Here is a question from a reader on Facebook who is new to the stock market and like many others, has gotten information overload. When this happens, a person runs the risk of losing interest and never getting started investing in stocks.
I’m just beginning my journey to the investing world. Have done quite a bit of reading about stocks, MF’s, ETF’s, options and futures. I want to start with 5K. I have also read various articles on your website but I guess I am overwhelmed and now confused after so much reading, would greatly appreciate a more personal advise on picking or move in the right direction.
First of all, investing in stocks IS a journey and the reader got that right! The stock market, in my opinion, should be viewed as a long term way to grow your money for retirement. It is NOT a casino where you place quick bets and hope to win them, although some “investors” do just that.
Please read my step by step guide to buying stocks if you are trying to figure out what you need to physically do to be able to buy stocks. But what do you do once you successfully open your first online broker account and put money in it? That is what the reader is asking and what the rest of this post will be about.
Start By Buying One Stock
I got started many years ago by buying just one stock and that is how you can get started too. My first stock was a company that I liked and I thought it would do well in the future. Please read this about my thought process of picking stocks which should give you some ideas of what to look for.
After picking that first stock I then slowly started learning about P/E ratios and other things which are talked about all the time in the stock world. There is so much information out there that you have to go slowly and accept that you can’t learn it all at once. After some time, I decided to buy my second stock, always continuing to try to learn along the way. And then when I had more money and felt more comfortable, I bought my third stock. (I don’t remember whether any of my first stock picks went up or down but I was building a portfolio of companies that I thought would be prosperous)
With $5,000 you can choose to buy 1 to 5 stocks, depending on how much you want to diversify. But the important thing is to buy that first stock!
I Would Ignore Everything But Individual Stocks And ETF’s
Mutual funds (MF”s) are a collection of stocks picked and managed by professionals who charge a fee which is built into the price you pay. A professional manager continually buys and sells stocks for the mutual fund based on his judgement and you have to pay a fee every year for that “service”. MF’s are good for diversification and some people like the feeling that their money is being actively managed by someone who presumably knows what they are doing.
But now you can buy exchange traded funds (ETF’s) which are super easy to trade (just like stocks) and they do pretty much the same thing as MF’s but with no fee. So I would ignore all mutual funds.
There are thousands of ETF’s to choose from that target different industries, different markets, and different indexes. When you buy an ETF you are buying a set basket of stocks that don’t change and the ETF’s you choose to buy can get you much more diversification than owning individual stocks. For instance, one of the most popular ETF’s is “SPY” which mirrors the stock market (if the market goes down overall, SPY goes down and the same for when the market goes up) and I own some of those shares. Unfortunately, I never followed through with my original plan of buying some SPY each month and I would have made more money if I had.
Warren Buffett has famously said that most investors would make the most money by putting all their investment dollars into ETF’s that mirror the market and never buying individual stocks. He might be right and so If I were starting out today I would probably buy a few individual stocks and put the rest into an ETF that mirrors the overall market.
Options, Futures, And Other Things You Should Ignore
When you get interested in learning about the stock market for the first time, you quickly become aware that there is a lot of terminology. I really mean A LOT! It can be terribly confusing for any beginner and knowing where to begin can truly be overwhelming.
But honestly, things like options, selling stock short, covered calls and other stuff like that should be ignored by all beginners. You should start with the basics and the basics is just buying your first stock. All temptation to try to learn more than that should be avoided at the start.
Its like beginner driving. You can’t do fancy spins, go 150 miles per hour around a racetrack, or parallel park right from the start. Thats because you have to learn to drive first. Only after you learn how to drive can you expand and learn how to do the more advanced stuff.
Its the same thing for beginner investors hoping to make money in the stock market. You can’t expect to understand everything right from the start and you don’t need to. What you do need to figure out is how to open an online broker account, how to fund it, and then successfully pick and buy your first stock (or ETF). THOSE are the first steps and the only ones you need to worry about. Once you do that, you can sit back and see if your stock goes up or down and try to get familiar with the feeling of having some money at risk in the market. From there you can plot your next course of action and continue to learn.