Investing in stocks is one of the most powerful wealth-building tools at everyone’s disposal. Plus, with the internet, investing in stocks is incredibly accessible. It’s no more complicated to sign up for a brokerage account than it is to make a new Gmail.
I am incredibly excited that you have decided to start your investing journey. Times are uncertain and scary, and that affects the stock market too. But the important fact is that the market has seen far scarier and less certain times than this. Yet, it has always more than recovered in the long term and rewarded those who stuck it out and invested regardless.
This post will cover why you should invest in stocks in 2023, and how to start your investing journey.
Why Start Investing Now?
As I talked about above, we are in very uncertain times. The political climate is very tense, there are serious talks of an impending recession, and the market is down significantly from its high in late 2021.
It may seem like a bad idea to put a horse in the race while everyone else’s horses seem so far behind. I mean, who wants to join a losing game?
The thing is that’s what everyone else is thinking. People becoming fearful and selling out is what causes the market to drop in the first place. By being one of the few to stick it out or join in during the downturn, you are signing up to take advantage of the market’s eventual recovery. Those who are selling out or staying out are missing out on those results.
I love this chart.
People who sell out at any time during the red of that chart are taking losses from the market’s previous peak. They get scared when they see their hard-earned money start to dwindle and think it would be safer in a bank.
However, they are letting their fear override the logic that the market always recovers, eventually. No one knows exactly when, but it will. With over 100 years of historical data showing recoveries after world wars, disease, and housing bubbles, we can be confident that the market will recover.
Not only are you avoiding the losses other people are taking by panic selling, but you are also setting yourself up better than they ever could by buying in when everything is down. This gives you a discount on any stocks or funds you purchase. A discount that will multiply your future gains.
The Best Time is Always Now
Ok so I know I just went on about how now is a specifically advantageous time to start investing, and it is. These sorts of market-wide discounts are quite rare.
However, the best time will always be right now, no matter when “right now” is. Regardless of the timing, political climate, or personal life. Giving the market time to compound your investment is more important than timing it perfectly.
True wealth is built on the stock market through long-term investing. The longer-term the investment, the less it is impacted by the exact price you paid for it in the first place.
As you can see from the above image, after you have been investing for a while, the growth of your portfolio far outpaces the rate at which you contribute. Plus, it is hardly impacted by the exact value of that initial purchase.
Think of the snowball effect. Where a snowball rolling down a hill gathers more snow, allowing it to gather even more snow, on and on. Eventually getting so large it is unrecognizable from the tiny initial one.
Stock market compounding is the same idea. The important thing is to get the ball rolling down in the first place. Gathering snow for longer will help more than making a slightly bigger snowball in your hand before rolling it.
How to Start Investing in Stocks
Step 1: Learn the Basics
Every form of investment contains some risk. The important thing about risk is that understanding it tends to reduce it. Driving a car is risky as you could get into an accident and be seriously injured. However, by understanding the risks – wet pavement, distracted drivers, speed limits – you allow yourself to reduce your personal risk.
Think about the stock market in the same way. Many people lose money in the market due to making risky investments. These risky investments will almost always be in companies or sectors that they don’t fully understand.
Meanwhile, there are people who make immense amounts of money on what others would perceive as risky investments. However, these people know enough to understand the risks and select a company that mitigates them.
With that in mind, before you start investing in stocks, let’s go over the pillars of the stock market.
Stocks & Shares
These make up the backbone of the market. Stocks are the publicly-available representations of companies on the market, and shares are individual pieces of these stocks.
When you want to purchase part of a company, you will purchase a share of a company. You may even purchase a fraction of a share if a share is expensive, or you are dollar-cost averaging.
This partial ownership, a share, is held, usually for many years, until you decide to sell. The goal is to always buy a company for less than you sell it for. This is usually done by paying a relatively low price for a company that you feel confident will recover and increase in the long term.
Funds
Funds are stocks that are usually made up of hundreds of individual stocks. These stocks make up fractional pieces of the stock. For example, if you bought one share of VOO, you now own 6.5% of one share of Apple.
Funds are a great way to easily diversify your portfolio by automatically investing into hundreds of different companies via one stock. This keeps your portfolio from swinging as violently when the market takes a turn. The downside is that you are missing out on rapid positive movement of individual companies.
Funds are, in general, a safer investment than individual stocks.
Brokerages
To access the market and the stocks it holds, you need to go through a brokerage. A brokerage is a middleman which accepts deposits from you, uses these deposits to purchase shares, and allows you to manage those shares.
Different brokerages offer different exact features and abilities, but the core ability of all of them is to buy and sell shares. The must-have features of a brokerage would definitely be digital (I’m not aware of any analog ones nowadays but worth noting), allow for purchasing partial shares, and offer recurring/automated investments.
Price Fluctuations
Prices on the market are never steady. They are constantly moving up and down, sometimes in greater swings and sometimes in smaller swings.
Price fluctuations are caused by buying and selling. When people are buying a stock, its price gets driven out since demand outpaces supply. Alternatively, when people are selling a stock, its price falls as there is more demand than supply.
This buying and selling is caused by an infinite number of factors, so I won’t try to dive into all of them. The important thing to understand is that in general, stock prices fluctuate based on the company and overall market performance. If a company has a record year, its stock will likely rise in price as people scramble to buy in. If a company loses margin and investors become fearful, its stock will likely fall as people sell out.
Attempting to time these fluctuations is a fool’s errand. Even professionals can’t consistently do it. Instead, look at these fluctuations as opportunities. If a good company falls to a low price with no change to its core functions, it may be a good buy. If a company begins to show signs of plateauing or inability to improve, it may be time to sell and move on.
Emergency Fund
Due to these price fluctuations, it is important to have an emergency fund. This fund is there to cover you in case an emergency expense pops up and you don’t want to sell investments since they are down.
A general rule of thumb is to have an emergency fund of 3-6 months living expenses, but up to 12 months is great. This will give you peace of mind to invest and not worry when you see things dip.
Type of Account
Investing can be done through many kinds of investment accounts. Generally, this is divided between tax-advantaged retirement accounts and taxed brokerage accounts.
If your goal is to invest towards a long time horizon such as 30 years, a retirement account is likely the best idea. These accounts can provide massive gains due to growing tax-free. The most common types of retirement accounts are employee-sponsored 401Ks and individual Roth IRAs.
An employer-sponsored 401K will have to be done through the brokerage that your employer partners with. Alternatively, a Roth IRA can be done independently with any brokerage that supports them, such as Fidelity and Vanguard.
The advantage of an independent taxed investing account is that you can pull the funds out at any time. If you decide to invest for 5 years and then use it to put down towards a house, you can do that. Instead, retirement accounts are far more restrictive regarding when you can pull out funds.
Step 2: Sign Up for a Brokerage Account
Brokerages are incredibly easy to sign up for. All they really need is some personal info such as social security number and address, and you’re all set. It shouldn’t take more than a day or two all told.
Though brokerages are very similar, do your research beforehand. Specifically, make sure that the brokerage you go with supports the kind of account you want to open. It is a lot more annoying to close a brokerage account than to open one.
If you’re looking for options for great brokerages, read this post covering the five best.
Once you select a brokerage, get familiar with the user interface. It sounds silly, but when this account will be housing thousands of your dollars, it’s important to understand how to maneuver it. Just spend a bit of time working through the different menus and options before depositing anything.
If your brokerage offers it, you can even practice with virtual funds to get a hang of things first. Look up whether your brokerage supports this feature to try and take advantage of it.
Step 3: Deposit a Small Amount of Money
Once signed up and familiar, deposit a small amount of money. With most brokerages, this can even be as small as $1. I would say put in no more than you would spend on a nice meal, and play with it. It doesn’t matter if you lose that money, so try buying a fraction of a share of a stock you recognize.
Please note that you shouldn’t buy and sell willy-nilly. Day trading, or buying and selling a stock on the same day, is frowned upon. It appears to the brokerage that you are a risky investor, and there can be restrictions or even bans placed on your account. Make sure that you buy and sell the same stock at least 24 hours apart.
Once you’ve purchased a dinner’s worth of a stock and tracked its movement for a day or two, try selling it. Gain or loss it doesn’t matter. Just practice selling it to get familiar with the process.
This small amount of money has a secondary benefit alongside practice. It makes the idea of investing real for you. Prior to this, investing was just an idea you had. Now, you have put real money on the line and used it to invest. Don’t underestimate the effect that can have on your likelihood of continuing to invest.
Step 4: Plan Out Your Investments
There are two aspects of a stock market investment you should consider: where and how much. “Where” is what stock you invest in. If you are looking for lower-risk, long-term investments, funds are a good choice. Specifically, one that tracks the overall market such as VOO or SPY that tracks the S&P 500, the top 500 companies on the market.
If you are more knowledgeable about an individual company or are looking for higher, more volatile returns, you can go the route of individual companies. This will likely require far more research and an in-depth understanding of the company. However, it is a good option if you feel you have an edge.
“How much” is how much you will routinely invest. Analyze your finances, and figure out an amount of money that you can reliably invest each month while still saving, and not stressing yourself about expenses.
I have found that it’s a good idea for it to be an amount that is slightly uncomfortable. Maximize your amount invested, while still not making yourself miserable when spending money.
The 50-30-20 rule is a good starting place, but everyone is different. Look at your own personal habits and requirements and work out an investment plan that works for you.
Step 5: Automate Investing in Stocks
All right, this is arguably the most important step. This is the step that so many people skip, and fail in the market because of it.
We are emotional and forgetful beings. Meaning we are liable to buy and sell when things get scary or exciting and fail to follow through on investing plans.
The best method to avoid this trap is to automate the process. Take the human element out of consistent investing and instead rely on software to follow your plans for you.
Most top brokerages can automate investments, or at a minimum, automate deposits that you can use towards investments. You can set this up to automatically invest a set amount of money into a specific stock at a defined interval.
For example, you could automate the process of investing $100 into Apple every month on the 9th. From then on, you will never have to remember to do this.
I would recommend setting up an automatic investment of at least $100/month to get started. This will get the snowball rolling without too much pain for most people. If you need to scale that back, no problem. Don’t put yourself in a position of constant stress. If you can easily afford more, definitely scale it up as far as possible.
Avoid Temptation
Automation also serves to avoid the effect of temptation. When investing manually, it becomes very tempting to use your available funds to spend on something you don’t need. Now, imagine that those funds are already gone, out of your account, and invested in Apple. You will no longer be tempted by that extra money because it has already been used.
As long as you don’t invest so much that affording your expenses becomes difficult, you will never regret automating your investments. You will come back to them months or years later and be pleasantly surprised by how much you invested without even thinking about it.
Closing Thoughts
It’s never too early to start investing in stocks. You are setting yourself up for the financial future that you deserve.
Don’t wait to take the first step. The sooner you start, the more time your portfolio has to grow.
Once you get started investing, let me know in the comments below how your journey is going and what you have decided to invest in. I’ll see you next time.
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