Investing in the stock market can be daunting. If you're a new investor, it can feel impossible to know where to begin because there's so much information out there. Plus, admit it -- it's scary. If you aren't well educated on the matter, investing in stocks can be overwhelming.
But here's a surprise: It's not as difficult as you think if you just take baby steps. As Martin Luther King, Jr. once advised, "You don't have to see the whole staircase, just take the first step." And when you see how easy the first step is, you'll be able to take the second, third, and fourth steps pain-free.
If you're ready to begin, here are six tiny steps you can take on your way to start investing.
1. Decide how much money you can afford to invest
To begin investing, you don't need lots of money -- just a little will be fine. It can be a monthly amount of $10, $50, or even $75. You may be surprised to learn that after 30 years, that $75 a month could turn into $139,440 with a 9% average return.
It probably isn't that difficult to commit $50 or $75 a month toward investing, but if it's challenging, there are lots of good ways to cut your spending to generate that amount without feeling much pain.
2. Start saving -- even a little bit
Now that you've decided how much you're willing to direct toward investing, it's time to start saving. (It won't do you any good if you don't follow up the thought with action.) We're talking about small steps, so you can put that money in a jar or envelope. If you're feeling ambitious, open a bank account devoted to investing. It doesn't matter which method you choose, as long as you select one and stick with it.
3. Open an investing account
Once you've saved enough money to make your first stock purchase (and with fractional shares, the next step below, you don't need much at all), it's time to open a brokerage account. You no longer need large amounts to do this -- many brokerages don't require any minimum deposit to open such an account.
Don't be intimidated by this step -- just determine which broker is right for you, fill out an application, and fund the account. It's a baby step -- and you can do it online from the comfort of your home.
4. Take advantage of fractional shares
There's a new game in town that makes it easy to buy shares in companies you like -- the ability to buy fractional shares. Decide how much money you want to invest and which company you want to invest in, and your brokerage will buy you shares -- even if they're just a fraction of a full share.
For example, let's say you've saved up $500 and want to invest in Amazon.com (AMZN 3.15%) because you love to shop there and think the company's primed for continued monstrous growth. But Amazon's shares are trading for approximately $2,500. Yikes -- that's a lot for a stock!
But all you need to do is tell your broker you want to invest that $500 in Amazon, and guess what? They'll buy you 20% of a share -- which means you'll own 0.2 shares of Amazon. Does $500 sound like too much money? No worries. You could invest only $10 and get 0.004 shares.
5. Enroll in your employer's retirement plan
Another small step -- and a no-brainer at that -- is to enroll in your company-sponsored retirement plan, like a 401(k). Not only is that account favorable because the amount you contribute will be deducted from your earnings so you'll pay taxes on a lower income, but a majority of employers with 401(k) plans will even match some portion of your contribution -- which means free money for you. And if someone's offering free money, it's crazy not to take it.
Enrolling is pretty simple: Find out if you're eligible for your company's plan and fill out some paperwork. There, you are enrolled. The next step would be to choose how much money you'd like to allocate and then pick some investment choices, which are generally mutual funds or exchange-traded funds (ETFs).
6. Choose your investments and go!
The last step is to choose your investments. If you don't have a lot of investing knowledge, consider buying stock in an S&P 500 Index Fund, which is made up of the top 500 U.S. stocks. You'll get instant diversification of your investment and a vehicle that's returned in the 9% to 10% range, on average, when held over a long period of time.
Even Warren Buffett, arguably the world's greatest investor, loves this investment vehicle. According to the Oracle of Omaha: "The S&P 500 index is the one to use. That's the one that I used in the bet I made for 10 years -- it's the one I told the trustee for my wife to put 90% of the funds I leave her into."
If you feel comfortable buying individual stocks, go for it, but be sure you have a sense of how to choose them. And remember, you can always buy fractional shares (see No. 4 above, in case you have a short memory).
Congratulations! You've just taken your first tiny step to start investing -- you've read this article. No amount of money is too small to invest any longer. But continue investing once you start, as that's the only way to accumulate wealth. As Confucius said, "It does not matter how slowly you go as long as you do not stop."