How to Make Your Very First Stock Investment

If you want to start investing and don’t know where to start, it’s easy to get overwhelmed by all of the options available to you. You probably know that investment accounts are an important part of achieving your financial goals; however, when it comes to buying stocks or picking a brokerage firm, you may find yourself a little lost.

While not every investment strategy is appropriate for every person, it is critical that you get into the stock market now if you’re not already. The good news is that once you get a general understanding of how the market works, it’s easier than you’d think to set up a brokerage account. Read on for some tips to keep in mind as you plan to buy your first stock.

Unlike a traditional savings account, investment accounts allow you to supercharge the return on any amount of 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, despite the fact that 2020 was a grueling year for many, the average stock market return over the past 10 years has been 9.2%, with the average of the S&P 500 returning about 13.5% 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 403b is so important.

Past performance on Wall Street illustrates that the stock market is the single most powerful vehicle you have 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 builds a clear case for the importance of getting into the stock market as soon as possible.

Once you know you’re going to get into the stock market, it’s important to look into the different 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 to use. Here are some of the most common investment options:

Individual stocks are likely the first thing you think about when you consider 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.

Related: How to Buy Tesla Stock

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 a bit more stability to your investment. One reason mutual funds are a great option for everyday investors is that 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 actually only making a 5% return.

A similar investment vehicle to mutual funds is exchange-traded funds, commonly abbreviated to ETFs. ETFs are a more low-cost option when it comes to 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, the fact that many ETFs trade commission-free can be a major draw for investors wanting to keep every cent that they earn. If you’re working towards diversification in your investment strategy as a way of minimizing risk, ETFs are also a great option since you can choose from different classes and sectors in order to fill any gaps in your investment accounts.

Whether you’re choosing a mutual fund or an ETF, a core component of your investment strategy will probably be securities that match something called an index fund. Index funds are portfolios designed to parallel a major market index, such as the Dow Jones Industrial Average or the S&P 500. Due to the fact that index funds offer a low-expense option for passive investment that is virtually guaranteed to grow your savings, they’re an ideal option 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. To date, 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.

If you don’t have a lot of assets or are just starting out, you might not be eligible to talk to a financial advisor. Even so, it can be difficult to set up a traditional online brokerage account on your own. For example, While Vanguard is a great option for many, you’d be surprised by how many first-time investors don’t realize that they have to go through an allocation process after putting money in their settlement account!

Clearly, 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 being to talk to about their risk tolerance. Since robo-advisers are low-cost and are capable of handling smaller sums of money very 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:

If you want to get your foot in the door when it comes to buying and selling stocks, Robinhood is a great option. Robinhood offers commission-free investing as long as you meet the requirements of their fee schedule. This ensures that you keep more of the 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’re only able to invest $100 at this moment, you can invest in .4 shares instead and start building your portfolio.

If you’re interested in using your investments to pay for short-term expenses as long as longer savings goals, Betterment might be right up your alley. Betterment helps you clearly identify your personal 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 larger amounts of money or are interested in even more advice, a Premium Plan is offered at an annual fee of .40%.

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 as you go. For example, you may start with full management of your portfolio while you’re getting your feet wet, but decide to opt for less management as you start to understand the market more.

Depending on the brokerage you choose and the investments you make, you may wind up paying a variety of fees and taxes. It’s worth noting that individual securities have their own expense ratios on certain transactions, and that depending on the investment vehicle you’ve chosen, you may need to pay taxes on any gains you earn on selling stock.

Since these costs vary from brokerage to brokerage, it’s important that you read any agreements and terms of service very carefully. Many online brokers advertise free commissions, but those rules only apply on certain securities. Make sure to read the fine print so that you know you’re getting the appropriate deal on your investments and won’t unwittingly owe money come tax time.

It’s widely accepted in the world of personal finance that if you want to build wealth you’re going to need to have a portion of your savings in the stock market. That being said, there are a few different pros and cons to keep in mind before you make your first stock investment.

While it may seem stressful to think about putting your money in the stock market, if you really 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 like the present to open up your first investment account!

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 than later. With the right information, you’ll be well on your way to building the wealth you need to achieve your financial goals.