New Investor? Here’s How to Get Started
Are you new to investing and don’t know where to get started? No problem!
This blog will make it simple to get started. You’ll master stonks in no time.
I broke down the 3 main steps we’re going to take, and you can use the links on the right to jump to those sections.
Let’s get started!
Open a Brokerage Account
A Brokerage Account can be used to buy and sell stocks and other securities.
It gets its name from the term broker, which refers to a person who buys or sells goods and assets for another person. A brokerage company, usually a bank of some kind, will make trades on your behalf. Basically, if you want to buy a share of, say, Microsoft (MSFT), then your brokerage company will find someone selling a MSFT share. They’ll collect the money from you, deliver it to the seller, and return the share of stock to your brokerage account.
How much does this service cost?
In my first brokerage account, each trade cost $8.95. Since I only had a couple hundred dollars to invest, I really needed to choose wisely and be in it for the long haul! I later upgraded to an account that only charged $4.95 per trade.
However, you don’t have to worry about this anymore! Most brokerage accounts now offer commission-free trading.
At least *cough* Robinhood *cough* changed the competitive landscape of brokerage services before they decided to screw over retail traders.
Here are a handful of banks offering brokerage services with commision-free trading. The links go straight to a page to open a brokerage account. (These aren’t sponsored links, just want to make it easy for you.)
If you currently bank with an institution that also offers a brokerage account, I highly recommend using theirs. It’s convenient to have everything accessible in the same place, and you can more quickly transfer money into or out of you brokerage accounts (intra-institution transfers are usually instant).
By the way, you can also use all of this same knowledge in an Independent Retirement Account (IRA).
As I mentioned above, if your brokerage account is at your current bank, this will be really simple. If it’s at another institution, you’ll need to go through the steps to link your accounts together before you can transfer money between them.
How much money should I transfer?
This is entirely up to you. Here are a couple tips to decide:
- If you’re brand new to investing and just want to learn the ins and outs then start with something small, such as the amount of extra money you have left at the end of the month.
- If you have some savings already set aside, you can take a portion of that. Maybe a couple thousand dollars.
- If you feel ready to jump in and start investing more regularly, consider setting up a monthly transfer.
Note, money in your brokerage account can remain as cash. You don’t have to invest it, and you can transfer cash out at any time.
One last thing I’ll say here, is don’t use money you can’t afford to lose. Make sure you have an emergency fund set up. This will help you make smart investing decisions because you know you got yourself covered in case there’s some market volatility.
Choosing Your Investments
This is the fun part! We’ll start by breaking down the types of investments you can choose from.
I mentioned the term securities above. A security is a fungible, negotiable financial instrument that holds some type of monetary value. Common examples include:
- Treasury Notes
- Mutual Funds
- Index Funds
- Exchange-Traded Funds (ETFs)
- Real Estate Investment Trusts (REITs)
Each of these types of securities come with different advantages and disadvantages, risks and rewards.
Since we’re learning, I recommend trying to invest in all of the above. You can usually buy single shares of a lot of securities, and if your account provides commission-free trading you can try small transactions without racking up a bunch of fees.
How do I decide what to invest in?
The goal is to learn, and I think the best way to learn is by doing. Sure, I could write a 40,000-word blog post explaining every last detail, but I’d rather teach you to fish.
So here’s what you want to consider:
- Past Performance
- Expected Future Performance
The above is a high-level list, but I’ll break it down some more for particular types of securities.
What To Look For With Bonds and Treasury Notes
These types of securities are referred to as fixed-income securities. That means they provide a fixed return for a fixed period of time.
For example, the US 10-Year Treasury Note provides a 1.612% return (at time of writing), and the note matures after 10 years (obviously). This makes it simple to know exactly how much money this investment would earn for you, whereas a stock may be up X% one year and down Y% the next.
When it comes to fixed-income securities, you want to take into account the credit worthiness of the issuer to assess the risk of that investment. In other words, when the note or bond matures, how likely is the issuer to actually pay you the amount of the note?
Typically, notes and bonds issued from the US Government are considered low-risk (hence they also offer pretty low returns). Though, who knows these days with all the debt ceiling drama going on. Then again, I’m sure they could just fire up the money printer and find a way to pay you back :p
There are some tax advantages that can be had with fixed-income securities too! For example, municipal bonds, which are issued by a local government, are typically exempt from Federal and state taxes.
What To Look For With Stocks
Stocks can be a little trickier to analyze because there’s a lot of variability.
Then, of course, there’s a more subjective measure of what their expected future performance is. This is much harder to quantify.
A great example is Tesla (TSLA). Right now, Tesla stock is on fire (and that’s probably an understatement). Does that mean Tesla is a good stock to buy? Let’s break it down.
Tesla’s market capitalization (at time of writing) is $785.69 Billion. Yes, with a B. This is larger than the market caps of the next 7 largest auto manufacturers combined, including Toyota and General Motors.
In 2020, Tesla sold 499,535 vehicles. The next 7 largest companies combined for 30 million vehicles sold.
So, according to the stock market, Tesla is just as valuable as the next 7 largest auto manufacturers that sell 60x more vehicles.
This is where the subjective measure comes in. A lot of people expect Tesla to overtake and dominate the vehicle market in the coming years, and that’s currently reflected in the stock price.
To determine if you consider that a good or bad investment you would want to make sure you understand the vehicle market and assess your own risk tolerance.
Similar analysis can help you understand if different index funds, ETFs, Mutual Funds, or REITs are good investments. Again, you want to look at:
- Past Performance
- Expected Future Performance
The best way to learn is by doing. I’ve slowly acquired my investment knowledge through 11 years of reading stock market news on my lunch breaks and perusing company financial statements (and looking up all the terms and concepts I didn’t understand).
You’ll notice that all companies and securities file financial statements and a prospectus that you can review to determine if that security is one you want to invest in. These are available on the websites of the respective companies and securities. If you don’t understand something, that’s normal. Just go look it up, and you’ll be learning every day. It takes practice, but you can become an expert.
If you want an easier option, check out my blog on Asset Allocation. You can set your risk tolerance and investment goals, and a computer can do all of the trading for you!
Have questions? Let me know in the comments!