The stock market is one of the most rewarding investment vehicles that exists, and you’d be hard-pressed to find a more reliable way to create long-term wealth. Stocks collectively produce a return on investments of about 10% — which has been the average since the beginning of the stock market — but since this typically occurs over long periods of time, the stock market is best for those with time on their side.
Of course, you can invest in the stock market at any age, but those with less time in the market are more likely to succumb to the short-term effects of the market’s fluctuations. That’s why one of the best ways to maximize your returns is to start in the stock market as early as possible. You’ll be able to afford more losses because there will be more time on your side to make up for them.
But before you start buying up random stocks, there are a few things you should know first. After all, there’s no guarantee you’ll make money in the stock market, so understanding exactly what it is you’re participating in can help minimize potential losses. If you are just dipping your toes into the stock market, here are some entry-level concepts for you to consider.
What is the stock market?
At its most basic level, the stock market is a marketplace of buyers and sellers of stocks, which represent ownership claims on businesses. The stock market is not a physical facility but rather a loose network where these transactions take place.
The stock market is comprised of both primary and secondary markets, with the primary market being where new securities for companies are issued — think an initial public offering, or IPO. Once the initial sale of these securities is complete, further trading is conducted on the secondary market, where the bulk of exchange trading occurs each day. The secondary market is where you personally are likely to buy and sell stocks.
Within the stock market, you have stock exchanges, such as the New York Stock Exchange or the NASDAQ. A stock exchange is an entity that provides stockbrokers and traders an avenue for buying and selling shares of stocks, bonds, and other securities in the stock market.
It’s best that you familiarize yourself with the stock market as much as you can. You can start by learning some basic investing terms, and there are numerous books on the subject. In the meantime, you can still get involved by starting off as a passive investor.
Start out with passive investing
As a general rule of thumb, if you don’t know what you’re investing in, there’s a strong case to be made that you probably shouldn’t be investing in the first place. Since you’re just starting out, start slow and get a feel for the market as a whole. Don’t be in it just to make a quick buck because chances are you won’t.
Stockbrokers and money managers are involved in the stock market for a living; they know what they’re doing, they trade large volumes of stocks, and even they still lose money. While outperforming the market is possible, it’s proven to be a difficult feat, even for professionals. As you’re just starting out, matching the performance of the market is a great place to start. This is often the goal of many passive investors, as the market generally takes time to produce consistent returns.
The goal of passive investing is to build wealth gradually with a buy-and-hold strategy, as opposed to actively and regularly trading stocks. Passive investing can be done by selecting individual stocks to build yourself a diversified portfolio, though this would require extensive research into each company you want to invest in.
If you don’t feel comfortable choosing the companies you want to invest in or don’t have the time, there are ways beginner investors can still get involved in the market. They don’t even require you to know the ins and outs of every company you’re investing in. One of the easiest ways to do this is by investing in ETFs.
Buy through an ETF
An ETF is an “exchange-traded fund”. It is a basket of securities — such as stocks — that often tries to produce similar returns as a stock market index like the S&P 500 or the Dow Jones Industrial Average. A stock market index is a measurement of a section of a stock market. The S&P 500, for instance, measures the stock performance of 500 of the largest companies listed on stock exchanges. Other ETFs can be made up of everything from real estate investment trusts (REITs) to sector-specific ETFs that allow you to invest in stocks within a particular area of the market, such as financials, energy, or technology.
ETFs that track a stock index will be made up of similar stocks as the index, so as the index rises and falls, so does the ETF. Say, for example, you invest in an ETF that tracks the S&P 500. If the stocks that make up the S&P 500 increase in value, the S&P 500 increases in value as well. Since the ETF you invested in tries to replicate the S&P 500, your ETF goes up in value as a result.
One of the main reasons an ETF is great for novice investors is that they are generally less expensive than something like a mutual fund. That’s because an ETF is passively managed (the fund manager doesn’t try to beat the market), comes with lower fees, and allows you to invest in the broad market without requiring in-depth knowledge on each individual company.
There are hundreds of ETFs for you to choose from so make sure you do your due diligence before investing. You can find reviews of most ETFs through a quick internet search, and make sure to also consider the fees you’ll be charged by adding it to your portfolio. If you’re looking for a simple way to start, Wealthsimple and Stash might be a great option. Wealthsimple is an online investment platform that allows you to invest automatically in ETFs. Stash is another investment tool that allows you to get started in the stock market for just $5, and you can build a portfolio of stocks, bonds, and ETFs.
Bottom line on starting in the stock market
The stock market is an intricate and complicated beast, but it’s one of the best ways to create long-term wealth. Since much of the success of the stock market has to do with how much time is on your side, the best thing you can do is start investing as soon as possible.
If you’re in a hurry to make money, there are better ways to go about it than diving into the stock market head first with the wrong expectations. Consider ways you can boost your income and make some extra cash in the short term. Then you can use that money to invest in the stock market. Voila!
Take the time and familiarize yourself with these three things you need to know about starting in the stock market and you should find yourself starting off on the right foot.