If the very words “how to invest in stocks” give you hives because you have no idea how the stock market works or what it means, you’re not alone. In fact, you’re in good company. According to a new Capital One ShareBuilder survey released exclusively to CNN Money in 2015, “ninety-three percent of Millennials say that both distrust of markets and lack of investing knowledge make them less confident about investing.” And while we understand that many people believe that cash is more comfortable when it comes to your financial future, it’s important to know how the stock market works, how it can benefit you, help you make the most of your money and ensure a healthy financial future. And remember, it’s never too late to learn.
So then, how to invest in stocks? Well, what exactly is the stock market? It can often seem like a way for people to gamble (and lose) money, but it’s actually far more complicated than that. According to Mike Patton, a contributor for Forbes.com, “the stock market is a complex system where shares of publicly-traded companies are issued, bought and sold.” He continues to explain that in simple terms “the stock market is a group of people pitting their expertise against one another.” People of varying opinions and backgrounds spend time investing their money in different companies and organizations, and in order to do so, another individual must believe that company is no longer a worthy investment (and therefore they are willing to sell their stake in that business).
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Now you know what the stock market is, generally speaking. But what’s next? How do you invest, or more importantly, how do you make smart investments? Well first, there are a few things you need to know. Number 1, the stock market is not designed to benefit investors. Bernard Baruch, known as “The Lone Wolf of Wall Street,” (aka one of the country’s best known financiers in the early 1900s) once said “the main purpose of the stock market is to make fools of as many men as possible.” That said, hundreds of thousands of individual investors are successful with the stock market every day, so it’s just a matter of knowing how it works. Here are some key things to keep in mind and understand as you begin to make investments in the stock market.
How Do I Invest and Buy Stocks?
Anyone can open an online brokerage account, it’s easy to do at sites like Fidelity, Charles Schwab and TD Ameritrade, just to name a few. Many of these websites also offer tips and tools to help you learn about the stock market, calculate your goals and make smart investments. You can also work with financial advisors to help you select your investments, craft a long-term financial plan and actually do the dirty work for you.
Once you start making investments you should try to create a diverse portfolio, or in simple terms, don’t put all your financial eggs in one basket. If that one stock or one industry that you are invested in tanks, you’ll lose all your money. As financial expert Suze Orman explains, “most people when they’re beginning to invest don’t have a lot of money. So, you don’t want to buy just one individual stock because if that individual stock happens to go down—and it can happen—there goes all your money. Diversification is the key.” CNN Money argues, “the core of your stock portfolio should consist of financially strong companies with above-average earnings growth. There are only about 200 stocks that fit that description. A well-balanced stock portfolio should consist of 15 to 20 stocks, across seven or more different industries.”
While you might start off with fewer or smaller investments than that recommendation, make sure you don’t only invest in one company or one business model. Set yourself up for success, but also prepare for potential failure should your stocks not perform well at any given time.
The stock market is not meant to make you a quick dollar with immediate results. To really benefit from stock market investments you need to think long term. Try to think big picture and consider when you will want your money and what you are saving for (retirement, a college fund, to purchase a home etc.) Once you know your financial needs and plans for the future, you can assess what kinds of investments you should make as far as risk and return. And remember, stock markets are volatile and stock prices go up and down often (more on that later), so you can’t worry every time your stocks take a little dip. According to Ron Lieber, author and “Your Money” columnist for The New York Times, “stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.”
Understand Why Stock Prices Change
It’s no secret that the stock market changes, and often. Stock prices go up and down, markets crash, people lose money, but people also make a lot of money. So why does this happen? Depending on the company or industry you are investing in, there are several factors that can affect the stock price. As per Forbes, everything from “the media, the opinions of well-known investors, natural disasters, political and social unrest, risk, supply and demand, and the lack of or abundance of suitable alternatives” can affect stock prices. If more people want to buy a stock than there are people willing to sell their stocks, prices will go up, and the opposite is true as well.
Try Not to Get Emotional
Above all, try not to let your emotions get in the way of making smart investments or investing at all. Of course it can be stressful and it’s not fun to watch your funds dwindle if and when the stock market suffers. But if you can focus on the big picture and look at your long-term performance then you and your finances will benefit. And if you are one of those people who does not operate well under stress, then the stock market might not be for you.