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By Charles Qi, CFA
Special to the Financial Independence Hub
Many of us are familiar with the benefits of investing. Whether you’re looking to save for retirement, earn money in the stock market, or achieve some other financial goal, investing — when done well — can help you build your financial future. But if you’re not professionally trained in the stock market, starting out can be daunting.
Whatever the reason someone has for dipping their toes in the investing waters, starting out can be daunting. There’s a lot of math involved, tricky rules, and an entire lexicon of investing terms to remember. Those who are not scared away may be wondering where to start.
Despite these fears and uncertainties, though, leaping off the investing cliff can help build a foundation toward financial freedom. Here are five tips for new investors looking to get started in the stock market.
1. Set an Investment Budget
It can help to make investment contributions part of a normal household budget. By setting aside a predetermined amount of funds to funnel into investment accounts each month or pay period, one can rest assured that their accounts are being regularly funded, even as the market rises and falls. A good investment goal is typically between 10% to 15% of your income. If one is enrolled in an employer sponsored retirement plan, their match counts towards that percentage goal.
2. Start Investing as Early as Possible
Finances can be tight when someone is just beginning to invest, even with a job that pays their bills. However, once you’re able to allocate a portion of your monthly income to investing in the stock market, it’s beneficial to start investing as soon as possible.
The earlier one begins to invest, the longer they can allow compound interest to accumulate. Compound interest is how your investments grow. For example, if you have an account that pays 1% interest per year and you deposit $1,000 into that account, you would earn $10 on that money in one year. Average rates of return can fluctuate year by year, so make sure that you check out the rate of return on any stock or money market account you may be interested in.
3. Learn Basic Investing Terminology
While those just beginning to invest don’t need to know everything off the bat, there are a few terms they will need to familiarize themselves with to help them make smart investment decisions. For example, what is a money market account, anyway? How about an IRA?
There are many new terms one will likely need to learn when they start investing. The different types of accounts, and how they function and grow, is important to learn before throwing large amounts of cash into investment accounts. The more one is able to learn about the difference between these different types of accounts, the more comfortable they will be in their investment decisions.
4. Know the Differences between types of Investing Accounts
If one doesn’t have a 401K account through their employer, the next-best option will be to open another type of account, such as a traditional or Roth IRA. Traditional IRAs — or Individual Retirement Accounts — are tax-deductible, provided the IRS qualifications are met. Roth IRAs, on the other hand, are not tax-deductible.
There are other similarities and differences as well. For example, a sticking point to watch out for are the penalties and taxes on early withdrawals. If one isn’t careful, they could get stuck with a 10% penalty for taking money out of their IRA before they reach retirement age, so the best bet for maximizing future returns is to leave the money there and letting it grow.
In addition to IRAs, new investors may want to try their hand at investing in individual stocks. Purchasing “shares,” as these individual stocks are called, effectively makes you a partial owner in a public company. One may decide to purchase shares in companies they support or are interested in through stock brokers.
Bonds are also an option. These are loans to a company or entity which investors earn interest on, where the company or entity promises to pay back the loan in a few years, plus interest. While bonds can be less risky than stocks, they also tend to be less lucrative. Lastly, one can also invest in mutual funds, which are a mix of investments that eliminate the need for people to choose between individual stocks and bonds.
5. Choose an Investing Strategy
Whatever investment strategy one ultimately chooses, that strategy should be based on how many years they have before retirement and how much money they will need (or want) before getting there. If one is closer to retirement age, they may want a lower-risk strategy to hold on to more of their money. Younger people with more work years ahead of them can afford to be riskier with their investing.
Getting started is half the battle. No matter where one is in their investment journey, learning the ropes is key to making sound decisions and eventually achieving financial independence.
Charles Qi is the CEO and Founder of StockPick, a video-based investing social network for retail investors. Prior to StockPick, Charles spent over a decade at CIBC Capital Markets, a top Canadian investment bank, where he was an Executive Director and Quantitative Investment Strategist and oversaw CAD$1 billion+ in institutional assets. Charles is a CFA Charter holder and holds a Master’s Degree in computational finance from Carnegie Mellon University.
