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If you want to start investing and don’t know where to start, it’s easy to get overwhelmed by all the options available. You probably know that investment accounts are an important part of achieving your financial goals; however, when buying stocks or picking a brokerage firm, you may be a little lost.
While not every investment strategy is appropriate for every person, you must get into the stock market now if you’re not already. The good news is that once you understand how the market works, setting up a brokerage account is easier than you’d think. Read on for some tips to remember as you buy your first stock.
In this article
Why you should be investing
Unlike a traditional savings account, investment accounts allow you to supercharge the return on any money you put into your brokerage. This is because as the stock price rises, the value of your investment rises, too. Unlike a savings account, which may have an interest rate of under 1%, the returns you can get investing are much higher.
For example, even though 2020 was grueling for many, the average stock market return over the past 10 years has been 9.52% (adjusted for inflation), with the average S&P 500 returning about 12.58% annually.
Especially when you consider the magic of compound interest, those sorts of returns can make your retirement account grow at an impressive rate. For example, if you start investing at age 25 and only invest $4,000/year, you could expect to have about $740,000 by age 65 with a rate of return of only 7%. When you run the math with an average rate of return of 9.2% (or 13.5%!), that money grows to either $1.3M or $4.1M, respectively!
Of course, market volatility makes it so that having such high returns year over year is unlikely. Even so, the above math illustrates why setting up an IRA (individual retirement account) or enrolling in your company-sponsored 401k or is so important.
Past performance on Wall Street illustrates that the stock market is the single most powerful vehicle for generating wealth, followed by real estate. Even when accounting for both inflation and downturns, the average annual return of the S&P 500 has been about 7%. This makes a clear case for entering the stock market as soon as possible.
Understanding different investment vehicles
Once you know you’ll get into the stock market, it’s important to look into the options available to you. Different investment vehicles have different pros and cons and fit different needs, so it’s a good idea to understand how they work and when they’re appropriate. Here are some of the most common investment options:
Individual stocks
Individual stocks are likely the first thing you consider when considering the stock market. These are shares of an individual company that rise or fall based on that company’s performance. Individual stocks are more volatile than other investment vehicles on this list; however, they also can offer a big reward. Just look at Tesla’s growth over the past few years, and you’ll see why at least buying a few individual stocks could make sense for you.
If you want more information regarding individual stocks of interest, check out Motley Fool's Stock Advisor service.
Related: Motley Fool Review
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Mutual funds
Unlike individual stocks, a mutual fund is a portfolio of stocks bundled together. Rather than worrying about how one stock will perform or if you’ve picked the best stocks, mutual funds let you invest in a balance of stocks, bonds, and securities that provide more stability to your investment. Mutual funds are a great option for everyday investors because they’re professionally managed with specific goals in mind. Retirement accounts, especially, take advantage of mutual funds since working towards building wealth by a target date is a clear objective that mutual funds can operate on.
Keep in mind that because a mutual fund is professionally managed, you’ll likely pay a commission (also known as an expense ratio) on any earnings you make. This means if you have an expense ratio of 2% and your portfolio grows at a rate of 7%, you’re only making a 5% return.
ETFs (Exchange-traded funds)
A similar investment vehicle to mutual funds is exchange-traded funds, commonly abbreviated to ETFs. ETFs are a more low-cost option for fees than mutual funds; however, they’re also more passively managed than mutual funds are, so there is a price to be paid by avoiding fees altogether.
That being said, many ETFs trade commission-free, which can be a major draw for investors wanting to keep every cent they earn. Suppose you’re working towards diversification in your investment strategy to minimize risk. In that case, ETFs are also a great option since you can choose from different classes and sectors to fill any gaps in your investment accounts.
Index funds
Whether you’re choosing a mutual fund or an ETF, a core component of your investment strategy will probably be securities that match an index fund. Index funds are portfolios that parallel a major market index, such as the Dow Jones Industrial Average or the S&P 500. Since index funds offer a low-expense option for passive investment that is virtually guaranteed to grow your savings, they’re ideal for novice investors.
Rather than betting on individual stocks and hoping that you’ll sell stocks at the right time, an index fund lets you bet on the market. In other words, when you invest in an index fund, you’re betting that the market will always go up, even if individual companies rise and fall. Historical data shows that this philosophy holds water, so there’s a lot of peace of mind that can come from index fund investing, too.
Robo-advisers to consider
If you don’t have a lot of assets or are just starting, you might not be eligible to talk to a financial advisor. Even so, setting up a traditional online brokerage account on your own can be difficult. For example, While Vanguard is a great option for many, you’d be surprised by how many first-time investors don’t realize they have to go through an allocation process after putting money in their settlement account!
It can help to have someone in your corner as you weigh the pros and cons of different metrics and goals. Robo-advisers can be perfect for new investors who need some hand-holding but don’t need a human to talk to about risk tolerance. Since robo-advisers are low-cost and can handle smaller sums of money well, they can be an ideal way to dip your toes into investing.
Here are just a few robo-advisers that make it easy to research and purchase different stocks:
Robinhood
If you want to get your foot in the door when buying and selling stocks, Robinhood is a great option. Robinhood offers commission-free investing as long as you meet the requirements of its fee schedule. This ensures you keep more profits you earn through investing rather than having a portion of them siphoned off by expense ratios.
One other benefit of investing with Robinhood is that you can buy fractional shares in a stock. While other online brokers have a minimum amount you need to invest or require you to be able to purchase at least one stock in a company to invest, fractional shares let you invest in just a portion. For example, if the stock you’re interested in buying has shares valued at $250, and you can only invest $100 now, you can invest in .4 shares instead and start building your portfolio.
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Betterment
Betterment might be right up your alley if you’re interested in using your investments to pay for short-term expenses as long as you have longer savings goals. Betterment helps you identify your financial goals and creates customized investment portfolios to help you reach those goals. Whether it’s saving for a down payment in five years or your newborn daughter’s college tuition, Betterment will help you find the right mixture of stocks and bonds to get you to your goal.
Unlike Robinhood, Betterment does have some fees associated with its services. Their most popular Digital Plan has an annual fee of .25% on your total balance. That means that if you’ve got $25,000 invested, you’ll only pay a little over $62 in fees. If you plan on investing more money or are interested in even more advice, a Premium Plan is offered at an annual fee of .40%.
E*trade
E*trade is another $0 commission option for trading online—as long as you’re buying and selling US-listed ETFs, stocks, and options. Similar to Betterment, E*trade helps you clarify your short-term and long-term goals before you hop into the market so that they can match you with an ideal investment strategy.
One benefit of E*trade is that you can switch up how much handholding you get. For example, you may start with full portfolio management while getting your feet wet but opt for less management as you understand the market more.
Costs
Depending on the brokerage you choose and your investments, you may pay various fees and taxes. It’s worth noting that individual securities have their expense ratios on certain transactions. Depending on your chosen investment vehicle, you may need to pay taxes on any gains you earn on selling stock.
Since these costs vary from brokerage to brokerage, you must carefully read any agreements and terms of service. Many online brokers advertise free commissions, but those rules only apply to certain securities. Read the fine print to know you’re getting the appropriate deal on your investments and won’t unwittingly owe money come tax time.
Related: Robinhood vs Stash vs M1 Finance
Pros and cons
It’s widely accepted in personal finance that if you want to build wealth, you must have a portion of your savings in the stock market. That being said, remember a few different pros and cons before you make your first stock investment.
Pros
- An excellent way to build wealth. Compound interest over time combined with high annual returns makes the stock market the single most powerful wealth-building tool at your disposal.
- Plenty of options to fit investing strategy. From individual stocks to mutual funds or ETFs, there are a variety of investment vehicles to meet the needs and goals of pretty much any investor.
- Easy to get started. The stock market might seem daunting, but thanks to online brokers streamlining the process of setting up your account, it’s much simpler to start investing than 20 or 30 years ago.
Cons
- Some expense ratios might harm your earnings. If you aren’t careful, you may have expense ratios or commissions cut into your earnings. While a commission of only 2% may seem harmless when you consider that you’ll someday need a portfolio of roughly $1,000,000 to retire, that 2% could cost you $20,000.
- Investing takes time. While people like to talk about investing as a way to get rich quick, to invest sustainably, you need years of consistency to build wealth. While it’s not impossible to make money short-selling stocks or day trading, the most surefire path to portfolio growth takes time.
The bottom line
While it may seem stressful to think about putting your money in the stock market, if you want to get a good return on your investment, the sooner you start, the better. The best time to start investing is yesterday, so there’s no time to open up your first investment account like the present!
Thanks to online brokerages and robo-advisers, you can automate your investing strategy based on personal goals for the future rather than getting bogged down in the details of an individual company or stock’s performance. Whether you choose a platform like Robinhood or opt into your company’s retirement plan, it’s critical to your financial future that you start investing sooner rather than later. With the right information, you’ll be well on your way to building the wealth you need to achieve your financial goals.
If you want more information regarding stocks of interest, check out Motley Fool's Stock Advisor service.
Related: Motley Fool Review
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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