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The Skills You Need to Invest in Stock
So, you want to invest in stocks, but you're not sure about the basics of investing. You may know that investing is one of the best ways to build money, and that it also carries a lot of risk when compared to something like a savings account. However, you may not be sure how to get started.
If you want to know how to improve your investment skills, you'll need to start with the fundamentals.
Here, we'll cover the basic rules of investing that provide the foundation for investing in and making money on stocks.
What You Need to Get Started
Before you begin, there are a few things you'll need.
You will need an investment pot to start — which is to say, money. You should have disposable capital ready to invest, plus money put away for emergencies. Recommendations vary, but the standard financial advice is to have between three months and a years’ worth of living expenses socked away — in cash, a savings account or anywhere you can get to it — as an emergency buffer.
You may want to save more if you work an industry with inconsistent employment. Things like seasonal work and high turnover or injury rates make it more likely you'll need to dip into that emergency money — and important to have more.
This may seem like a lot of money, because it is. It's better to have a safety net in place, though, before you start investing money that you could be saving.
The Basics of Investing
There are a few different ways for beginners to start investing.
In general, you can't really invest yourself — not directly, at least. To buy or sell stocks on the stock market, you'll need to go through a licensed stockbroker — but that doesn't mean you can't have a lot of control over how you invest.
One simple way to start investing is to open some sort of investment account. These accounts include options such as a 401(K) or Roth IRA in the U.S., but you'll have control over which stocks are being bought or sold.
With brokerage accounts, you'll have fairly close access to the stocks you invest in compared to other account types. This makes them great for short- or near-term investing and for those wanting to get some experience in buying and trading on the stock market.
You can also trade through robo-advisors — programs designed to provide advice similar to what you'd get from a regular adviser — and tools like stock market apps. These apps will generally include features — like price dashboards, alerts and market research — designed to make trading easier. They are not, however, necessarily better than any other method of investing and don't provide info or tools that you can't get elsewhere.
Know What You're Buying
Once you have an account or investment method set up, you'll be ready to start buying.
Before you begin, however, you should know what kind of investments it's possible to make on the stock market. Two of the best for beginners are individual stocks and mutual funds.
Mutual funds effectively allow you to buy pieces of many different stocks and tradeable assets with each transaction. There are a variety of different mutual funds that can have you investing in different things — like equity funds, which invest in stocks, and index funds, which are designed to track the performance of a specific index like the S&P 500.
Individual stocks, on the other hand, are just individual shares in a single company. It's possible to build a portfolio out of just stocks, but it's going to take more micromanaging and work to keep your portfolio diversified and making money.
How to Be a Great Investor
It's a good idea to keep your portfolio diversified by investing in a range of stocks — or something that ensures the diversity of your portfolio, like mutual and index funds. This will give your portfolio some defense against the natural volatility and risk of individual stocks.
You should also be aware of different ways to boost your investments. For example, investment-related tax incentives, like the ones recently carved out for those investing in opportunity zones. In general, you'll want to stay on top of all the latest developments related to the funds and stocks you're invested in.
This, combined with buying, selling and just following your investments, is the best way to improve your investment skills over time.
If you're wondering which specific stocks or funds to invest in, some are better bets than others, especially for beginners.
Because they track average market performance, you can't beat the market with index funds — tying your fate to the market, however, also means that the market won't beat you. This is especially true if you're investing over a long time period.
To help you understand the basics of investing, here are some key terms to know:
Broker — Licensed to trade on the stock market, this person buys and sells stocks for you for a fee or commission.
Brokerage account — An investment account opened with a brokerage firm. It's like a bank account that allows you to buy and sell stocks and other investments.
Diversification — Investing in a variety of funds and stocks that do well at different times to reduce the volatility and risk of your investments.
Equity Fund — A mutual fund that invests primarily in stocks.
Index Fund — An investment fund that increases or decreases based on an index that tracks the average performance of many different companies.
Liquidity — How accessible invested money is. A stock or fund is considered highly liquid if you can pull out invested cash at almost any time.
Mutual Fund — An investment company that uses investor money to buy stocks and other investments. By investing in one of these funds, you can effectively invest in many different stocks with one transaction. These funds typically require a minimum investment.
Stock — A small piece of ownership in a given company or firm. In general, the value of stocks increase when a company is doing well and decrease when the opposite happens.
Standard & Poor's — Index tracking the average market performance of the top 500 American companies and is designed to provide a rough indicator of current market conditions. It is usually referred to as the S&P or S&P 500.
The Basics of Making Money with Stocks
These are, of course, just the basics — but these basic skills can get you started investing.
If you ever find yourself with extra investing money but aren't sure what to invest in next, mutual funds, especially index funds, are some of the most reliable. Individual stocks can also pay off, if you're willing to keep on top of the companies that you invest in, as well as developments that may impact their fortunes.
In any case, a diversified portfolio is less likely to be volatile or get sunk by bad luck — in general, keeping your investments diverse is a good strategy.
About the Author
Kayla Matthews is a productivity writer and self-improvement blogger. You can find her work on The Huffington Post, MakeUseOf, Tiny Buddha and The Muse. To read more posts by Kayla, subscribe to her newsletter.