Are you trying to figure out how to get started in the stock market?
There are a couple of options open to you if you want to begin investing in stocks; however, before you start, you should take some time to understand the choices available to you.
Ask yourself why you want to invest in the stock market? Some long-term investors believe that day trading is more like gambling and not a valid form of investing. In contrast, some day traders don’t like holding onto one particular stock for more than five years to wait for returns to compound, and some traders close their positions in stock in a matter of days.
Both types of investing have definite advantages and disadvantages, though I do not advocate anything except a long-term strategy. If you’re researching how to get started in the stock market, it’s important to choose the investment strategy that suits you before you begin.
Step One: Register, an account with a stockbroker. It’s important to find a stockbroker that suits your particular trading style. You may also want to check the minimum account deposit, as the amount will vary between brokers. Some brokers offer discounted fees for traders who trade regularly. Fees for investors who only buy and sell infrequently may be higher fees, but they’re charged less often as they’re willing to build a stable, diversified portfolio over time. In today’s highly competitive market, most online brokers charge no fees and have no account minimums but have higher bid-ask spreads to make their share of the profits.
Investment apps like Acorns and Robinhood make investing easy to start. I would advise you to go with an online broker such as Charles Schwab, who not only has no fees but does offer some good benefits such as basic Morningstar analysis.
Step Two: Consider whether you’ll be investing using gearing in the form of a margin loan or not. If you have the knowledge and experience to increase the value of your trades using a margin loan, you may need to find a broker that will integrate a margin lending account with your trading platform. Gearing can help some investors compound their profits; however, gearing can also magnify any losses in the wrong hands. I do not advocate the use of margin in any circumstances because it is never wise to invest with borrowed funds.
Step Three: Decide whether a long-term investing strategy or day trading activity suits your investing plans better. Long-term stock market investors understand that dividends often make up a healthy portion of the return on their investment dollars. At the same time, day traders know their profit comes from the pricing difference between what they paid and what they sold for. As a financial advisor, I must make a side comment; dividends are generally taxed at a more favorable rate than short-term capital gains, which is at your top income tax bracket.
Step Four: Research which stocks you want to add to your portfolio. Read books or financial magazines to get an idea of how to choose stocks that will make a good addition to your portfolio. Understand how the analytical data and pricing charts work and learn how to use them to your advantage. I can honestly recommend the books of Jeremy Siegel and, of course, one of Warren Buffett’s all-time favorites The Intelligent Investor.
Step Five: If you’ve decided to invest in a diversified portfolio over the long term, consider how you want your dividends paid. Some investors prefer to receive a check in the mail and spend their dividend income how they choose, and other investors choose to reinvest the dividend to compound their returns.
Most companies offer the option of dividend reinvestment in stock allocation. Instead of receiving your dividend payment in cash, you receive stocks with the same value added to your account. Dividend reinvestment can help you grow a stock portfolio as you’re not paying broker’s fees on the transaction, and you’re increasing the number of shares you own in that company each time a dividend payment is made.
If you have additional questions or need more information, contact me directly if you are in or near the Metro-Nashville area or do not mind a virtual working relationship. For those outside Tennesse or who would like someone closer, seek out a qualified fee-only Registered Financial Consultant (RFC).
