How to invest in the stock market
Editorial staff, J.P. Morgan Wealth Management
- Investing in stocks essentially means buying a small piece of a company. You can earn money from these investments if the company pays you dividends or if you sell your stocks after their price has increased.
- There are different types of investment accounts that give you the opportunity to take a more hands-on or hands-off approach to choosing investments.
- You can invest in individual stocks or in stock funds, which are composed of multiple stocks. These funds may be either actively managed (most mutual funds) or passively managed (most ETFs).
- It’s important to remember that fluctuation in the stock market is natural. Some days, and some years, your investments may lose value. It’s a good idea to keep your long-term investment goals in mind.
The basics of investing in stocks
When you buy a stock, you are essentially buying a tiny piece of a company. If the company grows, the piece of it that you own may become more valuable. In other words, the price of the stock you own may go up. If that happens, other investors might be willing to buy your stock for more than you paid for it, meaning that you would make a profit. Additionally, many companies pay what are called dividends to shareholders. These are regularly scheduled periodic payments made as a way to share profits with investors.
If you’re not investing directly in individual stocks, you may be investing more broadly in something like a mutual fund or exchange-traded fund (ETF). We’ll get more into the ins and outs of those later on.
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Choosing an investment account
As you make a plan for investing in stocks, it’s important to think about how involved you want to be in picking the stocks you buy. To begin investing in stocks, one type of investment account you can open is known as a brokerage account. Your brokerage account can be one where you make all the investing decisions, or it can be an advisor-assisted account. If you choose not to work exclusively with a human advisor, there are two types that are popular among new investors.
- Self-directed account: If you want to choose stocks and stock funds yourself, you can choose an account that will allow you this kind of control, like a self-directed account.
- Robo-advisor: If you would like to be more hands-off with the process of choosing stocks, a robo-advisor might be a good choice.
Beyond these options, you may also consider consulting with a financial advisor.
Investing in individual stocks vs. funds
If you opt for more control over how you pick investments, you will need to choose between buying individual stocks and investing in mutual funds or ETFs – both of which are professionally managed.
- Mutual funds allow investors to put money into many different companies in one transaction. Some mutual funds track indexes. Others are linked to specific industries. The advantage of mutual funds compared to individual stocks is that they are diversified, meaning that they offer exposure to a broad range of stocks. In other words, when diversified, you don’t have all your eggs in one basket. You can only buy mutual funds once a day versus the below.
- ETFs are essentially baskets of investments that trade on a financial exchange (similar to a stock). You can buy ETF shares the same way you buy shares of a stock. But instead of only one investment, you potentially gain exposure to a myriad of investments because a single ETF can hold hundreds or even thousands of stocks. This can add diversification to your portfolio and help you reduce risk. One main benefit of ETFs is their flexibility – they can be traded freely throughout the day like stocks.
- Individual stocks are generally a more high-risk/potentially high-reward way to invest than mutual funds or ETFs. If you do research on a specific company and have reason to believe its stock price will go up, you might decide to buy shares of that company individually.
Investing in retirement funds
401(k)s and IRAs are common types of retirement investment accounts. Let’s explore the differences.
Many new investors start out by investing in an employer-sponsored 401(k). This can be a great way to begin investing and make progress toward long-term financial goals. Many 401(k)s give investors access to a selection of stock and bond mutual funds, but not to individual stocks and bonds.
Another retirement vehicle that people may be able to invest in is an IRA – aka individual retirement account. There are two main types of IRAs: traditional IRA and Roth IRA. Both offer potential tax benefits, such as contributing either tax-deductible or after-tax dollars to traditional IRAs or contributing after-tax dollars to Roth IRAs and potentially benefitting from tax-free growth. Stocks, bonds and mutual funds are all typically available to invest IRA funds in, but the best strategy may vary based on your situation and account type.
If you’re not sure which retirement plan is best for you and your goals, a financial advisor can help guide your choices. The same goes for general investing strategies, such as with ETFs or mutual funds.
The long game
It’s important to remember that stock market volatility is normal and even expected. Some days, and some years, your investments may lose value. But that doesn’t mean investing in the stock market is fruitless. History has shown that the stock market tends to rise over the long term. And when it comes to investing, time is on your side. The earlier you start investing, the better chance you may have of accruing more money when it comes time to liquidate your returns down the line.
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