So you’re ready to start investing, but you don’t know where to start. Don’t worry, we’ve got you covered.
Let’s first start by answering some common questions.
What is a stock?
A stock, also known as a share, represents a small piece of ownership in a company.
Each person who owns a share of stock is called a shareholder or stockholder.
You may also hear stocks referred to as securities.
What is the stock market?
The stock market is the entire collection of buyers and sellers of stocks, or shares of publicly traded companies.
Once you own stocks, you’re included in this collection. Brokers, 401k’s, pension funds, and even governments are also included, since they all buy and sell stocks.
The stock market also includes many different stock exchanges, or places where people can meet to buy and sell stocks. Most stock exchanges these days are not physical locations, but rather the buying and selling occurs electronically. The New York Stock Exchange (NYSE) and NASDAQ are examples of stock exchanges.
If you combine all the stock exchanges, and all the buyers and sellers, you have a stock market.
How much money do I need to start investing?
This really depends on you and your individual circumstances. Generally speaking, you can start investing with as little as a few hundred dollars. Many start with $1,000, $500, or even just $100.
We would recommend only starting with money you can afford to lose. So don’t drain your entire savings account to invest with. You’ll want to start with your “extra” money for a few reasons:
- stocks are not guaranteed to go up in price
- stock markets in general will go up over time, but sometimes that can take a very long time
- companies go out of business all the time
- individual stocks may be “de-listed” from the stock market, meaning their stock is now worthless
What stocks should I buy first?
We recommend not buying anything until you understand the risks involved, the process of how stock trading works, and only after you have researched your possible investments.
For most people - and especially people new to investing - you’ll almost never want or need to buy stocks in individual companies, due to the high risk involved.
A great way to reduce risk through diversifying your holdings. One easy way to diversify is through mutual funds and exchange-traded funds (ETFs). Mutual funds and ETFs represent a basket of many stocks owned of many different companies.
You can think of mutual funds and ETFs like a pizza. The entire pizza is the mutual fund or ETF, and each slice of pizza represents the stocks the fund owns of a single company. But mutual funds and ETfs have many, many slices of pizza.
By having this variety, mutual funds and ETFs reduce risk to their shareholders, because one single company in their basket can fail, but they have many other shares in many other companies to cover that risk.
Some mutual funds and ETFs track stock exchanges or even the entire stock market. These are called index funds and are meant to track an index, such as the S&P 500, Dow Jones, or NASDAQ 100 indexes. There are also mutual funds and ETFs designed to hold specific industries, such as technology, financial, or healthcare funds.
People new to investing would be wise to take a look at the ETFs and mutual funds they have available to them - and more specifically index funds - as these funds will generally give them a good variety of holdings which cover different industries and market sectors. Basically they have diversification and risk management built in.