Investing in stocks can seem like an intimidating activity, especially if you’ve never done it before. However, the process of buying stocks has become much easier thanks to new technologies and the internet.
Today, investors have the ability to create their own stock portfolios that suit their individual needs, whether they’re looking to purchase one or ten different companies or other entities.
If you’ve never bought stock before but would like to learn more about what your options are, this guide will help you pick the best stocks for your portfolio.
Step 1: Open an Account to Buy Stock
Before you can start picking stocks, you’ll need to open an account with a broker. If you’re just getting started with investing, I recommend Ally Invest.
Opening an account to buy stocks is easy and can be done through your broker.
This process will vary depending on what type of broker you have. The process should be relatively straightforward if you use a discount brokerage.
You will need to provide the following information:
- Name and address of the account holder
- Social Security Number or Taxpayer Identification Number if available (an Individual Taxpayer Identification Number may also work)
- Date of birth (must be on file with the broker)
- Whether you want paper statements or online statements for your account
Once you’ve opened your account, it’s time to choose your portfolio!
Step 2: Know your Goals and Risk Tolerance
Your risk tolerance is how much volatility you can tolerate. It’s important to know what your risk tolerance is before investing.
There are a lot of ways to figure out your risk tolerance, but one of the easiest ways to do so is by answering the following three questions:
1) What was your reaction when the stock market went down sharply in 2008?
2) How did you feel when you lost money on an investment?
3) How were you feeling when you saw that your investments have been performing well lately?
Answers to these questions can help give you an idea of where your risk tolerance lies.
If your answers fall closer towards being nervous or fearful, then it’s possible that you have a high level of risk tolerance.
Step 3: Do Some Basic Research
Now it is time to do some research. While you are doing your research, keep these questions in mind:
1) Why does this company exist?
2) What does the company do?
3) Who are the major players in the industry?
4) Who are their customers?
5) How is the company financed (stocks and bonds)?
6) How much profit does the company make, and how sustainable is this profit level?
7) Is there anything unique about the company’s structure that would make me want to buy or sell their stock (e.g., a money-losing start-up)?
8) If I were an investor, what would I be looking for before buying shares of this company’s stock?
Step 4: Use an Investment Manager
Once you have an idea of what type of stocks you want to invest in, the next step is using an investment manager.
If you are investing on your own, check out Morningstar’s list of top performing funds to find one that suits your needs.
If you don’t feel confident enough in your own skills, hire a financial advisor or use a robo-investment service like Wealthfront or Betterment.
Using their services costs less than $1 per day, and they’ll take care of all the research for you!
Step 5: Start with a Balanced Portfolio
One thing that can help you make smart decisions is to have a balanced portfolio.
This means that you’re not putting all of your eggs in one basket and if one particular sector or company tanks, it won’t hurt your financial stability as much.
A common rule of thumb is to invest 50% of your portfolio in stocks and the other 50% in bonds, but there’s no right answer here.
You need to assess what will work best for you given your goals, risk tolerance, and timeline for retirement.