How to Invest in the Stock Market
7 Ways to Invest in the Stock Market
There are many ways for beginning investors to buy stocks, each with advantages and disadvantages. If you want low fees, you have to put in more time managing your investments. If you wish to outperform the market, you'll likely have to pay higher fees. If you want a lot of advice, you'll have to pay more as well. If you don't have much time or interest, you might have to settle for lower results.
Perhaps the most risk is from the emotional aspect of investing. Most stock buyers get greedy when the market is doing well, and this, unfortunately, makes them buy stocks when they are the most expensive. On the other hand, a poorly performing market triggers fear, which makes most investors sell when the prices are low.
Selecting which way to invest is a personal decision and depends on your comfort with risk, and your ability and willingness to spend time learning about the stock market.
Buy Stocks Online
Buying stocks online costs the least, but provides little guidance; you are only charged a flat fee or percentage for each transaction. It requires you to educate yourself thoroughly on how to invest, and for this reason, it also takes the most time. It's a good idea to review the top online trading sites before you get started.
Joining an investment club gives you more information at a reasonable cost, but it takes a lot of time to meet with the other club members, who all have various levels of expertise. You may also be required to pool some of your funds into a club account before investing. Again, it's a good idea to research the better investing clubs before you get started.
A full-service broker is expensive, but you get more information and recommendations, which can help protect you from greed and fear. You must shop around to select a good financial professional that you can trust. The Securities and Exchange Commission offers helpful tips on how to select a broker.
Money managers select and buy the stocks for you, and you pay them a hefty fee—usually 1–2% of your total portfolio. If the manager does well, it takes the least amount of time because you can meet with them just once or twice a year. Make sure you know how to select a good financial advisor.
Also known as exchange-traded funds, index funds can be an inexpensive and safe way to profit from stocks. They simply track the stocks in an index. Examples include the MSCI emerging market index. There is no annual fee, but it's impossible to outperform the market this way because index funds only track the market. Even so, there are a lot of good reasons why you should invest in an index fund.
Mutual funds are a relatively safer way to profit from stocks. The fund manager will buy a group of stocks for you. You don't own the stock, but a share of the fund—with most having an annual fee between 0.5–3%. They promise to outperform the S&P 500, or other comparable index funds. For more, see 16 Best Tips on Mutual Fund Basics and Before You Buy a Mutual Fund.
Hedge funds are like mutual funds. They both pool all their investors' dollars into one actively managed fund. However, hedge funds invest in complicated financial instruments known as derivatives, and they promise to outperform the mutual funds with these highly-leveraged investments. Hedge funds are privately-held companies, so they aren't regulated by the SEC. They are very risky, but many investors believe this higher risk leads to a higher return.
Selling Your Stocks
Knowing when to sell stocks is just as important as buying them. Most investors buy when the stock market is rising and sell when it's falling, but a wise investor follows a strategy based on his or her financial needs.
You should always keep an eye on the major market indices. The three largest U.S. indices are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq. Don't panic if they enter a correction or a crash; those events don't last long.
If you don't have a lot of time to manage your stocks, you should consider a diversified portfolio, which means holding a balanced mix of stocks, bonds, and commodities. The stocks will make sure you profit from market upswings, and the bonds and commodities protect you from downswings.
The specific mix is your asset allocation depends on your financial goals. If you don't need the money for years, then a higher mix of stocks will provide a greater return in the long run. If you need the money relatively soon, you'll want more bonds to preserve your capital. It's a good practice to rebalance your portfolio once or twice a year. It will automatically make sure you buy low and sell high. For example, if commodities do well and stocks do poorly, your portfolio will have too high a percentage of commodities. To rebalance, you'll sell some commodities and buy some stocks; that forces you to sell the commodities when prices are high and buy the stocks when prices are low.