Why Invest In The Stock Market?
There is more than one way to invest in the stock market. What’s a better way to put money into the best wealth generator: the stock market? Don’t believe me? Look at the historical returns of stock investments in stock markets like the U.S. It has consistently outpaced many other assets, making them the favorite tool for investors looking to grow their wealth.
Before we dive deep into the complexity of whether investors can make money in the stock market. Let’s get straight into how investors can start investing in the stock market today. For beginners, one way to start investing in the stock market is by creating an online brokerage account. And trust me, it’s going to be easier than you think. With today’s development in the fintech space, trading stocks has never been easier, not to mention the commission-free trading fees from the brokerages. You can even trade within Square’s (NYSE: SQ) Cash App. Talk about convenience. If you would prefer to have more advice and guidance for buying stocks and financial goals, you could also consider a financial advisor. But before you start the investing journey, you must also consider the options that you have.
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What Kind Of Stocks Should You Invest In?
Whether it is a single stock investment, mutual funds, or exchange-traded funds (ETFs), investors are presented with limitless choices. This could be rather overwhelming for beginners looking at where to start. Single stock investing may present more risk, but it also produces greater returns if you make the right call. As for mutual funds or ETFs, it is inherently diversified. Hence, it is suitable for investors who want a steady appreciation and steady income. However, investors have to note that mutual funds are unlikely to move in a similar fashion like some individual stocks.
That said, before one starts their investing journey, there are also some questions you should ask yourself. Be it the time allocated to do research and due diligence, active or passive investing, and most importantly risk appetite. Once you have a clear idea, investing may not be that challenging after all.
You see, stock investing doesn’t have to be complicated. For most people, one way to start is by allocating a budget for investment purposes. Ask yourself, how much money do I need to start investing in the stock market? There’s no right or wrong when it comes to allocation. Rather, it is a personal choice where one has to assess their current financial state and the time horizon. You don’t want to be allocating 95% of your total assets to investing in stocks when you are in your retirement and face the risks of burning your investment during an economic downturn. And if you do fall into the retirement category, you may want to allocate a larger chunk into more conservative fixed-income investments.
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Focus On Long-Term Investing
There’s no perfect strategy, really. Stock investing can involve all sorts of strategies and methods. But it doesn’t mean that the more complex strategies will win. If anything, few things, if any, are guaranteed in the stock market. As Warren Buffet has famously said, the low-cost S&P 500 index fund is the best investment most Americans can make. I leave it for you to decide if you want to listen to the legendary investor. A single stock investment should only be chosen if you truly believe in the company’s potential.
If you are new to investing, it’s important to note that the stock market’s return on average is about 10% annually. That’s the average return over the past 100 years or so. This is a better deal than interests from the bank or US treasury bonds. So here comes the real question. If it can provide such a decent return annually, why do so many people fail to earn that 10%? The truth is, many don’t stay invested long enough.
Chances are, most of us are not experts in day trading. It is not easy to consistently outperform the stock market by active trading. Timing the market and day trading when you are starting the investing journey may not be your best move. But that could just be me. Here’s why say you began investing earlier in February 2020. And you invested in Facebook (NASDAQ: FB) when it was trading at $214 per share. When the pandemic came, it dropped 30%. For beginners, there could be some panic selling. However, investors who see the long term potential would stay invested and even buy more on the dip. From the stock market crash in March, FB stock has almost doubled in value.
An experienced investor might have an advantage over you as you’re getting started. But you don’t have to be a genius or Warren Buffet to start investing in the stock market. One of the strategies you can adopt is researching the specific companies that you may be interested in. You may spend some time with their annual reports. It would also be helpful to pay attention to the recent developments of the companies. Perhaps, you may be able to stand a better chance of making more educated bets.
Many are too busy to worry about monitoring their portfolios daily, sometimes a few times a day. That’s especially true for individual stock investing where you see your investment value swing in double-digit percentages. This is where the beauty of mutual funds or ETFs comes into play. These funds consist of a large number of stocks within the fund, which makes them more diversified than a single stock. What that means is that the daily swings in these funds are also smaller. And therefore less likely to make you nervous.
Investing in stocks involves dedication and a great deal of research and understanding. Perhaps, you may have the skills to time the market to buy low and sell high opportunities. But let’s be clear, the chances of one succeeding in this strategy consistently is very low if not zero. And if you look back at the history, you’re likely to buy low and sell high successfully if you hold on to your stocks for the long term. For those who would like to have a diversified portfolio, investing in mutual funds or ETFs at regular intervals would be a reasonable approach.