How To Invest In Stocks

There is more than one way to invest in stocks. You can opt for any of the following approaches or use all three. How you buy stocks depends on your investment goals and how actively involved you’d like to be in managing your portfolio.

• Buy individual stocks. If you enjoy researching and reading about markets and companies, buying individual stocks could be an excellent way to start investing. Even if the share prices of some companies seem pretty high, you can look at purchasing fractional shares if you’re just starting and have only a modest amount of money.
• Invest in stock ETFs. Exchange-traded funds buy many individual stocks to track an underlying index. Investing in an ETF is like buying stocks from a very broad selection of companies in the same sector or comprise a stock index, like the ASX200. ETF shares trade on exchanges like stocks but provide greater diversification than owning an individual stock.
• Own managed funds. Managed funds share certain similarities with ETFs, but there are substantial differences. Actively managed funds have managers who pick different stocks in an attempt to beat a benchmark index. When you buy stock mutual fund shares, your profits come from dividends, interest income and capital gains from the underlying assets that the fund invests in and actively manages.

Remember that there’s no right or wrong way to invest in stocks. Finding the best combination of individual stocks, ETFs, and managed funds might take some trial and error while you learn to invest and build your portfolio.

Related: Best Share Trading Platform for Beginners

There are a variety of accounts and platforms that you can use to buy stocks. You can buy stocks yourself via an online brokerage, or you can hire a financial advisor or a robo-advisor to buy them for you. The best method will be the one that aligns with how much effort and guidance you’d like to invest in the process of managing your investments.

• Open a brokerage account. If you have a basic understanding of investing, you can open an online brokerage account and buy stocks. A brokerage account puts you in the driver’s seat when it comes to choosing and purchasing stocks.
• Hire a financial advisor. If you would prefer to have more advice and guidance for buying stocks and other financial goals, consider hiring a financial advisor. A financial advisor helps you specify your financial goals and then purchases and manages your investments for you, including buying stocks. Financial advisors charge fees, which can be a flat annual fee, a per-trade fee or a percentage of the assets they manage.
• Choose a robo-advisor. Robo-advisors are a simple, very inexpensive way to invest in stocks. Most robo-advisors invest your money in different portfolios of ETFs, and they buy the assets and manage the portfolio for you. They are generally less expensive than financial advisors, but you seldom have the benefit of a live human to answer questions and guide your choices.
• Use a direct stock purchase plan. If you’d prefer to invest just a few stocks, many blue-chip companies offer plans that make it possible to purchase their stock directly. Many programs offer commission-free trades, but they may require other fees when you sell or transfer your shares.

Keep in mind that no matter the method you choose to invest in stocks, you’ll most likely pay fees at some point to buy or sell stocks, or for account management. Pay attention to fees and expense ratios on both managed funds and ETFs.

Don’t be shy about asking for a fee schedule or chatting with a customer service representative at an online brokerage or robo-advisor to advise you on fees you might incur as a customer.

In Australia, there are several types of accounts available for investing in shares:

Retail Brokerage Accounts: These are the most common type of accounts used for investing in shares. You can open a retail brokerage account with an online broker or through a financial advisor. These accounts do not have any special tax treatment and there are no contribution limits.

Superannuation Funds: These are retirement accounts where both you and your employer can contribute. The funds in your superannuation account are invested and the earnings are taxed at a concessional rate. There are annual contribution limits for both pre-tax and after-tax contributions.

Self Managed Super Funds (SMSFs): This is a private superannuation fund that you manage yourself. SMSFs can have up to four members, all of whom are trustees responsible for the fund’s compliance with relevant laws. SMSFs can invest in shares, property, and other assets.

Managed Funds: These are investment funds managed by professionals. You invest your money with a fund manager who pools it with other people’s money and invests it in a portfolio of shares, property, and other assets.

Each type of account has its own features, benefits, and rules. Depending on your financial goals and situation, you may choose to use one or more of these accounts to invest in shares. Setting up your investment accounts can be done through a broker (online or through your financial advisor), your bank (for investment bonds), or your employer (for superannuation accounts).

If you plan on buying shares via a Self Managed Super Fund (SMSF) retirement account, you might want to establish a monthly recurring deposit. Concessional super contributions are payments put into your super fund from your pre-tax income and are tax-deductible for self-employed people. They include your employer’s super guarantee (SG) contributions. Concessional super contributions are taxed at 15% when they are received by your super fund.

For example, the annual contribution limit for concessional (pre-tax) contributions is $27,500 for the 2022-23 financial year. If your goal is to max out your contribution for the year, you might set a recurring deposit of approximately $2,291 per month to meet that limit.

If you’re buying shares through an employer-sponsored superannuation fund, you’ll need to indicate what percentage of your pay or a flat dollar amount you want to be deducted from each pay cheque.

For all other types of investment accounts, establish clear investing goals and then decide how much of your monthly budget you want to invest in shares. You can choose to move funds into your account manually or set up recurring deposits to keep your share investment goals on track.

Here are a few things to keep in mind as you set your investment budget and fund your account:

Managed fund purchase minimums: Many managed funds have minimum initial purchase amounts. Be sure to research different options—Morningstar is a great resource—to find ones with zero or low minimums to start investing in shares as soon as possible.

Trading commissions: If your brokerage account charges a trading commission, you might want to consider building up your balance to purchase shares—especially individual stocks—until the commission only represents a small fraction of your dollars invested.

Managed fund fees: When buying a managed fund, be sure to review what the “load” is on the shares you’re purchasing. Some managed funds have an upfront or back-end sales charge—the so-called load—that’s assessed when you buy or sell shares. While not all managed funds have loads, knowing before you buy can help you avoid unexpected fees.

Select the individual stocks, ETFs or mutual funds that align with your investment preferences and start investing.

If you’ve chosen to work with a robo-advisor, the system will invest your desired amount into a pre-planned portfolio that matches your goals. If you go with a financial advisor, they will buy stocks or funds on your behalf.

Upon successful execution of your order, the securities will be in your account, and you’ll begin enjoying the rewards of the stock market. And yes, your funds will reap dividends and experience losses as the economy changes, but for the long-term, you’ll be taking part in the sector of investments that have helped investors grow their wealth for over a century.

As you make your initial stock purchases, consider enrolling in a dividend reinvestment plan (DRIP). Reinvestment plans take the dividends you earn from individual stocks, managed funds or ETFs, and automatically buys more shares of the funds or stocks you own. You may end up owning fractional shares, but that will keep more of your money working and less sitting in cash.

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Once you’ve started building up a portfolio of stocks, you’ll want to establish a schedule to check in on your investments and rebalance them if need be.

Rebalancing helps ensure your portfolio stays balanced with a mix of stocks that are appropriate for your risk tolerance and financial goals. Market swings can unbalance your asset mix, so regular check-ins can help you make incremental trades to keep your portfolio in order.

There’s no need to check in on your portfolio daily, so a monthly or quarterly schedule is a good cadence. As you review your portfolio, remember that the goal is to buy low and sell high. Investing in stocks is a long-term effort. You’ll experience inevitable swings as the economy goes through its usual cycles.

The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.