Learning how to invest in the stock market can be daunting enough, let alone knowing what kind of stocks to invest in and how to manage your investments. Luckily, it isn’t as scary as some of your school’s local finance bro’s want you think. With some background knowledge, the following guidelines and tips, plus your determination to continue learning, you’ll become a smart and savvy investor before you even graduate college.
Read on for the ultimate guide for first-timers on how to investing in the stock market.
1. Gain background knowledge on the stock market
Smart investing can pave the way to a stable financial future, but you first need to know how to make those good investments. The best way to learn about the stock market is by taking a class. Take advantage of being in college and sign up for an intro to finance class to gain a good intro to managing your investments. “A couple of classes have helped me make [investment] decisions,” said Alejandro Méndez, Boston University senior and investment Banking Summer Analyst at Goldman Sachs. “[They] helped me understand what to look for in a company, where its weaknesses or opportunities might be or how they might be hidden and helped me understand the different ways companies fund their growth and understand any change to a company’s source of funds means a change in the risk assumed by me.” Taking these financial classes will not only help you understand the basics of how investing works but will help you become a smarter investor.
If you don’t have the time or ability to fit an extra class into your schedule, you can look into online courses. Websites like Umedy, which offers a catalog of different online investment courses or Morningstar, which has an online investing classroom, provide a flexible option for learning at your own pace. If you want one-on-one investing advice, you can also search for an investment advisor registered under the Investment Advisors Act of 1940. “Learn how to invest because how financially secure you will be as an adult is much more a function of how you’ve invested and spent the money than how much money you’ve earned, like in a salary,” said Peter Ricchiuti, senior professor of practice at Tulane University’s Freeman School of Business. By gaining a thorough knowledge of the stock market as early as you can, you’ll set yourself up for a financially secure future.
2. Ask yourself what kind of investments you want to make
You have many different options when it comes to investing in the stock market. The three main ways to invest include stocks–company shares–, mutual funds or an Exchange-Traded Fund (ETF). People often confuse mutual funds and ETFs; mutual funds invest your money in a collection of stocks whereas an ETF, while similar to a mutual fund in that it is a collection of assets, mimics the performance of specific financial markets. You can also trade ETFs like normal stock, while you can only trade mutual funds once a day.
Ask yourself if you want to invest for the short term or the long term. Short term investing, known also as speculating, involves selling a stock for more than you bought it. Long term investing allows your money to run through the cycles of the stock market and make your return. Determine the level of risk you can take. Younger investors typically take higher risks since they’re further away from retirement when they’ll need the money. However, that doesn’t mean investing in risky stock is a good idea if you want to remain financially stable.
3. What to absolutely not do
Don’t Treat Stocks like Gambling
Investors refer to speculating as the gambling of investments because of the prospect of making a lot of money, but it can all easily crash and burn right before your eyes. “I’ve never seen speculators really ever make money over the long run, they make a couple of quick trades and make some money and then they think they’re Warren Buffett and then eventually give it all back,” Ricchiuti said. “It’s sort of like when you go to the casino, if the house didn’t usually win there wouldn’t be a house.” Speculating often involves day trading, or trading stock multiple times during the day to continuously buy for less and sell for more. However, in the end, you make less money than you would by letting your investment ride through the cycles of the stock market.
By making long term investments instead of speculating you would also have less risk of making bad trades that lose money and you won’t accumulate expensive trading. “I know hundreds of people that have made millions of dollars in the stock market and none of them have done it through getting in and out of stocks, although it’s great to tell girls and everything, but it doesn’t really make any sense,” Ricchiuti said. “The things that really make money are boring.” A lot of new investors, especially young college-aged investors, fall for the enticing and entertaining investments, but if you keep your investments “boring,” you’ll profit more than them.
Don’t try to outplay the market
After taking a few finance classes, plenty of students make the same mistake: they think they understand all the advanced investment tools. those advanced tools include derivatives, a contract between two or more parties. The value of the derivative derives, or comes from, the value of another asset, such as a stock. Derivative instruments can function as tools for implementing risk management strategy or as a way to magnify gains, but also loss. “The risks in derivative instruments can be such that you can definitely lose more than you invest. So, unless you really understand all the possible outcomes and scenarios of getting into a derivative instrument, just do not do it,” said Irena Vodenska, associate professor of finance and director of finance programs at Boston University’s Metropolitan College. “Don’t do it. Because people get curious and people say, Oh, I know what to do with the derivative. And they don’t. So it’s very dangerous.” Pay close attention to your investments at all costs.
Short selling — betting against a stock, so you make money if the stock drops but lose if it rises — is another risky investment. “You have limited upside potential to make a profit. And the reason is that you’re betting on the stock declining and it can only go to zero. So you know how much you can make, because you’re making it on the downside. But here’s the exciting part, you have unlimited loss potential [if] the stock goes up, goes up and up and up,” Ricchiuti said. If you want financial stability, avoid trying to outthink the market with these risky investment strategies.
How to start investing the smart way
1. Open an account
For the easiest option, go online to Schwab, Fidelity or even download the Robinhood app to open an account. All three of these allow you to start investing with no initial fees and have lower trading fees later on, unlike the bigger more prominent firms. Schwab, Fidelity, and Robin Hood don’t charge an annual, monthly or maintenance fee making them affordable accounts to begin investing. They also all provide learning resources on their websites to help new investors. Robinhood, Schwad and Fidelity all have resources to help you understand the ins and outs of opening an investment account and the market itself. These resources make great places for beginners to try out investing. “Nowadays you can open a Robinhood account and invest as little as $1 to test the waters. Start with money you wouldn’t mind losing,” Méndez said. “Actually, investing your money and being on top of the market, news [and] your investments helps you understand investing.” All of these websites’ resources combined with little to no fees create an easy to use starting point for new investors to learn and grow with.
2. Have a diverse portfolio
When it comes to investing, you can either make a little money, lose a little money, make a lot of money or lose a lot of money. At the end of the day, the most important thing is to protect yourself from losing big. “It’s the name of the game at the end of the day,” Vodenska said. “You want to win more than you lose. You don’t win it all. You don’t lose it all, but you want to win more than you lose.” Diversifying your investments prevents you from losing a large amount of money at once by spreading out your risk. “Any investment can have a risk, medium, low, high, it’s still a risk. By not putting all your eggs in one basket, you’re spreading that risk,” Vodenska said. You can diversify your portfolio by investing in individual stocks across different areas of the market.
By diversifying your portfolio, the economy will affect your various stocks in different ways, such as investing in both pharmaceuticals and finance-based stocks. You can also automatically diversify your investments by investing in a mutual fund or an ETF. Since a mutual fund is a collection of different assets and an ETF mimics the value of a specific financial market, spreading your risk out amongst a multitude of variables.
3. Don’t get attached
Whether you are buying individual stocks or into mutual funds, when you’re new to investing, it’s easy to get overly attached. “Don’t get attached to your investment,” Vodenska said. “You know, they’re not your babies.” Your first investment is usually in a stock you believed would do well, but it takes discipline to recognize when it’s time to let go or move on. “What happens with people this is human nature. You see your stock goes up, and then you want to hold on to it as long as possible. And then it may just drop like a bullet overnight,” Vodenska said. “So establishing some self-described algorithmic discipline is very helpful.” Becoming attached to a stock or other asset that no longer has a future can lead to bad financial decisions, so remember not to put your emotions into your investments.
Even if it comes to the point where you start to lose some money from a lack of discipline with your stocks, it’s important to take those bad decisions as learning moments as well. “You won’t always win when you buy a stock and that’s perfectly fine,” Méndez said. “Take your losses and learn from them. Try to understand where your rationale went wrong and the causes for the stock movement.” So, when it’s time to move on from an investment and cut your losses, do so, but don’t beat yourself up about it, instead take it as a learning experience that helps you become a better investor in the future.
4. Only Invest What You Can Live Without
Only invest your savings that you don’t need at the moment and won’t need in the near future. “If you’re able to save that certain amount of money and then you know that you’re not going to depend on it for the next year or two, I would say invested cautiously and invested in a mutual fund or some exchange-traded fund mimicking the financial markets,” Vodenska said. After you start investing and making a full-time salary, start placing the majority of your money that you don’t immediately need into safe investments. “A really good rule of thumb is that the portion of your money you should put in stocks and your investments is 100 minus your age,” Ricchiuti said. Based on that, when you get to 30 you would keep 70 percent of your savings in stocks. The amount decreases as you age because you have less time to recover from a crash in the stocks as you near retirement when you’ll need the money.
5. Think Long-term
When you first invest in stocks, the idea of reaping the benefits from your investment yearly in cash dividends can excite new investors. However, reinvesting those dividends back into your investment instead lets you play the long game. “Reinvest all the interest in the dividends because let’s say you bought the fund and the fund dropped, well you’re kind of bummed,” Ricchiuti said. “But, mathematically, when that fund starts spitting out interest and dividends it starts buying more shares at these lower prices. So you get an offset that allows you to sleep better and mathematically makes sense.” This means if your dividends were worth one share of the stock when that stock price increases along with the value of your share, the dividend you reinvested is now worth more as well. This lets you make money off the money you already gained, generating an even bigger reward than the immediate payout.
6. Use Mutual Funds for a trusted start
If the time to choose companies you trust, monitor everything about them and accumulate enough money to properly diversify your portfolio exceeds the time you can spend on investing, consider a mutual fund. Choosing a mutual fund can prove an equally successful way to invest and can pose less risk than individual stocks. The different types of mutual funds include large-capitalization, mid-capitalization and small-capitalization, which refer to the size of the companies in which you invest. “I would focus on those mid-caps and small-caps because the companies haven’t already exploded the price in their business and you’re much more likely to find something to find a hidden gem,” Ricchiuti said. “So I think those mid-cap mutual funds and small-cap mutual funds are really a better, better place to be.” Even though not all mid-caps might be a hidden gem, a mutual fund offers a better chance of obtaining a hidden gem than betting it all on one mid-cap company.
7. Be careful investing during the pandemic
A lot of college students heard that the stock market is at a low, bringing the perfect opportunity to invest. But that’s based on economic lows of the past. It’s important to remember that we’ve never experienced an economy like in this pandemic before, and with that comes the need for cautious investing. “We don’t have a crystal ball and we cannot see the future. I would advise for caution at the moment,” Vodenska said. “Of course, the recovery is going to happen. But the uncertainty of how and when, and what are we in for. It’s not grounded in the specific economic reasons. It’s a health crisis.” If you do decide to invest, make sure you’re investing in something sure to grow. “If you fundamentally think that certain investments are underpriced, they’re expected to grow, you can buy the stock and then just keep it,” Vodenska said. “But I would not recommend this timing the market trading in and out.” While some people might assume that means investing in companies that are still growing during the pandemic, such as Netflix, you have a better chance of seeing financial growth in a current underdog.
On the flip side, you have no way of knowing which underdogs will survive the pandemic and which will crash. “If you said I really want to buy things that are down, and I can’t recommend this, but you would look for companies that are selling it next to nothing,” Ricchiuti said. “Some of them aren’t going to make it. But if you can figure out the ones that are going to make it, they’re going to do very, very well.” Investing in specific companies or areas of the market is a gamble right now since we have no idea how or when the different sectors of the market will bounce back. However, if you think that fundamentally the market will right itself, then you should theoretically be safe to start investing; just do so with caution and the proper research.
8. Take advantage of being young
When it comes to long term investments, the earlier you start investing, the more money you will make. If you start cautiously and early, you can set yourself up for good financial practices and stability later in life. “You may want to rebalance at some point, you want to change certain things, you want to get more educated about it,” Vodenska said. “But it’s never too early to invest. ” Young investors also have the advantage of being able to ride out the changes in the stock market to a stable return rate. “If you look at the market since 1900, we’ve had crashes and the Cuban missile crisis and everything,” Ricchiuti said. “But it keeps going eventually, not every stock is going to make it, but if you’ve got a diversified portfolio, and you’ve got some time to wait to have it develop, it’s still the best place to be.” Even in these unprecedented times, college students have the advantage of youth to ride out the lows to find some investment success once the economy returns to the new normal.