How to invest in stocks
To start investing in the stock market is as easy as opening a brokerage account. But with so many brokerages to choose from, you need to be sure you understand the details before you settle on which one (or ones) suit you best. Some important points to consider: investing costs (including fees for various types of trades, annual maintenance and inactivity), investment options and account types.
Once you settle on a broker and open an account, you’re free to start investing.
How do you want to invest in stocks?
When you think about investing, your mind might go straight to stock picking—selecting individual companies that you believe are poised to do well and bring in the returns you need. This investing strategy requires a lot of homework. Not only do you have to research each business that interests you and determine whether it’s a worthwhile investment; you also have to find enough worthwhile investments to build a well-diversified portfolio.
For most people, investing in stock mutual funds or exchange-traded funds (ETFs) is a simpler strategy. Index funds, which mirror stock indexes like the S&P 500, can be a great option (there are ETF and mutual fund versions of these). The pros running such funds handle all the hard stock picking for you and let you invest in their portfolios of hundreds or thousands of different stocks in one quick trade, which also helps keep your costs down. (Acorns’ pre-selected portfolios include a mix of ETFs with allocations designed to match a variety of investing styles and financial goals.)
What to keep in mind when investing in stocks
Whether you go with individual stocks or stock funds, we repeat: You need to diversify your investments to carry you through all the market’s ups and downs. And that diversification needs to happen within your stock holdings, as well as in your overall portfolio. Some types of stocks you need to consider: domestic vs. foreign, different size companies (small vs. medium vs. large), various sectors (for example, retail vs. tech) and growth vs. value (think Facebook vs. Walmart).
Each type comes with certain expectations. For example, small companies (typically defined as having a market capitalization, or value, of less than $2 billion) tend to have greater potential for growth than large companies (with a market cap of more than $10 billion). But small caps also generally offer less stability than large caps, making them riskier bets.
You might also consider whether a stock pays dividends, periodic payout of earnings that some companies and funds share with investors. If a company (or fund) does, you can enjoy that little payout, even when the stock price slips. If you need the income, you can cash it out. Otherwise, you can reinvest your dividends and try growing your money even more. Just remember that dividend-paying companies tend to be well-established businesses within particular sectors like utilities and telecommunications and may offer less growth potential than other companies’ stocks. That means investing in dividend stocks alone does not a well-diversified portfolio make.
How much to invest in stocks
Remember that investing is for the long haul. So you should only invest money you won’t need within the next five years or so. That should give you enough time to recover from any short-term losses and reap the potential long-term rewards.
The specific amount you invest depends on your budget. If you go by the 50-30-20 guideline touted by many experts, 20 percent of your budget should be reserved for future goals, while 50 percent goes toward essential spending and the remaining 30 percent covers everything else. Of that 20 percent, you should invest whatever money you don’t expect to need anytime soon. So, if your monthly budget starts with $10,000, you’d aim to set aside $2,000 a month for the future—and that’s the maximum you’d want to invest, depending on your goals.
Of course, not all of us fit into model sizes. Perhaps you can afford to invest more than 20 percent. (Go, you!). Maybe 20 percent feels like too lofty a goal for now. (Don’t sweat it.) What’s most important is that you get started as soon as possible. Even if you have just a small amount to invest, the sooner you start investing, the more time your money has to grow. (Acorns lets you start investing with as little as $5.)
How to invest in bonds
Just like with stocks, investing in bonds is easy to do through any brokerage account. (You can even buy Treasuries directly from the U.S. government without a brokerage account—just go straight to www.treasurydirect.gov.) But understanding and selecting your bond investments is a bit more complicated.
What types of bonds can you invest in?
Bonds typically pad the safe side of your portfolio. But how much padding they provide depends on the type of bonds. And just like with stocks, the risks and returns of bonds are correlated. Treasuries, issued by the federal government, provide the most safety and the lowest returns. Corporate bonds, issued by companies, tend to offer greater returns, but also greater risks—the degree of which depends on the stability of the particular company. Municipal bonds, issued by state and local governments, fall somewhere in between.
Bonds also vary by maturity. That’s how long it should take you to get back the face value of the bond. And the longer it takes, the greater the returns—and risks—stand to be. Short-term bonds mature in five years or less, intermediate bonds mature between five and 12 years and anything beyond is considered long-term.
Individual bonds vs. bond funds
As with stocks, you can invest in bonds individually or through a basket of bonds. And going the fund route comes with the same advantages: You can benefit from expert management and greater diversification at relatively lower costs. Acorns gives investors potential exposure to thousands of bonds through its ETF offerings, including iShares 1-3 Year Treasury Bond ETF and iShares iBoxx $ Investment Grade Corporate Bond ETF.
How much to invest in bonds?
Again, how much you invest should be limited to the money you won’t need within the next few years. How much of your investment portfolio should be allocated to bonds depends on several factors, including your risk tolerance (how much you can stand to lose), risk capacity (how much you can afford to lose) and time horizon. Basically, you have to figure out how aggressive or conservative you want your portfolio to be, and that determines your allocation between stocks and bonds.
One rule of thumb: Subtract your age from 120, and that’s the percentage of your portfolio that should be allocated to stocks. The rest would go to bonds and other safer investments. So, if you’re 35, you’d go with 85 percent stocks and 15 percent bonds. And as you age, your portfolio should grow more conservative. Of course, these are just general guidelines, and you should tweak your numbers however you see fit.
A well-diversified portfolio of stocks, bonds and other investments should help you sail through even the most volatile of markets. After all, investing naturally comes with its ups and downs. The point of diversification is to strike a balance between the potential risks and rewards, so that you feel comfortable weathering any volatility and sticking with your long-term investing strategy to achieve all your financial goals.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.