It's never too late to get started investing in the stock market. This Investing in Stocks 101 guide will walk you through the necessary steps of how to invest in the stock market.
The stock market provides a pathway to potential wealth, whether for retirement or another long-term objective. But it takes hard work to achieve long-term and lasting success in the stock market.
First, you'll need to decide on suitable investments. Next, you'll open a brokerage account. Then, you'll need to find stocks to buy and watch.
Lastly, you'll plan your trade from buying to selling a stock.
Let's get started.
Investing In Stocks 101: Getting Started
Based on your investment objectives, you'll have to make some decisions about your potential investments.
Active investors may seek to trade stocks. Stocks are short or long-term investments in individual companies. Compared with bonds and options, stocks hold the greatest potential returns. Yet they also carry a significant amount of risk. Just like bonds and options, the price of a stock can go to zero.
For a more passive investor, exchange traded funds (ETFs) may be the best fit. ETFs track a specific index. For example, the Invesco QQQ Trust (QQQ) ETF tracks the Nasdaq 100, which includes 100 of the largest domestic and international nonfinancial companies in the Nasdaq composite.
Meanwhile, other passive investors may decide mutual funds are optimal. Mutual funds pool money from investors and use that money to buy holdings for its portfolio. As an investor, you own shares in the mutual fund. The fund's portfolio managers take care of all the investment decisions. For that privilege, the fund company charges an annual management fee to fund shareholders.
Financial advisors who sell mutual funds also may add a sales charge or commission, often called a load. However, brokerages are increasingly selling mutual funds that have no load. They are called no-load funds.
An example of a top growth mutual fund is the Fidelity Contrafund (FCNTX). The Boston-based mutual fund is a large-cap growth fund that focuses on stocks with strong fundamental metrics.
Once you have determined your ideal investment choice, the next step is to select a brokerage firm.
How To Select A Brokerage Firm
Every year, Investor's Business Daily surveys investors to discern the Best Online Brokers. The survey uses the brokerage firm's own customers to see which firms are performing best.
In the beginning of 2018, Fidelity Investments earned IBD's award of top overall brokerage firm by scoring the highest Customer Experience Index rating. Other high-quality brokers were Charles Schwab (SCHW), TradeStation, TD Ameritrade (AMTD) and Interactive Brokers (IBKR).
Be sure to research the brokers for characteristics most pertinent to you. Active, self-guided investors might focus on the best stock-trading tools. Other investors may seek the lowest fees. Or they may want to get the best investment and retirement planning tools.
More tech-savvy investors may check out zero-fee stock trading app Robinhood. Its user growth continues to accelerate with 5 million users in July. The privately-held firm is considering an IPO and is valued at $5.6 billion.
How To Invest In Stocks
Investor's Business Daily recommends buying stocks when they are "breaking out" above a risk-optimal buy point. But not all stocks are created equal. Investors should focus on companies with strong quarterly and annual earnings growth.
Meanwhile, many stock market winners have something new. For example, Apple (AAPL)'s game-changing iPod, iPhone and iPad led to a big advance from 2004 to 2012.
But the work isn't over once you buy a stock, you'll need to have an exit plan for when things go right — and wrong.
How To Sell Stocks
It's critical to always have a plan to get in and out of a stock investment. Before you place a stock trade, you should have an idea when you will sell a stock. Plan your trade and trade your plan.
From IBD's perspective, most upside gains should be taken around the 20%-25% profit-taking range. Typically, growth stocks tend to advance 20% to 25% after breaking out of a proper base, then decline and set up a new base. Rather than sitting through the decline, it is often better to take profits and wait for a new base formation.
On the downside, if a stock falls more than 7%-8% from your initial purchase, you should cut your losses to avoid more significant losses. At that point, the stock is clearly not performing as expected and should be removed from the portfolio.