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So, You Want to Invest in The Stock Market

Here is the scenario: I am new to stocks but I want to start investing in the stock market.  How do I start?  I encounter this scenario very frequently and I am often asked the question about starting.  My response is one that most people don’t expect from a “finance person”.  The best way to start investing in the stock market is to start out small and slow.  Later, after you have gained the capital, knowledge and skill to analyze stocks, you may start investing in individual stocks. 

“Why do you want to invest in the stock market” is usually my first question to the inquiring person.  The stock market is far from a sure thing as we have found out within that past 6 months.  Investing in the stock market is very risky.  A person starting out with a couple thousand dollars is not going to hit it big overnight.  It just doesn’t happen that way. 

“What money are you using for your investing?”  My position on this has changed over time due to the extreme volatility in the market.  I now recommend that if people are going to invest in stocks that they use money that may not be allocated for another purpose - meaning money that we can afford to risk losing.  Don’t use emergency funds or savings for a big purchase such as a new car or house.  I am even starting to question whether we should have our retirement savings in the stock market - but this an entirely different issue.

“What is your objective for investing in stocks?”  A long-term time horizon (5-10 years) is better than a short one.  Do you want to buy that vacation condo in Miami Beach in ten years?  If you want to capture daily or weekly swings in the market and essentially be a day trader - good luck but this article won’t help you. 

“How familiar are you with the stock market and how interested are you in learning the necessary skills to analyze particular stocks?”  Investing in stocks requires research and analyzing data - the level of the research and analyzing increases with an investor’s involvement in the stock market.  If you start out small and slow, which is recommended, this will require some research and analyzing data but the level of research and analyzing will increase if you choose to become a more active investor in stocks - particularly if you choose to invest in individual stocks.

Invest in Exchange Traded Funds (ETF) or Mutual Funds.

Exchange Traded Funds (ETF) are investment vehicles traded on a stock exchange such as New York Stock Exchange or the American Stock Exchange.  The ETF holds or owns the underlying assets such as stocks that are included in a certain stock index such as S&P 500.  Yahoo! Finance has a lot of good information on ETFs.  ETFs are good because they typically have lower fees than a mutual fund and provide some tax advantages over mutual funds. 

ETFs provide many option to someone who is interested in investing in the stock market but doesn’t have the time or the skill to analyze individual stocks.  There are ETFs that invest in stocks of certain indexes such as the S&P 500 and there are ETFs that invest in different types of stocks (very similar to mutual funds) such as large growth stocks, mid-capital stocks or small capital stocks.  There are plenty of options and in order to be successful investing in ETFs will require research and analyzing data. 

Investing/trading ETFs will typically require a brokerage account.  The best brokerage accounts are the online brokerage accounts that provide low commissions.  ScotTrade, TD Ameritrade and E-Trade are good ones. 

Mutual Funds also provide a good option to starting investing in stocks or the stock market.  The best mutual funds to invest in are index funds - funds that invest and track a particular index (again) such as the S&P 500 and are considered “No-Load”.  A “No Load” fund is one that does not charge sales fee or commission.  Be careful some “No Load” funds will charge 12b-1 fees (marketing fees) and possibly redemption fees and they will have operating expenses.  Here is a good list of index fund mutual funds.  Most mutual fund accounts can be opened directly through the mutual fund company or money manager (eg. Vangard, Fidelity, T.Rowe Price).

There is plenty more to cover in the future regarding investing in stocks.  Stay connected to RebelCapitalist.com.  Good luck.