How to get started investing in the stock market

How to Get Started Investing in the Stock Market

Josh Calcanis
August 11, 2022

Would you like to start investing in the stock market but don’t quite know where to begin? Believe it or not, making money off of stocks isn’t necessarily the way you might see it portrayed on social media or in the movies. In fact, millions of Americans earn money passively every year off of the markets with little to no trading at all. In this post, we’ll explore how you can safely get involved with investing in stocks. We’ll also explain where to get started and why it’s a golden opportunity that you won’t want to pass up.

Why Do People Invest in the Stock Market Anyways?

When done strategically, investing in the stock market can be one of the most effective ways to build sustainable, long-term wealth. People from all walks of life have become millionaires over time by taking advantage of one of investing’s greatest features: the compound interest effect. The compound interest effect is when money builds on top of both your contributions as well as any previous earnings. To illustrate this point, consider what would have happened if you had invested $1,000 in the stock market back in 1982. 40 years later, it would be worth $86,352! How is that possible? It’s because (generally speaking) the stock market tends to trend upward, increasing in value with time. Additionally, investors periodically may also receive distributions called capital gains and dividends that they can use to reinvest into the markets. All in all, this causes the initial investment to multiply over and over again. And when done systematically, it can lead to a sizeable portfolio that will allow the account owner to retire someday.

What Should I Invest In?

There are dozens of financial products that can be used to make money off the stock market. Here are a few of the most popular options for beginners to consider.

Individual Stocks

When someone says they own a share of stock, what they mean is that they have a piece of ownership in a publicly traded company. These can be well-known names that you’re already familiar with like Apple, Walmart, and Amazon, or they might be from any of the other thousands of registered businesses. As companies perform well, their stock becomes more desirable and the share prices will increase. However, the inverse is also true if the company misses earnings targets or experiences negative publicity. Buying stocks individually gives the investor full control to pick and choose the ones they believe will do the best over time. However, it can also expose them to risk if they’re not well-diversified in their selections.

Mutual Funds

What if instead of buying one or even ten different stocks, you could buy hundreds or thousands of them with a single purchase? That’s exactly what a mutual fund does – it’s a collection of assets that you and other investors purchase with a shared pool of money. Besides being incredibly simple, mutual funds are diversified by design which significantly lowers an investor’s risk of loss. Mutual funds can also contain other assets beyond stocks such as bonds, real estate, crypto-related products, etc.

ETFs (Exchange-Traded Funds)

An ETF essentially takes the concept of a mutual fund and packages it into a financial product that can be bought and sold on the open market (just like a stock). Investors get the same benefits of simplicity and diversification. But ETFs also offer the extra advantage of having lower fees than most mutual funds.

Index Funds

What if instead of trying to pick your own stocks and beat the stock market, you just simply bought the average return of the stock market as a whole? That’s the concept behind an index fund. Indices are collections of assets that are used as broad measurements of the market as a whole. You hear about them every night on the news. One of the most well-known ones is the S&P 500 – the 500 largest companies in the U.S. Many financial experts have praised index funds over the years claiming that even professional fund managers can’t beat the overall market over the long haul (roughly an average of around 10 percent per year). Effectively, that means someone with absolutely no investment knowledge could put their money into an index fund and most likely be more successful than the majority of people who tried their hand at picking individual stocks.

How Should I Get Started?

To start investing, you’ll need to first set up an account with a financial platform to serve as your brokerage. Here are a few of the most common ways to do this:

Trading Apps

Trading apps make buying and selling stocks, ETFs, and even crypto as easy as the click of a button from your smartphone. Simply download the app to your phone, connect your bank info, and then you’re ready to go. Popular options include Robinhood and M1 Finance.

Robo-Advisors

If you’re not confident in your ability to build a diversified portfolio, then why not let a computer do it for you? The market is full of a new breed of broker called robo-advisors where an app picks out your investments based on your answers to a few simple questions. Consider platforms like Wealthfront and Betterment.

Traditional Brokerages

If you’d like to partner with a financial platform that you can grow with, then going with a full-service brokerage might be a good way to go. These are established, well-known financial companies that go beyond buying stocks and can also offer other services such as financial planning. Check out classics like Vanguard and Fidelity.

Retirement Plans

Does your employer offer the opportunity to participate in a 401k retirement plan? If so, then this is essentially an investment account that gets special tax advantages. Even if the company you work for doesn’t offer a retirement plan, you always have the option to open another type called an IRA with a financial institution of your choice. By far, retirement plans are one of the easiest ways for the average person to get involved with investing because they won’t have to manage the taxable gains every year. Plus, since most participants make automatic contributions with each paycheck, you’ll be regularly investing without even realizing it.

Whatever You Do, Don’t Wait

No matter what you decide to invest in and how you go about it, the main thing to keep in mind is not to delay. The compound interest effect takes time to make your money grow, and that will only happen if you take the initiative to actually start investing. That’s why the most important thing you can do is to take that first step and start putting your dollars to work.