Planning to invest in stocks or enter the stock market but do not know how and where to begin? This article lists and explains the steps in investing in stocks for beginners.
Step-By-Step Guide to Investing in Stocks
Step 1. Know Your Financial Goals and Objectives
Before you invest in stocks or even in other financial instruments and financial markets, you should know why you are investing. Ask yourself the following questions:
• Why am I investing? What am I planning to do with my earnings? It is first important to understand your personal reason why you are investing. Stock investing can bring numerous benefits but also it addresses specific financial goals and objectives. Are you investing for extra income? Or do you want to preserve your wealth? Are you investing for retirement or for the education of your children?
• How much should I be investing? How frequent should I invest? Determining how much you are planning to invest involves revisiting your savings and regular budget. You should also decide whether you will be investing in stocks via a one-time placement or if you want to do it in small amounts but more frequently.
• What is my risk profile? How much risk am I willing to take? There are three major risk profiles: conservative investor, moderate investor, and aggressive investor. Which one are you? Investing in stocks is usually suited for those with a higher risk tolerance or those who have a moderate to aggressive risk profile. Determining this involves understanding how much money you can afford to lose and the timeframe you have set to achieve your investment goals and objectives.
• How long I am planning to hold on to my investment? Your financial goals and objectives should always have a timeline. Are investing for the short-term or are you in for the long haul? Purchasing stocks either from private or public companies can have a medium-term to a longer-term timeframe of 10 to 30 years.
Step 2. Choose Between Active Investing and Passive Investing
You can also choose between two general approaches to investing: active investing and passive investing. Note that you can also do both. Active investing generally involves purchasing stocks directly from a stockbroker while passive investing involves investing your money via a fund manager. Take note of the following:
• Active Investing: This involves purchasing stocks directly from an intermediary or a stockbroker. It also requires a hands-on approach because you will need to find a broker and select which companies and stocks you want to invest in. You also need to design your own portfolio of stocks and understand the right time to buy and sell.
However, you can also hire a portfolio manager or a financial advisor to guide you through your different investment decisions. This is also sometimes called direct investing or do-it-yourself investing.
Investing in pooled fund that are actively managed by professional fund managers is also a form of active investing. The goal of these funds is to outperform passively managed funds such as stock market indices.
• Passive Investing: This involves investing in a basket of funds or pooled funds such as the index funds or mixed funds of mutual funds, exchange-traded funds or ETFs, unit investment trust funds or UITFs, and even variable universal life insurance. Pooled funds are also referred to as investment funds or professionally managed funds.
Note that pooled funds can be actively or passively managed by professional fund managers. Examples of passively managed funds as far as stock investing is concerned include index funds of mutual funds and UITFs.
Passive investing does not require a hands-on approach to investing. It simply requires you to find and transact with a fund management or financial services firm offering investment funds. This firm pools money from other investors and manages your investment on your behalf.
Both active investing and passive investing have their respective advantages and disadvantages. It is also important to note that direct stock investing involves more specific options, especially when it comes to choosing a broker.
The easiest way to invest directly in stocks is to find a brokerage firm with an online platform or an online broker. This entails creating an account, funding this account via bank transfers or online payment facilities, and selecting which companies to invest in.
Some brokerage firms have human financial advisors while most have both human advisors and so-called robo-advisors. Both can help you decide which companies or stocks to choose from and assist you with designing your stocks portfolio. Each has its own advantages and disadvantages. For example, robo-advisors are cheaper than human advisors.
Investing passively in stocks can also have more specific options due to the existence of different financial services firms and different types of pooled fund products. It is important to understand the differences between mutual funds, ETFs, and UITFs, among others.
The choice between active investing and passive investing, especially when it comes to stock investing, all boils down to understanding the pros and cons of purchasing and investing in stocks directly or purchasing stocks passively by investing in funds, as well as in choosing between a stockbroker or a professional fund manager.
Step 3. Learn the Different Types of Stocks and Funds
Learning how to invest in stocks also involves learning the different types of stocks and/or investment funds, especially their respective features and applications. You cannot just choose a particular stock or an investment fund to invest in. All of your investment decisions should be aligned with your financial goals and objectives.
Hence, when choosing stocks and/or funds, it is imperative to revisit your purpose. Why are you investing? How much do you want to invest? What is your risk profile? When should you reap the benefits of your investments?
There are different types and categories of stocks. Take note of the following:
• Common Stocks vs. Preferred Stocks: A common stock represents partial ownership of a company and grants the common shareholder the right to receive a certain amount of money in case of company dissolution. A preferred stock grants a preferred shareholder the right to receive dividend payments and preference to receive certain repayments in case of company dissolution before common shareholders.
• Large-Cap, Mid-Cap, Small-Cap Stocks: Stocks are also categorized based on market capitalization or the total worth of all of the shares of a particular company. Large-cap stocks are considered lower-risk investments when compared to mid-cap and small-cap stocks. However, both mid-cap and small-cap stocks have better growth potential and possible returns, thus making them riskier.
• Growth vs. Value Stocks: Both growth stocks and value stocks are other categories of stocks based on growth investing and value investing. Growth stocks are more expensive and riskier but have higher and faster growth potentials while value stocks are less expensive and relatively less risky albeit with slower growth potential.
Stocks can also be categorized in terms of the industries or sectors in which the companies operate. Tech stocks include tech companies such as Apple, Microsoft, Amazon, and Samsung. Financial stocks include banks and financial services companies. Energy stocks include all companies involved in energy production and distribution such as oil and gas companies or electricity distributors.
There are also different types of funds that invest in stocks. Take note of the following:
• Funds By Product: Mutual funds, exchange-traded funds, unit investment trust funds, private equity funds, and variable universal life are actually pooled fund products. Most companies offer either one or two while some offer one. These products have different variations with one variation focusing on pooling funds for investing in stocks or more specifically, for investing in equities.
• Equity Funds: The aforesaid pooled fund products typically include different variations of equity funds. These include index funds, which is based on a stock market index, mixed fund, which include a mix of equities and other securities such as bonds and money markets, as well specialized equity funds such as global equity funds, tech funds, emerging equity funds, among others.
• Feeder Fund: A feeder fund is another specialized type of investment fund which does almost all of its investments through a master fund via a master-feeder investment structure. For example, an equity feeder fund of a variable universal life insurance product might simply be a fund linked to the master equity fund of a mutual fund or a unit investment trust fund product.