During the COVID-19 pandemic, many people found themselves out of work with nothing to do. As a result, many turned to investing with platforms like Robinhood to fill the time and earn themselves some extra money. But how do you go about getting started trading? This guide will give you some pointers to help you out.
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Make a plan and get started trading
Before you decide to do anything, you'll need to make a plan for your investments. The first thing to decide is how much you're going to invest. You shouldn't invest all of your savings because you don't want to risk everything. For investors who just want to get their feet wet by investing, stocks and exchange-traded funds are a good idea.
If you don't have enough money to hire a financial advisor or you just want to take a do-it-yourself approach to trading, you'll need to open an investment account. Robinhood has exploded in popularity this year. It features a $0 account minimum, $0 trading costs for stocks and options, and no fees except a $75 outgoing transfer fee, which can be avoided by paying $5 a month for Robinhood Gold. You can also find out what other investors are doing by checking out the most popular stocks on the platform.
There are also many other options for those who want to get started trading. Interactive Brokers, E*Trade, TD Ameritrade, Charles Schwab and Fidelity Investments are other options for those who are just getting started trading.
If you don't want to do the active trading yourself, you might consider a robo-advisor instead. Robo-advisors allow you to trade stocks, but you don't have to pick each stock yourself. The service manages your portfolio for you for a small fee, usually 0.25% of your account balance. Some examples of quality robo-advisors include Wealthfront and Betterment. If you decide to use a robo-advisor, you won't really need to do much else.
ETFs and mutual funds
After you select a brokerage account, it's time to start thinking about individual investments. It's natural to think about stocks when it comes to investing, but there are other ways to invest in stocks without buying individual stocks. These options include exchange-traded funds (ETFs) and mutual funds.
The benefit of ETFs and mutual funds is that they allow you to invest in multiple stocks with a smaller investment possible. The goal is to build a diversified portfolio, and ETFs and mutual funds offer this without you having to buy a bunch of different securities. The funds themselves hold the securities for you, so you get a much bigger bang for your buck than if you buy individual stocks.
By investing in ETFs or mutual funds, you get some experience trading securities because they are publicly traded, but you also get the diversity of investing in a broader portfolio. It's like the best of both worlds between a robo-advisor and being able to do your own investing without a lot of extra legwork on your part.
Most ETFs and mutual funds are passively managed, which means they track a stock index like the S&P 500. This provides further assurance that the portfolio is diversified across companies and sectors.
Going the individual stock route instead
The downside of ETFs, mutual funds and robo-advisors is the fact that you can't choose any stocks yourself. If you already have a specific company in mind that you want to invest in, you'll need a brokerage account that will let you trade individual stocks.
If you do decide to go the individual stock route, there are some things you should keep in mind. First, it's important not to invest your entire portfolio into just one or two stocks. If you aren't starting with a lot of money, it can be difficult to diversify in the beginning, but you should try to do the best you can.
In this scenario, you may want to at least start with an ETF or mutual fund and then expand into individual stocks. Another option is to invest the bulk of your money into ETFs or mutual funds and then pick a few individual stocks of your own on the side, making sure that the stocks you pick aren't already included in the ETF or mutual fund you have selected.
It may not always be possible to get a complete list of the stocks that are included in the ETF or mutual fund you have selected, but if you know which index they are tracking, you can get a pretty good idea. Some of the most common ETFs track the S&P 500, so all you need to do is look up the constituents of that index to find out what's included in the ETFs that track it.
Getting started investing can be very exciting, but doing your research before you make any decisions is a necessary part of the process. The research part can seem like a lot of work, but it's necessary if you want a quality portfolio that performs well with an acceptable amount of risk.
It's important to realize that you should never invest money you can't afford to lose, so you probably won't be able to finance your lifestyle with your investments. Investing is a great way to increase your savings, but don't become discouraged if things don't work out immediately. The best way to make money investing is to buy and hold investments for years.
This allows your investment to earn back whatever it loses from time to time. If you have made your investments wisely, often you just need to wait a while for the money to return, although that isn't always the case.