in 10 years! That’s almost triple your original investment. Of course, this level of return isn’t guaranteed due to years when the market can perform better or worse. I know this doesn’t seem like much in 10 years, but when investing correctly, you have to remember that it is a marathon, not a sprint. I would certainly say it’s a better alternative to the average bank account or Las Vegas slot machine.
What are some easy ways to invest in Stocks?
There are different types of investment vehicles that offer varying levels of risk. Some are safer than others, as the stock market can be volatile!
Assuming you’ve already opened your brokerage account. Let’s discuss a few investment vehicle options for you to start investing in stocks today!
- Mutual Funds
- Exchange Traded Funds
- Individual Stocks
- Options
Mutual Funds
Above all, A mutual fund is a type of investment vehicle that pools money from investors and invests it into different securities (stocks, bonds, etc.) based on what the fund manager thinks will do well. This means that when you invest in a mutual fund, you’re not putting your money directly into individual companies; instead, you’re investing in a group of companies that the fund manager has chosen.
Look, I get it… this is probably not the sexiest way to invest, I know. I’m not making risky bets and personally picking the next Apple, Tesla, or Google, but in my opinion, this is an easy way to invest in stocks along with ETFs. I’ve seen tremendous growth doing so as well. My approach is the classic ‘buy-and-hold strategy’ (buying stocks and holding on for the long term until you’re ready to retire or use those funds), which has been proven to work by Investopedia!
Many investment brokerages offer a selection of mutual funds, and they are the best way to invest if you want to do so passively. Even target-date mutual funds will automatically risk-adjust over time based on the year you plan to retire. For more info, check out FINRAs explanation on Target-Date Funds! Here are a few significant brokerages and their mutual fund listings Vanguard, Charles Schwab, and Fidelity. It should be noted that there can be minimums of $500-$5,000 to enter a mutual fund, which could initially limit this option. But have no fear. There are ETFs!
Exchange Traded Funds (ETF)
ETFs are similar to mutual funds because they pool money from investors and invest it into different securities. However, unlike mutual funds, ETFs trade on exchanges just like shares of stock. They can also offer great diversification benefits! They allow investors to buy a basket of assets rather than choose one purchase at a time.
This vehicle can be very similar to a mutual fund; in fact, there is more of a tax advantage when dealing with ETFs versus mutual funds. This is because when investors enter and leave the mutual funds, the fund managers must buy and sell assets in the fund. This can cause you to pay capital gains tax on the assets sold. Some ETFs track the same indexes as mutual funds, which can be a good alternative. This is an easy way to invest in stocks and is my primary way of investing. If you want to quickly get exposure to the entire US stock market for the absolute most diversification, there are ETFs such as VTI, SCHB, and ITOT.
Individual Stocks
Most people think this is the best way to invest in the stock market. But, unfortunately, I am here to tell you this is not where it is! This is not a good first step into the stock market. As we discussed earlier, you shouldn’t base an investment decision solely on one company alone. This exposes you to tons of risks that could be company-specific, industry-specific, and sector-specific.
To diversify this risk, you must purchase plenty of stocks in many different sectors, which costs you major moola. However, you can eliminate many potential risks by balancing them with other stocks in the market. You would also benefit from more cost-efficient diversification in an ETF or Mutual Fund.
Stock Options
An option gives you the right to buy or sell a certain number of shares at a specified time. You can make money by trading options instead of buying shares.
These can be complex investments, especially since it is a bet on the underlying asset’s direction (which, in this case, is a stock). However, individual investors who can make consistent profits from them are not the norm. This is an active approach to investing and requires strategy and discipline! This is not an easy way to invest in stocks! Based on the long-term probability of success with this strategy, I do not advocate this being the intro for a beginner.
In Summary
For those who don’t want to read all that (because I know you’re out there), stocks are an excellent tool for long-term wealth creation. Mutual Funds and ETFs are a great way to get into stocks and gain diversification quickly. Individual Stocks and Options can also be adequate for long-term wealth creation but will require much more research, effort, and luck to maintain consistent success. Remember, slow and steady wins the race when it comes to investing. But I guarantee you’ll see a payoff if you stick with it!
DISCLAIMER: The above references an opinion and is for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Do your research; this content is designed to be used and must be used for informational purposes. It is essential to do your analysis before making any investment based on your circumstances.
