Are you ready to invest in stocks?
Develop a strategy and set goals before you begin buying
First, ask yourself what your financial goal is.
For Rasheed McCallum, getting more serious about investing meant he got an itch to invest in individual stocks. His first step was putting about $20 in a stock account with Robinhood, an app for stock trading.
“I’m 33 now, so this is the age when people start to think about money more seriously,” says McCallum, an engineer from Plantation, Florida. “I wanted to get involved in the stock market because that’s where people say they get their gains.”
With his investment, he bought a few shares of Fitbit, which appealed to him because of its price at the time of his purchase – less than $3 a share – and the popularity of healthtracking devices. Fitbit’s stock price jumped to more than $7 a share on Friday when Google said it was buying the fitnesstracking company.
“Everybody had a Fitbit, and the price of the stock was within my budget,” he adds.
Part of the allure may be the recent strong performance of the stock market, with the S&P 500 reaching a new high on Friday. About 55% of Americans say they now have investments in stocks, either through an individual stock or fund, up from a post-recession low of 52% in 2013, survey firm Gallup said in September.
And with a number of brokers and online trading platforms now offering commission-free trading, the barriers to entry have fallen for individual investors, says James Cox, managing partner for Harris Financial Group.
“2019 presents one of the greatest opportunities for individuals to learn how to buy stocks,” Cox adds.
Here are five questions to ask before getting started:
What’s your goal?
Honing your goal will help determine your risk profile and approach, says Chantel Bonneau, wealth management advisor at Northwestern Mutual. For instance, an investor who wants to experience the stock market’s ups and downs may be more risk-tolerant than someone who is saving to buy a house.
“Decide what is the goal of the money, then plan appropriately,” she notes.
Which businesses do you know?
McCallum’s approach isn’t uncommon, experts say. That’s because starting with businesses you’re familiar with can be a good entry point for learning about the stock market’s basics and a corporation’s finances, such as their quarterly profits and competitive outlook.
“Start with the fundamentals: Why you like the company, do you use its products and why do you think they’ll be successful in the future?” Harris Financial’s Cox says. “Ask yourself, ‘Do you think the company will be here in 10 years?’ ”
Do you have a tax strategy?
Tax planning should also be part of investing in individual stocks, experts say.
“Everyone wants to talk about what stocks to buy, but is there any tax benefit?” Northwestern Mutual’s Bonneau says.
Roth IRAs and Roth 401(k)s can prove useful for investors who are saving for retirement, experts say. In these vehicles, investors sock away after-tax money. Once they hit 59 1⁄2 and have owned the account for at least five years, they can withdraw earnings tax-free.
Do you have a diversification plan?
“Stocks carry a lot of risks,” says Lazetta Rainey Braxton, the CEO of financial planning firm Financial Fountains. “I hate to go back decades, but it’s like Enron – you don’t see that that often, thank goodness, but it helps to explain diversification,” she adds, referring to the one-time energy high-flyer that imploded when an accounting scandal was uncovered in 2001.
Diversification, which reduces risk, can include investing across industries and geographies, such as emerging markets. But Northwestern Mutual’s Bonneau says she often sees investors concentrated in tech heavyweights like Amazon and Facebook.
“It’s not prudent to be in one sector or in one asset class,” she adds. “It’s like going to the gym and using only one machine.”
And before you invest, check your strategies through a trading simulation, such as one offered by TD Ameritrade. It’s a risk-free method to jump into stock investing – and can help your comfort level with volatility when real money is on the line.
Is it time to check with the experts?
About seven of 10 people who work with an advisor say their plans are built to weather the market’s ups and downs, compared with three of 10 without an advisor, according to Northwestern Mutual’s 2019 Planning & Progress study.
The time to hire a professional may be when “you are trying to progress,” Bonneau says.