Although investing in the stock market can feel intimidating at first, it could be the key to achieving your financial goals. Short of hitting the lottery or building a thriving business that you can sell, buying securities that increase in value over time is usually the easiest path to wealth.
After all, the average savings account pays out a paltry 0.05% APY according to the Federal Reserve Bank of St. Louis, yet the average stock market return is around 10% per year before accounting for inflation.
Unless you want your money to languish in a savings account where it’s worth less with each passing year, learning to invest should be at the top of your to-do list.
6 Steps to Start Investing in the Stock Market
But, how do you start down a path that is notoriously complicated and has the potential to leave you with less money than you started? Here are a few top steps you should take to get started.
1. List Your Goals
Ask yourself what you hope to accomplish by investing in the stock market. A few examples of investment goals might include:
- Making a quick profit by investing in the short-term, and reselling stocks at a higher price,
- Creating a source of passive income you can use later on,
- Growing investment earnings so it can cover your retirement, or
- Saving money for a specific goal.
As you list out your goals, make sure you have the extra money to invest on a regular basis, while also having cash set aside for emergencies. If you have a lot of credit card debt or other high-interest debt, you might even consider paying it off before you begin investing. After all, the average credit card interest rate is currently over 16% — and you might not get an investment return anywhere close to that.
2. Start With Retirement Savings Accounts
There are advantages that come with investing in a retirement account. Accounts, like a workplace 401(k), a SEP IRA, or a Solo 401(k) are tax-advantaged, giving you the chance to reduce your taxable income (and thus, pay less in taxes) when you contribute.
With a 401(k) plan from your job, for example, you can contribute up to $19,500 in 2020 and again in 2021. If you’re age 50 or older, you can also contribute another $6,500 each year which is called, a “catch-up contribution”. The amount you contribute is taken off of your taxable income, so your tax liability is lower.
You might also qualify for an “employer match” on contributions to your employer-sponsored retirement account. Check with your company’s human resource department to learn if your employer offers this benefit.
Other retirement accounts to consider include a traditional or Roth IRA. You can deduct your full traditional IRA contribution from your taxable income, if you don’t have a retirement plan at work. Another option is funding a Roth IRA which lets you contribute using after-tax dollars instead. This means you won’t get a tax deduction for contributing, but Roth IRA funds grow tax-free and you can take distributions at retirement age without paying any taxes.
In 2021, contribution limits for IRAs stay the same as 2020. You can contribute up to $6,000 to an IRA, or $7,000 if you’re age 50 and older.
3. Open a Brokerage Account
In addition to investing for retirement, you can also open a taxable brokerage account. You won’t get any upfront tax advantages for opening a brokerage account, but you get the chance to buy and sell stocks and other securities, or buy and hold them for the long-term.
There are excellent brokerage account options for beginners or experienced investors, many of which let you invest in some capacity without any fees. Some of the top firms to consider include:
- Betterment: Best for Beginners
- Robinhood: Best for No Minimum Balance Requirement
- M1 Finance: Best for Free Trades
4. Compare Costs and Fees
You might not have a lot of options if you’re investing in your workplace retirement plan at first. If you have the option to select a brokerage firm, you’ll need to compare the fees and costs involved in investing. Fees and costs to watch out for include:
- Investment management fees. These fees can be nonexistent or as high as 1% of your account balance (or more).
- Expense ratios. Specific funds, like index funds or mutual funds, might carry this fee.
- Transaction fees. You might pay transaction fees when buying or selling a stock or another security.
- Front-end loads. This fee can be charged on some investments upfront.
- Annual account fees. A charge that’s tacked on just for using your brokerage account.
These are just some of the main fees to watch out for, but there are plenty of others. If you want to figure out how much you’re paying in fees on your investment accounts, the free retirement fee analyzer tool from Personal Capital is a good place to start.
5. Start Off With Simple Investments
You’ve probably heard plenty about the “hot stocks” of the last few years, and how investors who got in early have gotten rich by being in the right place, at the right time. Unfortunately, most “regular” investors don’t hear about hot stocks until it’s too late.
As a beginning investor, it’s usually best to keep your stock market strategy simple by investing in what you understand. Some beginning investments to consider include exchange-traded funds (ETFs), which are made up of various investments that track an index or focus on a specific industry sector. You could even stick to index funds, which are another type of investment that tracks an index and are mostly “hands-off” for the investor.
Target-date funds are another type of simple investment to consider. These funds include a selection of stocks and bonds that adjust for less risk over time. If you purchase a target-date fund that’s meant to last until 2050, for example, your risk would be high at first but slowly taper down as you approached 2050 or whatever “target date” you choose for retirement.
6. Research Before Jumping on Complex Strategies
If you’re curious about more complex investing options, you’ll need to learn more about how and when to invest. Some resources to turn to include investing books, like:
- The Little Book of Common Sense Investing by John C. Bogle
- Investing All-In-One for Dummies by Eric Tyson
Blog posts that can help you get started with some investing basics include:
- How to Invest Essentials for Beginners & Intermediates
- How the Stock Market Works
- How to Buy Stock Online
The Bottom Line
Investing in the stock market can be nerve-racking, but starting with common-sense investments in place (e.g. employer-sponsored retirement account) and uncomplicated investments (like index funds), lets you ease into the process slowly.
Over time and with more experience, you’ll have a better sense of when — and when not to — shy away from the risks of the stock market.