That being said, you really have to know how to invest in stocks in a variety of markets and economic conditions if you want these types of returns. You generally won’t get this type of ROI by sitting on your hands the whole time.
It’s not difficult to learn how to invest in the stock market. Even beginners can get started almost right away with the right investment strategy. If you want to get started right away as you learn the basics, consider investing in a broad market index fund like the SPDR ETF, which is a vehicle that tracks the S&P 500 composite index.
You can also look at the Vanguard Total Stock Market Fund which tracks 3,000 stocks in an effort to match the broader US stock market. Both of these index funds have historically produced the returns of 8-12% a year that I was talking about.
But again, if you want to get exceptional returns, you will need to do some learning.
Finding a Financial Advisor
Before you do anything, you should find a financial advisor. A good one will do far more than just give you investment advice about individual stocks. They will help you create a comprehensive investing strategy that is based on your risk profile, time horizon and financial objectives.This doesn’t mean you should give up ownership of your own finances. No one will care more about your personal finances than you. You cannot hand this responsibility off to someone else.
At the same time, you don’t want to reinvent the wheel. You can also benefit from another perspective as well as any research and investing ideas they might be able to offer.
You could go with a standard stock broker, but there are a lot of downsides to doing that if you are a beginner investor. I would look for a fee based investment advisor that you can trust and feel comfortable with. Some of the larger fee based advisory firms are Edward Jones and Ameriprise Financial Advisors.
Online Stock Market Trading Account
The next thing you will probably need to do is set up a trading account with a stock broker. Most people these days go with an online stock broker. The big ones that most investors use are Etrade, TD Ameritrade, and Scottrade. Just put a “.com” after their name and you are there.Stocks or Mutual Funds?
Again, it really depends on how active you want to be. If you want someone else to manage your money for you, you should invest in a mutual fund. If you are very interested in the stock market and would like to pick your own stocks, you can do that as well.If you are going to stock pick yourself, be warned. Most people cannot average market returns. If you don’t beat the market, there is no point in actively picking your own stocks. You might as well invest in a S&P 500 index fund ETF. You would get better returns, cheaper transaction costs and with the fraction of the time investment.
Time Horizon
It is important that you consider your time horizon when investing. If you are young and have 20-30 years before retirement, you should be a little more aggressive. You should look at investing in small cap growth stocks or a mutual fund that does the same.If you are older and closer to retirement age, you should be more conservative. That means investing in large cap stocks that offer dividends with low risk of capital depreciation. You should also start reallocating your assets into bonds and other fixed income investments as well.
Rebalancing Your Investment Portfolio
There is a spectrum to follow. As you get older, you should get progressively more conservative in your investment strategy. You do this with something called re-balancing. This is where you check in with your portfolio regularly to reallocate your assets based on your time horizon.For example, let’s say you want 80% in stocks and 20% in bonds. In 3 months from now, your stocks may appreciate to 90% of your portfolio and bonds 10%. To rebalance to get you back to your optimal ratio, you should sell your stocks and buy bonds. Either that, you can leave the stocks the same and allocate more capital from elsewhere to your bonds.
Introduction
First of all, the stock market is a financial exchange where buyers and sellers get together to trade shares or stock in public companies. Public companies issue shares of ownership in their company. Some may have 1,000 owners, some may have 1 million owners. In either case the owners are said to own stocks in that company.In stock market investing and trading, those owners can freely sell their share of the company to a buyer for the market price. Or they can buy additional shares in that company or in another company. The stock market gives investors and traders an avenue to do this freely, efficiently and it streamlines this whole process. These are basic things you need to know whether you are doing stock market trading or day trading for a living.
Terms and Definitions
Here are some stock market investing basics terms and definitions you will need to know to understand what’s going on in the market. You can find these terms and learn more about them in stock market for dummies 101 books that I will eventually do a post on. In the mean time, here are some of the more important ones that you would learn in most stock market courses and tutorials.
The Dow – When a CNBC reporter refers to the Dow, she is referring to the Dow Jones Industrial Average. This is the average of the share price of 30 of the largest and most influential stocks on the New York Stock Exchange. The Dow typically is looked at as an indicator of the state of the US economy.
S&P 500 Index - This is another composite of companies compiled by a credit rating agency called Standard & Poor’s, hence the S&P. The 500 part refers to how many companies are included in this index. S&P has a set of criteria to pick the 500 most important companies in the US. This again is used to indicate the health of the US economy and stock market.
Share Price – Refers to the price of a single share of a company.
Market Cap – Also known as market capitalization, this is a measurement of the company’s size. It’s calculated by taking the share price and multiplying it by the number of outstanding shares. The 3 main categories of market caps are large-cap, mid-cap and small-cap.
P/E Ratio – This is the price per earnings ratio. It gives an indication of how much real money a company is earning relative to it’s share price. If their P/E is high, that means the price is way higher than what they are earnings, which means there is a market expectation that this particular stock will go up at some point in the future, the earnings will rise significantly, or both.
Stock Broker – Everyone needs one of these in one form or another to buy and sell stocks. A broker trades shares on your behalf and you pay them a commission each time you do it. Back in the old days, you’d have to call them on their landline to place an order. You can still do that, but most people have an online brokerage account that they trade from these days.
Mutual Fund – This is when a money manager puts together an investment portfolio and let’s other people get in on it. It’s like if you were picking stocks to invest in and other people started to ask you to do it for them. You are basically paying a professional to invest your money for you and you pay them a management fee.
Investment Portfolio – This is your overall basket of stocks, bonds and other assets that you have invested in. If I own shares in GE, Microsoft and Coca-cola, I would say that those stocks are in my investment portfolio.
Diversification – This is an important concept to understand when you are developing your investment strategy. Diversification is the idea that you don’t put all of your eggs in one basket. By buying a variety of stocks, bonds and other kinds of assets, you are diversifying your risk. If one goes down the tube, you have other assets to make up for it. It is unlikely that all of your assets will tank. And if one does extraordinarily well, it will make up for the losses. But you have no way of knowing which ones will do well and which ones won’t, so you buy all different kinds.
