Stock Investing 101

When, Why and How Should You Invest In Stocks

Stock Investing 101
June 23, 2016

You should invest in stocks as long as you meet the following criteria: you are alive, and you have money. It's really that simple, because stocks consistently outperform every other asset class over any meaningful time horizon.

  • When Should You Invest in Stocks? – Obviously, the stock market rises and falls. However, as noted above, it will almost certainly provide you with higher returns over time than other investments. Consequently, you should normally be invested in stocks. Trying to time when the best moment is to enter or exit the market is nearly impossible, even for professional investors. Therefore, the best time to invest in stocks is generally today.

    Of course, you must think about your broader financial goals and investment needs before acting. This includes an assessment of when you will need to free-up cash for your kids' college or your own retirement. Speaking of that, how much money do you expect to need before you stop working?

    Do you have other big, expenses looming also, like helping aging parents? What is your tolerance for risk? How bold – or cautious – are you? It is important to answer this question honestly, for whatever your future objectives may be, you still need to sleep easy at night.

    Think about all of these things before you act, but don't delay acting for long – because the more time you wait to invest, the more time it will take to achieve your financial goals. To make this analytic process as painless -- and fruitful -- as possible, you may wish to consult with a trusted financial advisor.

  • Why Should You Invest in Stocks? – Because stocks consistently outperform other forms of investment over the long haul, and that is exactly what investing is for – they are essential to both the economic security of your family and the future quality of your retirement.

  • How Should You Invest in Stocks? – Most people are introduced to stocks through an employer-based retirement program such as a 401(k) plan, where you choose your preferred investments from several options. Take full advantage of these programs, since they are tax-deferred and have matching components.

    You can also buy or trade stocks yourself, but you must go through a licensed broker. This can be as simple as an online interface where you are on your own, or as complex as hiring a fee-based money manager who handles all aspects of your finances. In-between, there are discount brokers offering minimal advice for slightly higher fees and full-service brokers that take the time to meet with you and understand your goals and needs.

    You should buy your stocks through whatever method meets your comfort level and financial needs. However, as you are currently reading an article entitled "Stock Investing 101", you may want to avoid the online and discount brokers until you have a little more experience.

Did we forget to cover where?

  • Where Should You Invest Your Money in Stocks? – Where you invest depends on the goals brought up above. Assuming that you have already determined your goals and your tolerance for risk, look for stocks or stock mutual funds that match your criteria on growth, returns, dividends, etc. In general, stocks with higher rewards such as emerging markets, start-up companies, or technology companies come with higher risk.

    Since stock prices can be volatile, it is unwise to invest too heavily in any one company or sector (such as energy, technology, finance, etc.). Diversify to minimize risk, and adjust your asset allocation periodically to reflect either changes in the stock or changes in your needs (this is known as rebalancing your portfolio). A rough rule of thumb is to invest your age in bonds or more conservative investments, and the rest in stocks (at age 25, keep 75% of your investments in stocks). Even though stocks typically shine over the long haul, they can be quite risky over the short run. That is why savvy investors distribute some of their capital into other asset classes such as bonds, real estate and money markets.

There are plenty of online resources to help you learn how to analyze a stock or mutual fund, and feel more comfortable picking your own stocks and balancing your own portfolio. Use all of the resources you can to educate yourself, and before long, you might be able to handle the majority of your own investing. However, if you aren't interested in managing funds yourself, take the time to find a suitable professional who can help. You will pay for the privilege, but only you can decide which path is the best use of your money and time.

We almost forgot to cover who should invest in stocks, but that's simple. Everybody should invest in stocks – including you.


Photo ©iStock.com/tarabird

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