This article was last updated on June 22
With the economy showing continued signs of improvement and financial markets making a strong recovery (example: Market indexes back to record highs), many would be investors are more willing to invest in the stock market in order to earn higher than average returns. Investing in this day and age is easy and for newer investor’s the most straight forward way to do so is via stocks, exchange traded funds and/or mutual funds. I have written a lot on these topics on this site and here is an overview on how to invest in each asset class.
First, find and sign up with a stock broker. For most people who just want to trade shares, the best bet is to sign up with a discount online broker that offers free brokerage (the cost of the transaction to buy or sell a share) AND one who does not have any account keeping fees. There are lots of brokers out there but the one I use and recommend is TD Ameritrade.
Finding the right one is a matter of visiting the sites to get a feel for the user interface (most sites have free demo’s). Pay attention to the fee structure and how it works with your trading style. Another point to note is that when you sign up for an online account you will also have to have to fund your brokerage/trading account. You should do this electronically via your normal savings/checking account.
It should take about 15 to 20 minutes to sign-up with an online broker and 2-3 days to get the funding and relevant paperwork finalized. Now comes the fun part – buying the stock. Here is my most important piece of advice before you do this – Research before you buy!!! Your online broker should have lots of free research available on the stock and you can do a simple web search to find out more information about it. Buying a stock takes less than one minute, research is where all the time and effort is spent. To improve your odds of becoming a successful investor in the long term, research is key.
If you are like me with a day job and a family to care for, there is just not enough time in the day to pick individuals stocks in a consistent and disciplined manner. Further like many investors, putting all my money in a handful of stocks is a risky move in volatile markets. However there is an easy and lower risk solution available – Exchange Traded Funds. An exchange-traded fund, or ETF, is an investment product representing a basket of securities that track an index or sector such as the S&P 500 or commodities. They are among the most popular form of investing because they offer the diversification benefits of mutual funds (at a lower cost), but trade just like stocks.
Just like stocks and mutual funds there is no shortage of information available online about ETF’s. The problem has almost become that there is too much information. Personally I like to use my online broker’s research tools, the Wall Street Journal, Bloomberg, and well known funds research sites like Morningstar and Yahoo or Google Finance- for researching the various ETFs available for a sector or index I want to invest in. As an example, suppose you feel that the health care sector is going to be strong for the next year and you want to find a large but low cost ETF to invest in the sector. Go to the ETF section of the Morningstar site and click on the (new) ETF screener. It has some predefined criteria like expense ratio and performance, but you can use the add criteria drop down to select more. Use the Morningstar sector weightings and select health care. Add this criterion and you will see over 200 potential ETF’s returned. To get a more refined list add or change other criteria. Once you play around it for a bit you will get use the tool and the best thing is that you can save your ETF screen for future use.
When you have decided which ETF to buy (after doing your research I hope!), just execute the trade via your online brokerage account like you would a stock. Your broker will execute the ETF transaction process on the relevant trading exchange and you should then see the ETF added to your portfolio. Like any investment, make sure you monitor it and the sector or index it tracks. Selling the ETF through your broker is just as simple and transaction costs should be the same as for stocks.
If you want a more active, yet diversified, low-cost way to invest regularly then the best approach is likely via low cost mutual (managed) funds because of their lower transaction costs for ongoing contributions. Investing in ETFs is like investing in stocks and normally purchased in the same manner – meaning you pay transactions costs whenever you buy or sell an ETF. Mutual funds on the other hand normally allow free regular contributions as long as a certain initial and ongoing balance is maintained.
As with any investment option, research is key and I recommend you start with well regarded and unbiased research sites like Morningstar, Yahoo or Google Finance are not bad to get an initial comparison of various funds based on the following factors: Expense ratio (the lower the better), 5 yr performance (make sure you include this year), Management experience, analyst opinions, ongoing costs and performance relative to a common index of similar funds. Using this basis gives you a good starting point to compare a number of funds and then narrow your search down to two or three that you can delve deeper into. It takes times to get a feel of which metrics work best but with a little bit of playing around and education you can quickly weed out the losers from the winners.
I also recommend new investors stick with well diversified index based mutual funds as opposed to very specific sector or investment type funds, until they learn more about investing and the associated risks.
For smaller investors the biggest drain on their returns (apart from a stock market crash) is the ongoing management fees. Fortunately most mutual funds do not charge money for making regular contributions – though it is normal to ask for a minimum balance like $1,000 to $3,000 to open an account. Mutual fund management costs should be less than 2% and there should be no transaction fees for ongoing investments. One fund manager that I use regularly, Vanguard, has very low management costs and no fees for regular direct deposits.
While it may indeed be a great time to invest, folks who have never invested before or do all their investing via a retirement account, should be very careful before investing their hard earned money. Do your research first, pick a low cost broker and don’t rush into making an investment. As you get more advanced you can look at investing in gold, options or other instruments.