Investing in the stock market is one of the best ways to build wealth, but it can also be intimidating -- especially for beginners.
Approximately 41% of Americans say they're too nervous to invest in the stock market, according to a recent survey from Allianz Life. Right now might be an especially nerve-wracking time to invest, with the market experiencing extreme volatility over the last few months. Those who do have money invested have likely watched their portfolios take a nosedive recently, which isn't very reassuring to nervous investors.
However, there are simple ways to invest in the stock market while avoiding risk as much as possible. You'll never be able to eliminate risk entirely when investing, but with these two options, you can earn substantial rewards while still limiting your chances of losing money.
1. Index ETFs
Index ETFs are among the safest and most reliable investment choices. Exchange-traded funds (ETFs) are collections of stocks, bonds, and other types of securities all lumped together into one investment. So when you invest in an ETF, you're actually investing in dozens or even hundreds of different securities at once.
An index ETF is a type of ETF that mirrors a particular index, such as the S&P 500 or Dow Jones Industrial Average. You can't actually invest in the Dow or the S&P 500 themselves, but investing in an index ETF that tracks them is as close as you can get.
There are two primary benefits to investing in index ETFs: diversification and low costs. When you're investing in hundreds of different securities at once, you're significantly limiting your risk. If a few of the stocks in the fund aren't doing so well, it won't cause your entire portfolio to plummet in value. You may see your investments take a hit during major market downturns and recessions, but these downturns aren't permanent. In other words, once the stock market as a whole starts to recover, your index ETFs will bounce back as well. And historically, the stock market has always recovered from every recession it faced.
The other benefit of index ETFs is cost. Unlike actively managed mutual funds, where a portfolio manager is deliberately selecting the securities within the fund, index ETFs are passive investments. They simply follow the indexes without human intervention, and that results in a lower cost for you. This makes index ETFs one of the most affordable and safest ways to invest in the stock market.
2. Fractional shares
If you have very little money to invest but still want to diversify your investments as much as possible, fractional shares are a good option. Like the name suggests, fractional shares allow you to invest in just a fraction of a share of a stock rather than one full share.
Some stocks are incredibly expensive per share (especially those of big-name, very profitable companies), making them unaffordable for the average investor just getting their feet wet. With fractional shares, you can still invest in those high-priced stocks, but at a fraction of the cost. This way, if you only have a limited amount of money to invest, you can still invest in several different fractional shares rather than putting all your cash toward a single share of a high-priced stock -- thus limiting your risk.
Additionally, you can sometimes buy fractional shares of ETFs. If you want to invest in several ETFs but are on a tight budget, buying fractional shares of each fund can help diversify your investments without breaking the bank.
Not all brokerages offer fractional shares, so as you're searching for brokers, ask about whether they offer this option. Keep in mind too that if you decide to change brokers down the road, you may not be able to transfer your fractional shares if the new broker doesn't offer them. So if you decide fractional shares are a good option for you, it pays to do your research on brokers to make sure you're choosing one you'll like for the long-term.
Is it the right time to start investing?
These are uncertain times, and it can be intimidating to invest in the stock market right now. However, market downturns are some of the best times to invest, because when stock prices are lower, you can get more for your money.
Index ETFs and fractional shares are both great investment options, but no matter how you choose to invest, make sure you're diversifying your investments as much as possible. You'll never be able to eliminate risk altogether, but by making wise investment choices, you're more likely to see significant financial gains.