Investing in stocks is the first step toward learning how to invest. Historically, equity investments have produced higher returns than other assets, making them a powerful tool for those wishing to grow their wealth.
When you invest in stocks, you buy shares of a publicly-traded company. Those shares are the company’s stock, and by investing in them, you hope the company will grow and perform well over time. In that event, your shares may become more valuable, and other investors may be willing to purchase them for a higher price than you paid. If you decide to sell them, you could make a profit.
Different Ways to Invest in Stocks
Investing in stocks can be done in several ways. Choosing how to buy stocks depends on your investment goals and how actively involved you want to be in managing your portfolio. You can choose from any of the following strategies or use all three.
1. Purchase individual stocks:
Investing in individual stocks will be excellent if you enjoy researching and reading about markets and companies. Despite the high share prices of some companies, you can consider purchasing fractional shares if you are starting with only a limited amount of funds.
2. Purchase stocks through exchange-traded funds (ETFs):
Exchange-traded funds (ETFs) include many individual stocks tied to an underlying index. It is similar to holding stocks from various companies within a particular sector or representing a specific index, such as the S&P 500. As with stocks, ETF shares are traded on exchanges, but they provide greater diversification than individual stocks.
3. Purchase stock mutual funds:
Although mutual and exchange-traded funds have similarities, they also have significant differences. The managers of actively managed mutual funds make stock selections to beat a benchmark index. The profits you receive from investing in stock mutual funds come from dividends, interest income, and capital gains.
How To Buy Stocks?
There are various accounts and platforms available for you to purchase stocks. The easiest way is through an online brokerage or by hiring a financial advisor or robot advisor to buy them on your behalf.
✅ Open an online brokerage account
With some basic investing knowledge, you can open a brokerage account online and purchase stocks. With a brokerage account, you have control over the selection and purchase of stocks.
✅ Hire a financial advisor
Consider hiring a financial advisor if you prefer more guidance and advice when buying stocks. In addition to helping you specify your financial objectives, a financial advisor purchases and manages your investments, including the purchase of stocks. Financial advisors generally charge a fee, which can be a flat annual fee, a fee for each transaction, or a percentage of the assets they manage.
✅ Choose a Robo-advisor
Using Robo-advisors is a simple, affordable method of investing in stocks. Robo-advisors typically invest your money in ETF portfolios, buying assets and managing portfolios on your behalf. Although they are generally less expensive than financial advisors, you rarely get the chance to speak with an individual who can answer questions and give advice.
✅ Use a direct stock purchase plan
For those who prefer to invest in just a few stocks, many blue-chip companies offer plans that allow you to purchase their shares directly. Some programs provide commission-free trades but may charge additional fees when selling or transferring your shares.
✅ Use retirement accounts
The most common retirement accounts are 401(k) and individual retirement accounts (IRAs). These accounts provide tax advantages that encourage you to save for retirement but also have annual contribution limits. The former is offered only through an employer, whereas anyone can open an IRA through an online brokerage or a robot advisor.
Manage Your Stock Portfolio
The daily fluctuations in your portfolio will not deteriorate its health. However, you will need to monitor your stocks or other investment portfolios from time to time.
When purchasing mutual funds and individual stocks, you should periodically review your portfolio to ensure that it is aligned with your investment objectives.
If you are approaching retirement, you should consider shifting some of your stock investments into more conservative fixed-income investments. When your portfolio is too heavily weighted toward one sector or industry, consider investing in stocks or funds from a different sector to increase diversification. It would help if you also thought of geographic diversification. According to Vanguard, as much as 40% of your portfolio should be comprised of international stocks. To achieve this exposure, you can purchase international stock mutual funds.
Michael Choi is a senior lawyer based in Hong Kong whose background includes international trade and trade financing. Over his career, he has assisted numerous international corporate clients in raising capital and increasing their funding levels. Michael has also provided free legal advice to the public in Hong Kong since 2011 to assist those who cannot afford to pay the legal fee.