The number of retail investors is increasing rapidly as new brokerages and neobrokers enter the market. Investing has become more accessible than ever. Gone are the days when you had to call a stockbroker to make an investment.
This rapid growth is no surprise. Investing is one of the best ways to generate passive income and build financial security.
If you want to start investing but don’t know where to begin, this guide is for you, no matter where you are located in the world. Please note that this is not investment advice but rather a launching pad for your investment journey.
Basic concepts: What do you need?
In order to invest in stocks, funds or ETFs you need to select a broker and setup an investing account. When it comes to brokerages there are multiple to choose from. But don’t let this distract you, hang on and we’ll start with the basics.
Brokerage
What is a brokerage? A brokerage is a firm that facilitates the buying and selling of financial securities between a buyer and a seller. Brokerages manage your accounts, hold and safeguard your cash and investments.
How to select a brokerage? Key considerations:
Reputation and regulation: Look for well-established brokerages with positive reviews. Make sure the brokerage is regulated by a reputable financial authority.
Fees: Compare the fee structures (trading fees, account maintenance fees, etc.) Consider how much you plan to invest, such as on a monthly basis. For instance, if a brokerage charges an $8 transaction fee and you invest $100 in a stock, the fee consumes 8% of your investment. Over time, minimizing these fees is crucial to maximise your returns.
Tools and usability: The tools brokerages offer and overall usability vary depending on the platform. You can also compare the services each brokerage offers. However, when it comes to tracking your investments and performance, you may notice that most brokerages lack even the most basic tools. This is why we built an investment management platform for retail investors across the globe — Stockle.
Types of Accounts: If you are looking for a specific type of account (IRA/401(k) etc.), verify that the brokerage offers support for it.
Available securities: Market and instrument coverage varies across brokers. Check if the broker provides the markets/instruments you are interested in.
Customer Support: Good customer service can be crucial when you need help or face issues.
Fractional shares: Some brokerages allow you to invest in fractional shares, meaning you can buy a portion of a share instead of needing to purchase whole shares. This can be beneficial for those just starting out and wanting to invest as little as a few dollars at a time.
Transferring investments to a brokerage: Check whether the broker has an option to transfer positions to another service. This features ensures maximum flexibility in cases where you have to switch brokerages.
Security: Ensure they have robust security measures to protect your investments and personal data.
Using multiple brokerages? There is no reason you couldn’t use multiple brokerages to diversify, optimise fees for certain markets or gain access to different types of accounts. Using Stockle you can aggregate your accounts to a single platform.
Investing Account
Depending on the brokerage and your location, brokerages may offer different types of accounts. The most common one is a standard individual brokerage account, which is a good starting point. Additionally, you can have accounts that offer tax advantages. Notice that depending where you live, you may have access to different types of accounts.
Types of Investment Accounts:
Standard Brokerage Account: A flexible account for buying and selling securities. Unlike retirement accounts such as IRAs or 401(k)s, standard brokerage accounts do not offer tax benefits. However, they also do not have contribution limits or early withdrawal penalties
Tax optimised accounts (IRAs, 401(k)s etc.): Tax-advantaged accounts that are optimal for long-term savings. These types of accounts maximise the effect of compounding. They often have contribution limits and in some cases withdrawal penalties.
How to Select the Type of an investment account? Key considerations:
Investment Goals: Choose an account that aligns with your financial goals. Note that you can have multiple standard brokerage accounts. When it comes to tax-optimized accounts, in some cases, you may only be allowed to have one of a certain type, so ensure you understand these regulations before creating multiple accounts.
Tax Considerations: Understand the tax implications of different account types.
Instrument coverage: Consider the characteristics of different accounts. You may notice, for example, that certain types of investments cannot be purchased to certain types of accounts.
Accessibility: Consider how easily you can access and withdraw your funds.
Fees, limits and Minimums: Be aware of account minimums, contribution limits and fee structures.
Find Your Investing Style
This may sound complex, but the idea is to establish a good starting point for your investing journey.
Begin with a small amount to familiarize yourself with the market, and increase your investments gradually. Investing is a long-term process that demands time and consistency. Therefore, investing all your savings into a single stock at once isn’t the wisest move.
Analyze how much you can invest annually, quarterly, monthly, or weekly. A common approach is to start with a small percentage of your monthly income and invest it in stocks, ETFs, or funds each month. This strategy, known as dollar-cost averaging (DCA), aims to reduce the impact of market volatility on your investments. Instead of investing a large sum all at once and risking buying at peak prices, you spread your investments over time, consistently purchasing securities each month regardless of price fluctuations. This way, you avoid the pitfalls of trying to time the market and benefit from potentially lower average costs over the long term.
If you are interested in crafting a personalised investing plan, here’s a more thorough guide on it.
Types of investments
Conduct thorough research before making investment decisions. Let’s review some basic types of investments.
Stocks: Stocks represent ownership in a company. When you buy a stock, you become a shareholder and own a portion of that company. It’s important to note that if you choose to invest solely in stocks, diversifying into multiple stocks can help mitigate risks.
Passive Funds: Passive funds, also known as passive investments or index funds, are investment funds designed to mirror the performance of a specific market index such as S&P500. The S&P 500, or Standard & Poor’s 500, is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. By investing in an index, you can invest in a large pool of companies instead of having to find suitable stocks yourself. This way, you can benefit from overall economic growth.
Actively managed funds: Actively managed funds are investment funds where professional fund managers actively make decisions about which securities to buy, hold, and sell within the fund’s portfolio. Because these funds require ongoing research and analysis by professionals, they often come with high fees. Therefore, it’s crucial to carefully consider the fee percentage and the fund manager’s track record. Despite the expertise of fund managers, only one out of four actively managed fund beat their average passive counterpart over the course of ten years.
ETFs: Exchange-Traded Funds, are investment funds that trade on stock exchanges like individual stocks. They typically aim to track the performance of a specific index or sector. ETFs offer diversification, liquidity, and transparency to investors with lower fees compared to many funds. Before ETFs, passive funds were the primary way to invest in indices such as the S&P 500. However, now there are multiple ETFs that track major indices, providing more options for investors.
How to make your first investment — Step by step
Now that you’ve selected your first investment, let’s look at how you can step into the world of investing:
1. Verify the Brokerage: Ensure that the brokerage you’ve chosen is well-established, offers the type of account you need, and supports the stocks, ETFs, or funds you’ve researched and decided to invest in.
2. Set Up a Brokerage Account: This process varies slightly from platform to platform but generally involves providing your personal details, identification, and answering some background questions.
3. Deposit Cash: Transfer funds into your brokerage account. Be aware that some platforms may charge a small fee for cash transfers using specific providers, so consider these fees over the long run.
4. Invest:
For Funds: Investing in mutual funds is slightly different from stocks and ETFs. Funds are bought and sold through the fund company, and transactions are processed at the fund’s next calculated net asset value (NAV), based on the closing prices of the securities in the fund. This means that if you invest a certain amount in a fund today, the number of fund shares you receive depends on the fund’s closing price at the time of your investment.
For Stocks and ETFs: When investing in stocks or ETFs, you’ll need to specify either a limit order or a market order on your brokerage platform. The choice between a limit order and a market order depends on your preference and investment strategy. Both options can be utilised effectively.
— Limit Order: Allows you to specify the maximum price you are willing to pay for a stock or ETF
— Market Order: Executes the order at the best available current price.
5. Congrats you’ve made your first investment!
Further Tips:
Consistency: Regular investments, even small ones, can grow significantly over time through the power of compounding.
Marathon, Not a Sprint: Investing is a long-term journey. Stay patient and avoid the temptation to chase quick gains.
Beware of Too-Good-To-Be-True Promises: Be cautious of anyone promising guaranteed high returns with little to no risk.
Investing can be a rewarding way to grow your wealth, but it requires knowledge, patience, and a well-thought-out strategy. Use this guide as your starting point, and continue to educate yourself as you progress on your investment journey.
Using Stockle, you can easily track, manage, and stay up-to-date on your investments and performance, no matter where you are located or whether you are a beginner or advanced investor. Stockle is also a perfect way to safely familiarize yourself with how the markets work.
May the markets be in your favour!
Team Stockle
