Investing: How to Start
Updated: Jan 14
Starting from square 0?? Read this; the ultimate beginners guide to investing.
*Not financial advice - your money, your choice.*
When I first got started investing, I had a lot of questions that came up that I now look back on and chuckle a little at the amount of personal finance knowledge that I had; everyone has to start somewhere! I didn't even know what a stock was! (we'll cover that here)
What I'll cover in this post:
What is a stock?
What is a bond?
What is a dividend stock?
What is an ETF?
How can I open an account to buy stocks and bonds and ETFs?
What are stocks?
Stocks are shares of company ownership that can be bought and sold between people/institutions/companies, usually on an exchange like the New York Stock Exchange (NYSE).
A share is worth a percentage of a company and its worth is proportional to the total worth of the company e.g. if a company is worth $1,000 and it has 100 shares, the price of 1 stock/share would be $10.
A bond is different than a stock; it is a loan to a company or government with the promise from that company/government that you will get repaid with interest in return for 'holding the bond'.
Generally, bonds don't return as much as stocks but if a company runs into financial trouble or needs to raise money for expansion, then it can sell bonds to raise money.
If the company runs into trouble bondholders get paid out first so they are perceived as less risky.
Dividends are similar to bonds in that they pay you on a schedule but they require that you hold stocks. It is effectively a cash reward from the company that is given out in exchange for holding shares of a company.
If the business makes money, then the value of the share you hold may increase AND you may also receive some of those profits.
The money you receive is typically proportional to the number of shares that you hold in that company.
EX: If the dividend yield is 4% (annually) and you own 10 shares and each share is worth $100 when you bought then you will get $4 the first year assuming the price doesn’t change.
Using this same math, to earn $1,000/mo in passive income (making money while you sleep), you would need to have $300,000 invested at 4% interest.
Learn more about the power of compounding interest here.
An ETF is an 'Exchange Traded Fund'. I think of these as a pan with a bunch of different slices of pie in the pan where each type of pie is a different company BUT, different from the picture, each slice could be a different size weighted on certain criteria… and there could be hundreds or thousands of different flavors:
Picture from the University of North Carolina: School of the Arts
Now that you know what a stock, bond, and ETF are, how do you buy them?
To be able to purchase assets like stocks, bonds, and ETFs, you'll need something called a Brokerage Account.
These are financial products offered by top brokerage firms such as Fidelity, Charles Schwab, E*Trade, and TD AmeriTrade. They offer low brokerage fees and provide LOTS of amazing info & advice.
Personally, I use Charles Schwab for my primary brokerage though I have friends who would die for Fidelity or RobinHood (update: both now have 24hr customer support). I personally use Schwab + larger firms because they tend to carry SIPC and FDIC insurance and Schwab always has a real person (not a Pinocchio) I can chat with - important if there's an issue with my life savings/investing as opposed to being stuck in a frustrating phone tree with Wells Fargo or Bank of America.
Opening an account at one of these firms is similar to how you may open a checking account with your current bank. Usually, all you need is your SSN.
Follow these steps once you open an account:
Link it to your checking/savings/another account
Fund that account by making an xfer/deposit
Most brokerages offer automated transactions - I have mine set up to automatically transfer money after each paycheck I receive (If I don't see it, I can't spend it!)
Once your account is funded - go buy some stocks, bonds, or ETFs! My favorites are Vanguard ETFs like VTI and VOO because they offer broad market exposure and VERY low expense ratios (fees) - I'm talking 0.03% of your holdings.
Most brokerages allow automation of investments through an AIP or recurring buys of certain securities
Once you've got the brokerage account it's time to open a ROTH IRA or Trad. IRA using a similar process (usually) at the same brokerage! To understand why I wish I started investing 10 years ago, click here.
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