How to Start Investing

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Investing can seem like it’s impossible to understand. However, with guidance and patience, anyone can invest. This TradingSim article will help budding investors start investing early to build a strong portfolio. In this article, I will also help new investors invest on their own to thrive at the end of this bear market.

How to Start Investing
How to Start Investing

What is investing?

Investing is owning a piece of a corporation. When you invest in a stock, you put money into that corporation hoping that you will increase that money at a profit. For example, say you buy Google stock at its (NASDAQ: GOOG) stock. If Google stock increases after a new Google product is released, your $100 will grow.

Google stock is a popular stock if you want to learn how to start investing

What are you investing in when you invest in the stock market?

Investing in the Stock Market
Investing in the Stock Market

When you invest in the stock market, you are buying stocks on a stock exchange. The New York Stock Exchange is the most exchanges that trades stocks. Many stocks like Nike (NYSE:NKE) and Starbucks (NYSE:SBUX) are offered on the New York Stock Exchange.

In contrast, many tech stocks like Apple (NASDAQ: AAPL) and Microsoft (NASDAQ:MSFT) are traded on the NASDAQ (National Association of Securities Dealers Automated Quotations) exchange.

All the performances of the top 30 companies on the exchanges are measured on the Dow Jones Industrial Average. If the Dow Jones rises, stocks are performing well and investments gain more money. If the Dow Jones falls, then stocks are performing poorly and your investment funds shrink.

The Standard & Poor 500(S &P 500) is an index that tracks the top 500 largest companies in the U.S. Many stocks that investors choose are in the S&P 500.

What do the symbols on the New York Stock Exchange mean?

When you’re monitoring stocks you purchase, you may see a series of one to three-letter symbols. Those symbols are called ticker symbols. For example, if you have Walmart stock, on the New York Stock Exchange, the ticker symbol would be NYSE:WMT.

On the NASDAQ exchange, tech stocks have four-letter symbols. For example, Apple stock is listed as NASDAQ: AAPL.

How do companies choose their stock prices?

When corporations go public and sell shares to investors, they issue an initial public offering (IPO). When companies list their stock on the New York Stock Exchange or NASDAQ, they list their stock at a certain price.

For instance, when Uber started selling shares to investors, the shares sold at $45. If investors buy a lot of the shares, the company’s stock price rises. If investors sell a lot of shares of a company, the company’s stock price falls.

How do you start investing in the stock market?

With trading apps like Robinhood, it’s never been easier to invest. New investors can start trading within minutes on trading apps.

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A Robinhood spokeperson noted that the millions of investors have started investing through the app.

“It is not lost upon us that our company and our service have become synonymous with retail investing in America, and that this has led to millions of new investors making their first investments through Robinhood,” said a Robinhood spokesperson .

“We[ Robinhood] aim to provide the best investing experience as well as the resources customers need to get and stay informed,” added the spokesperson.

Robo-advisors and financial advisors can help you start investing

Rick Swope is vice president of investor education at E-Trade, a brokerage firm. He advises young new investors to use robo-advisors to get started in the stock market.

“Young investors who are just starting out should look to simple solutions like robos[robo advisors] and when investors graduate to more complex financial needs, like estate planning, they may turn to the services that a financial advisor can provide,” said Swope.

Then, there are options if you want to passively invest and have a computer program pick stocks for you. If you want another investing strategy, Robo-advisors are investing programs that use algorithms to help investors pick stocks.

One robo-advising trading app, Betterment, saw a 25% jump in new investors this spring. Dan Egan is Betterment’s managing director of behavioral finance and investments, He noted the increase in investing since the start of 2020.

“We have a large number of younger people who have opened up accounts and are getting started with investing,” said Egan.

Brokerage firms can help investors learn how to start investing

If you want more guidance with your investments, you can open an account with an established brokerage firm like TD Ameritrade or eTrade.

With a brokerage firm, you can more easily change your investment strategy. They can also help you rebalance your portfolios every few months to recalibrate your investment strategies.

Once you purchase a series of stocks, you have a portfolio of stocks. You can monitor that portfolio and rebalance your portfolios if you want to buy or sell stocks.

How much does it cost to invest with a brokerage firm?

While trading fees vary, there are fees for different services if you’re learning how to start investing with a brokerage firm. Mutual funds often come with high fees. If you have a mutual fund manager, discuss the fees with that advisor.

Kevin Dorwin is managing principal at wealth management firm Bingham, Osborn & Scarborough. He commented that mutual funds have fees because of their costs to brokerage firms.

“Mutual funds, for the most part, are still priced much higher because they’re harder for the brokerages to administer. And I think a lot of people use mutual funds, so they’re not really saving on that at this point,” said Dorwin.

Evan Kulak is co-founder of Polaris Portfolios, a Chicago-based financial planning firm. He noted that brokerages have many fees.

“Brokerages still charge commissions and fees on mutual fund trades, options contracts, broker-assisted trades and international securities,” said Kulak.

“Many accounts still have wire, transfer, research, and/or inactivity fees. In addition, there will likely be an increase in nontransparent fees such as such widening bid-ask spreads, sale of order flow data and low cash sweeps rates,” added Kulak.

Investors should be cautious about brokerage fees

If you have money left in your account after buying stocks or investing in other assets like gold, you have to pay fees on that as well. Steve Sanders is the executive vice president of marketing and product development at Interactive Brokers. He notes that “idle cash” that isn’t moved to a money market account is taxed.

A money market account is a high-interest savings account. If you have idle money in a brokerage account that isn’t moved, there are hidden fees.

“Those that do pay interest often require clients to sweep money into a money market account. Many people don’t think to do that or don’t have time, so the broker is able to pocket the money,” said Sanders.

Broker fees can add up for people learning how to start investing

Sally Brandon is senior vice president of client service and advice at Rebalance. She noted that even if broker fees sound small, they’re not.

“The trouble with fees is they sound small because many are less than 1%, but the reality is that many investors don’t understand what that means in dollars,”  said Brandon.

“Be mindful of the multiple layers of fees. Look for an advisor charging below 1% to manage your portfolio, invest in low-cost funds like index funds and ETFs,” added Brandon.

Spreads and market makers have an impact on investor fees

When a market maker makes a trade, they profit from the spread- the difference between the bid and the ask prices. Investors don’t usually get the market price when buying or selling a stock. Because of that, they may pay more when they purchase the stock and make less when it’s sold.

Luke Lloyd is an investment strategist at Strategic Wealth Partners. He noted that the spread between the bid and ask prices can cause more brokerage fees.

“With stocks, there isn’t much to watch out for besides the spread between the bid and ask: The bid is the best price available where somebody wants to buy a security, and the ask is the best price available where somebody wants to sell a security,” said Lloyd.

Lloyd noted that brokerage fees make money when investors buy stock at the market price.

“If you want to buy at the market price, you will pay a couple percent premium to buy it. Some brokerages make money on that spread. It’s just something you want to look out for when placing an order,” said Lloyd.

Many online traders are free for people learning how to start investing

If brokerage firm fees are too confusing, there are many commission-free alternatives. In addition to Robinhood, established firms like Charles Schwab are also offering commission-free online trading.

JMP Securities’ Devin Ryan wrote in a note to clients that Robinhood accelerated the change to make it easier to start investing.

“Free trading isn’t a new theme in the industry, but the cadence of announcements from firms offering zero-commission trades seems to be picking up, and we also note that many of these companies have more credible platforms (and capital behind them) than the offerings of the past,” wrote Ryan.

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While new trading apps are flashy, Scott Coyle, CEO of Click IPO, isn’t impressed by them. He thinks that other dealers offer more financial infomation to new investors than Robinhood.

“These broker- dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do,” he says.

How can you save for investing?

Savings
Savings

No matter how much you spend on investing, it’s crucial to have an investing budget. With that budget, investors can delve into the stock market without losing too much money.

When you invest in a stock with a broker, you can place a stop-loss order. When you place a stop-loss order, you can have a broker sell a stock when the price drops below a certain point.

For instance, if Uber stock plummets below $45, you can place a stop-loss to sell the Uber stock. When you place a stop-loss, you can prevent yourself from losing too much money when a stock’s price plummets.

In addition to stop-losses, you should have an emergency fund to cover losses. Since the stock market is so volatile, it’s crucial to have money to cover trading expenses and losses. Personal finance expert Ramit Sethi advises investors to have an emergency fund.

“An emergency fund is money saved for any unexpected expenses. It gives you the piece of mind knowing you have a hedge against the worst financial disasters,” wrote Sethi.

How to start investing with 401ks

If you have a 401k or 403b retirement account, you’re already investing. When you work for a corporation that offers a 401k, your employer has helped you start investing in stocks. If you work for a non-profit, you likely have a 403b account. A group of stocks comprises a 401k.

Since an employer deducts a certain amount of your paycheck, you’re investing a portion of your income into the stock market. If you want to start investing more gradually, you can increase the 401k deduction to invest more in the stock market.

Kelly Lannan is vice president of young investors at Fidelity Investments. She advocates investors having automatic deductions from their accounts to contribute to 401k’s.

“Some people really benefit from this automated approach as the money is never in their bank account to be tempted to spend,” says Kelly Lannan, vice president of young investors at Fidelity Investments.

If you don’t make any premature withdrawals before the age of 59, you can get your 401k account money tax and penalty-free. You have to withdraw your funds from a retirement account after you turn 72.

529 plans can help you invest for children’s tuition

In addition to 401ks, you can invest in 529 plans. If you have children and want to save for their tuition, 529 plans are a good option. These state-run programs are often offered by brokers. An investor can set aside money into the plan until their child is ready to attend college. Those funds can be withdrawn to use for tuition.

This investment plan lets investors contribute up to $15,000 to beneficiaries tax-free. Jim White is the founder of J.H. White Financial. He recommends that people learning how to invest should contribute to 529 plans to save for their offspring’s future.

“529s are still the best savings tool for college tuition. Any of the various alternatives frequently mentioned either have contribution limits or lack tax benefits,” said White.

Ksenia Yudina is CEO of U-nest and touts the versatility of 529 plans.

“529 plans can now be used for virtually any kind of education expense, not just college. You can even use them to pay down your own college loans,” says Ksenia Yudina CEO of U-Nest, a 529 investment app.

A change to a tax law in 2017 helps more parents who want to invest in 529 plans. Ben Birken is a financial advisor with Woodward Financial Advisors in Chapel Hill, North Carolina. He commented that the new law expands to let parents contribute to the plans for K-12 education. Parents can contribute to 529 plans to pay for tuition for private elementary and high schools in addition to colleges.

“For most people, this change doesn’t amount to much due to the high cost of private school and the limited amount of time that would be available for tax deferred/tax-free growth,” he says.

How much should you invest in 529 plans for your kids’ tuition?

When parents invest in 529 plans, there are questions about how to invest in these plans and when. White believes that dollar-cost investing is best in this volatile stock market. Dollar-cost averaging for 529 plans is contributing more to the account when the stock market is down. In contrast, you can contribute less to the account when stock prices are up.

“While the (recent market) volatility has not changed my view on 529s, it has strengthened my opinion that monthly savings in age-based target portfolio is the way to go,” said White.

“You cannot predict the future and trying to do so usually doesn’t end well. Dollar-cost averaging in an age-based portfolio that will slowly reduce risk as the student approaches college is simple and prudent and doesn’t require trying to remember to reallocate,” added White.

What approach should you take to invest in 529 plans?

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Katie Vercio is a 529 expert and a wealth consultant at Evergreen Wealth Consultant. She recommends that parents take a cautious approach to investing in these plans if their child is entering college soon.

“If a child is in high school, I would recommend taking a conservative track. If a child is starting school in fall 2019, it may be a good idea to switch to a cash or (a certificate of deposit) option,” said Vercio.

Emily S. Boothroyd is a private wealth advisor at Price Financial Group. She advises parents to invest for their financial future first before investing in 529 plans for their children.

“For younger parents or those who are focused on their own financial planning, please use the oxygen mask analogy when thinking of your kids: Help yourself first, then them,” Boothroyd says.

“If you have credit card debt, you probably should not be adding to a 529. If your retirement isn’t on track, you probably shouldn’t be adding to a 529,” added Boothroyd.

When you’re starting to learn how to start investing to save for your kids’ future, 529 plans can be a prudent choice.

Where can you practice how to start investing?

If you want to practice trading stocks before investing real money, TradingSim is a great place to start. You can practice buying and trading stocks by simulating trades on TradingSim. By simulating trades with your account, you can learn risk-free about how to start investing.

What else can you invest in when you learn how to start investing?

In addition to stocks, you can invest in other assets as well. You can invest in mutual funds, ETF’s, or foreign currency exchange(forex) as well. Many of them can be purchased through online brokers.

Mutual funds are low-risk investing options

Mutual funds are a collective investment fund that combines money from different investors to buy hundreds of stocks. Because they’re considered low-risk investments, they’re usually included in 401k retirement accounts.

Index funds are mutual funds that match the stocks that comprise stocks that are usually in the S&P 500. Warren Buffett is a legendary investor that became a billionaire through his shrewd investments. Because he usually makes low-cost investments, he advocates for investors to pick index funds.

Warren Buffett
Warren Buffett is an expert in advising people learning how to start investing

“Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net result [after fees and expenses] delivered by the great majority of investment professionals,” said Buffett.

Mutual funds and index funds are low-cost, low-risk options for people who want to know how to start investing.

Bonds are a stable option for learning how to start investing

Bonds are another asset that you can invest in as well. While stocks mean you own part of a company, bonds mean that a company owes you a debt.

When a corporation or government wants to fund a project, they issue bonds. Bonds are issued by corporations and the U.S. government to fund projects. When they issue bonds, they’re essentially IOUs to investors. The corporation or government promises to pay off the debt with interest within a certain amount of time at a fixed interest rate.

For instance, if you buy a company’s bond for one-year at $10,000 at 5% interest, you have a fixed-rate coupon bond that pays the same rate over time. After a year, you would get $500 in interest from the bond.

Throughout history, U.S. government bonds have a record of strong returns. Saturna Capital portfolio manager Bryce Fegley said that U.S. government bonds were issued to investors and had strong value.

“During the Great Depression, U.S. government bonds were among the only investments that retained their value as the government was one of the only institutions that could be trusted to make payments in a hostile economic environment,” said Fegley.

Diversification of investment is key

When you start investing, you may want to just focus on one stock that you’re familiar with to play it safe. However, having a wide range of stocks can be a better way to increase profits. When you own a lot of different stocks and other assets, you have a diversified portfolio.

Josh Barrickman is a senior portfolio manager at investment firm Vanguard. When he advises investors, he says that holding many different stocks and bonds can help increase profits in the long run.

“By potentially holding hundreds – sometimes thousands – of bonds in a single fund, you get more diversification than you would (by) buying individual bonds,” said Barrickman.

If one industry is underperforming, diversification in other stocks and bonds can help. If you have stocks in the airline industry and they tumble during the COVID-19 era, you can recover. When you have investments in better-performing industries like tech, you can keep your portfolio healthy and increase profits.

ETFs can be a good option if you’re learning how to start investing

In addition to bonds, ETF’s (exchange-traded funds) are a good option if you want to learn how to start investing. Exchange-traded funds are a basket of stocks and bonds for investors to pick.

While ETFs sound similar to mutual funds, there are differences. ETF’s tend to track an index like the S&P 500. Jay Jacobs is senior vice president and head of research and strategy at Global X ETF.

Schwab ETF is a popular choice for people who are learning how to start investing

He says that investors should invest in tech ETFs if they’re learning how to start investing. His ETF contains stocks like Zoom(NASDAQ:ZM) and Netflix (NASDAQ:NFLX). Jacobs noted that many people use cloud computing stocks are a good choice to invest in as part of an ETF.

Zoom stock
Zoom stock is part of many tech ETFs

“These are companies that we can’t survive without, whether it’s video conferencing, whether it’s chat functions, whether it’s accessing data and being able to do remote work. Cloud computing technologies are at the very center of every part of our daily lives, and they’re proving it,” said Jacobs.

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“These are very valuable companies that are just really beginning to take off for what we think is a long-term structural trend,” added Jacobs.

Forex is an international option if you want to know how to start investing

If you want to explore investing outside of the U.S. stock market, forex or foreign exchange trading is an option. Forex or FX trading involves trading different currencies. For example, the U.S. dollar is traded against another currency, like the Japanese yen. If the American currency rises and the yen falls, an investor can make a profit.

Robert Johnson is professor of finance at Creighton University’s Heider College of Business. He explains FX trading to people learning how to invest.

“The FX market does not set a currency’s absolute value but rather determines the value of one currency relative to another. You can take a position in virtually any major currency against another major currency in the FX market,” said Johnson.

Sergey Savastiouk, CEO of Tickeron, a market intelligence platform that assist users with portfolio and trading decisions on assets like foreign currency. He says that forex trading can be safe if investors choose a reputable firm like IG or Forex.com.

“Forex trading is safe if you properly select a brokerage account and firm,” said Savastouk.

Forex trading requires patience and extra funds

While forex trading can be exciting, people learning how to start investing should exercise caution. Even forex trading firms warn that investors can lose 70% of their funds in forex trading. Johnson notes that there are different aspects to forex trading. While stock values can rise over time, there isn’t the same growth with foreign currency.

“Investing in currencies, whether traditional currencies or cryptocurrencies, is fundamentally different than investing in stocks, bonds or real estate. “Over the long term, investing in the stock market is a positive-sum game,” said Johnson.

“Over both the short and long term, investing in currencies is a zero-sum game,” Johnson says. “When the U.S. dollar strengthens versus the yen, those holding U.S. dollar positions win and those holding yen positions lose an equal and opposite amount.”

Forex trading can be a good start to learn how to start investing. However, you need a lot of capital to start and a lot of patience.

How do you invest in real estate when you start learning how to start investing?

In addition to forex, you can invest in real estate. If you invest in real estate, you can invest in real estate investment trusts or REIT’s. These trusts are owned by companies that own assets like buildings and warehouses. Public Storage( NYSE: PSA) is an example of a REIT because the company owns several storage warehouses. Investing in REITs is a way to generate passive income from real estate.

Public Storage is a popular REIT to invest in

Investments in REITS can be lucrative, according to David Lebovitz, global market strategist at JPMorgan Asset Management.

“We believe it is about combining REITs and direct real estate, particularly given that REITs provide greater exposure to more forward-looking sectors,” he said.

“We still see value in direct real estate as a source of income, and more broadly, as a portfolio diversifier,” added Lebovitz.

Investing in real estate can be lucrative for people learning how to invest

In addition to REIT stocks, people learning how to invest can choose commercial real estate. With research and a lot of capital, you should find the best mortgage lender, lawyer, and other support to start buying real estate. With low interest rates, purchasing real estate is easier if you want to start learning how to invest.

You can also act as a loan processor and focus on making commissions on loans you originate.

Now this is not passive income like stocks or rental incomes, but another investment stream.

How is the real estate industry for people learning how to invest?

While there is a decline in house sales, the housing market is poised to rebound. Dhruv Arora, CEO of digital wealth manager Syfe, said the real estate market is resilient.

“In most historic recessions, the property market has either remained largely resilient or was only impacted across certain real estate sectors,” noted Arova.

In Australia, Trent Wilshire, an economist at the Australian property site Domain, notes that the economy restarting will help real estate.

“Transactions will start rising again in coming weeks but are still likely to be sluggish compared to late 2019/early 2020.“We’re already seeing a pick-up in recent weeks, with new ‘for sale’ listings rising the past few weeks and rising inquiries on Domain from potential buyers,” said Wilshire.

Where should you invest in the real estate market?

In addition to the real estate market overall, investors should look at the best locations. Kristina McPherson, a real estate agent at The Corcoran Group in Palm Beach, Florida, notes that the key to investing in real estate is location, location, location.

“You can look at all of that information and make a determination on which specific city in a state that you want to invest in,” said McPherson.

“It really varies on the specific location,” she says. “If you’re two blocks off the intercoastal [waterway] here, it’s suddenly a different price than if you’re right on the intercoastal,” added McPherson.

Vered Raviv-Schwarz is a chief operating officer of Guesty, a technology platform in the vacation rental market. She wants investors in real estate to consider the type of property they want to buy and how long they want to rent the property.

“If you buy a property in a ski resort, is it also available for summer holidays like hiking trips in the area? “If so, then you’re also likely to have occupancy in the summer months, too. When “it’s near a major city, long-term rentals may make sense,” said Vered Raviv-Schwartz.

Real estate experts like Noah Rosenfarb, the founder of Florida-based Freedom Family Office notes that investors need a lot of capital to invest in real estate. The amount of capital needed depends on how much rent you want to charge tenants.

“If the rent is $1,000 a month, then you should pay $100,000,” he says. “If you’re going to buy a condo for $250,000, you should hope that the monthly rent is $2,500. When ” it’s only $1,800 you’re going to have a tough time servicing the debt, paying maintenance, covering the taxes and so on.”

What do financial experts want to tell people who want to learn how to start investing?

Christine Benz is the director of personal finance for Morningstar, an investment research firm. She noted that individual stocks may not be the best first choice when you’re learning how to start investing.

“I’ll say it: Individual stocks are terrible investments for people just starting out,” said Benz.“[W]e[ Morningstar] haven’t talked enough about how poorly many small investors are apt to do with individual-stock purchases, especially if they’re just learning.”

How can you save and invest?

If you’re insure how much to invest, you can start with small amounts, even as little as $100. Josh Simpson is an investment advisor representative with Lake Advisory Group. He says that his clients started investing with very little money.

“Some of the wealthiest clients that I have started off investing small amounts of money when they could,” Simpson says.

Christine Benz is the director of personal finance for investment research firm Morningstar. She advocates for people learning how to invest to still save a significant amount of their income.

“Unfortunately the key to financial success is incredibly mundane — it’s disciplined savings,” she says. “Your savings rate is, by far, going to be the biggest determinant of how you do financially over time.”

starbucks stock
Starbucks stock is a good choice if you want to learn how to start investing

Benz also wants investors to diversify their portfolios.

“I think it makes sense for young folks to have more of a globally diversified equity portfolio,” Benz says. “You can buy a total world stock index fund — one fund that gives you exposure to every economy on the planet, practically.”

Learning how to invest can pay off with patience and education

Unless you are like Jordan Belfort who clearly can make money legally just as easily as he did illegally, you will need to have a long-term game plan.

When investors are learning how to invest, there are many options. With research from simulating trades on TradingSim, expendable capital, and a lot of patience, any can learn how to start investing to build their financial futures.

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Ella Vincent Editor
Ella Vincent has been a financial writer for years. She attended the University of Illinois at Chicago, where she studied both journalism and finance. Ella has written for renowned finance site Motley Fool where she offered stock analysis to investors. She also covered the US stock market for IG Group, a UK-based stock and foreign currency trading corporation. She became interested in the stock market ever since she saw financial advisor Mellody Hobson. In her spare time, Ella likes to attend concerts and watch basketball with family and friends. Follow her @bookgirlchicago.

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