Investing is a way to keep money busy with life and that money works for you so that you can fully reap the rewards of your labor in the future. Investment is a means to a happy ending. Veteran investor Warren Buffett has defined investment as "... the process of withdrawing money" to get more money in the future. The investment aims to make your money work in hopes of one or more types of investment vehicles. Your money is increasing over time.
 |
| Investing In Stocks |
Let's say you have $ 1,000 set aside, and you are ready to enter the world of investment. Or maybe you only have $ 10 extra a week, and you want to invest. In this article, we will walk you through how to get started as an investor and show you how to maximize your returns while minimizing your costs.
key takeaways:
(i) Investment is defined as money or capital for an effort, with the expectation of gaining additional income or profit.
(ii) Unlike consumption, investing earmark money for the future, it expects it to grow over time.
(iii) However, investment also comes with a risk of loss.
(iv) Investing in the stock market is the most common way for beginners to gain investment experience.
What Kind of Investor Are You?
Before you make your money, you have to answer the question of what kind of investor am I? When opening a brokerage account, online brokers like Charles Schwab or Fidelity will ask you about your investment goals and how much risk you want to take.
Some investors want to take an active hand to manage the growth of their money, and some like to "set it and forget it." More "traditional" online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.
Online broker
Brokers are either full-service or exempt. Full-service brokers, as the name suggests, offer a full range of traditional brokerage services, including everything related to retirement, financial advice for health care, and money. They typically only deal with high-net-worth customers, and they may charge a substantial fee, including a percentage of your fees, a percentage of the property you manage, and sometimes an annual membership fee. It is common to see a minimum account size of $ 25,000 and in full-service brokerages. Nevertheless, traditional brokers justify their high fees by advising on your needs.
Discount brokers used to be the exception to this, but now they are the norm. Discount online brokers give you the tools to select and place your transactions, and many of them also offer a set-it-and-forget-it-Robo-advisory service. As the financial services space has moved into the 21st century, online brokers have added more features including educational content to their sites and mobile applications.
Also, although there are many discount brokers with very few (or very few) minimum deposit restrictions, you may face other restrictions, and some accounts do not charge a minimum deposit fee. This is something that an investor should keep in mind if they want to invest in stocks.
Robo-Advisor
Following the 2008 financial crisis, a new breed of investment advisor was born: Robo-advisor. John Stein and Eli Browerman of Betterment are often credited as the first in space. Their mission was to use technology to lower costs and streamline investment advice for investors.
Ever since Betterment has been introduced, other Robo-first companies have been established, and even online brokers such as Charles Schwab have added advisory services such as Robo. According to a report by Charles Schwab, 58% of Americans say they will use some sort of Robo-advice by 2025.3. If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, then a Robo-Advisor for you. And as the success of index investing has shown, if your goal is long-term wealth creation, you can do better with a Robo-advisor.
Investing through your employer
If you are on a tight budget, try to invest just 1% of your salary in a retirement plan available at work. The truth is, you probably won't even leave a contribution.
Work-based retirement plans deduct your contribution from your pay before taxes are calculated, which will make the contribution even less painful. Once you are comfortable with the 1% contribution, perhaps you can increase it as soon as you raise the annual. You will not miss the possibility of additional contributions. If you have a 401 (k) retirement account at work, you can already allocate mutual funds and even your own stock in your future.
Minimum to open an account
Many financial institutions have minimum deposit requirements. In other words, they will not accept your account application unless you deposit a certain amount. Some firms will not allow you to open an account with an amount as high as $ 1,000.
It pays to check our broker reviews before shopping around something and deciding where you want to open an account. We list the minimum deposit at the top of each review. Some firms do not require a minimum deposit amount. If you balance above a certain threshold, other costs such as trading costs and account management fees can often be reduced. Still, others may offer a certain number of commission-free trades to open an account.
Commission and fees
As economists say, there is no free lunch. Although recently many brokers have been running to reduce or eliminate commissions on trades, and ETFs offer to invest all those who can trade with a bare-bones brokerage account, all brokers need one from their clients Or have to earn money in another way.
In most cases, your broker buys a commission each time that you are buying stock, either buying or selling. Trading fees range from the lower end of $ 2 per trade but maybe as high as $ 10 for some discount brokers. Some brokers do not charge any trade commission, but they try for it in other ways. There are no charitable organizations running brokerage services.
Depending on how often you trade, these fees can add to and affect your profit. If you often invest in stocks with a small amount of money available to invest, investing in stocks can be very expensive.
Remember, trade is an order to buy or sell shares in a company. If you want to buy five different stocks at the same time, this is seen as five different trades, and you will be charged for each.
Now, imagine that you decide to buy the shares of those five companies with your $ 1,000. To do this, you will spend $ 50 in trading costs - assuming the fee is $ 10 - equal to 5% of your $ 1,000. If you invest $ 1,000 in full, your account will be reduced to $ 950 after trading costs. This represents a 5% loss before your investment even has a chance to earn.
Should you sell these five shares, you will pay the cost of the trades once again, which will be $ 50. You will have to spend $ 1,000 to make a round trip (buy and sell) on these five shares, or 10% of your $ 1,000 initial deposit. If your investment has not earned enough to cover it, then you have lost money just by entering and exiting positions.
Mutual Fund Load (Fee)
Apart from trading fees for purchasing mutual funds, there are other costs associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in a focused manner, such as large-cap US stocks.
An investor will pay several fees for investing in a mutual fund. One of the most important fees to consider is the management expense ratio (MER), which is charged by the management team each year based on the number of assets in the fund. The MER ranges from 0.05% to 0.7% annually and depends on the type of fund. But the higher the MER, the more it affects the overall return of the fund.
When you buy a mutual fund you may incur several sales fees, which are called loads. There are some front-end loads, but you will also see no-load and back-end load funds. Make sure you understand whether the fund you are considering will have to bear the sales load before purchasing. If you want to avoid these additional charges, check your broker's list of no-load funds and no-transaction-fee funds.
In the context of the initial investor, the mutual fund fee is actually an advantage relative to the commission on the shares. The reason for this is that the fees are the same regardless of the amount you invest. So, as long as you meet the minimum requirement to open an account, you can invest $ 50 or $ 100 per month in a mutual fund. The term is called dollar-cost averaging (DCA) and can be a great way to start investing.
Diversify and reduce risk
Variety in investment is considered a free food. In short, by investing in a range of assets, you reduce the risk of performing an investment that severely damages your overall investment return. You can think of it as financial jargon for "don't put all your eggs in one basket."
In terms of diversification, the greatest amount of difficulty in doing so would come from investing in shares. As mentioned earlier, the cost of investing in a large number of shares can be harmful to the portfolio. With a $ 1,000 deposit, it is almost impossible to have a well-diversified portfolio, so keep in mind that you may need to invest in one or two companies (at most) to get started. This will increase your risk.
This is where the major benefit of a mutual fund or exchange-traded fund (ETF) comes into focus. Both types of securities have a large number of stocks and other investments within the fund, which makes them more diversified than single stocks.
Bottom-line
If you are starting out with a little money, then it is possible to invest. It is more complicated than just choosing the right investment (a feat that is quite difficult in itself) and you as a new investor should be aware of the restrictions.
You have to do your homework to find the minimum deposit requirements and then compare the commission with other brokers. Chances are you won't be able to buy individual shares cost-effectively and still be diversified with a little bit of money. You also have to choose which broker you want to open an account with.
