Approximately 45% of Americans are not investing in the stock market at all, either in individual stocks or through a retirement account like a 401(k) or IRA, according to a 2020 survey from Gallup.
Investing in the stock market can be intimidating, especially during periods of volatility. However, it's one of the most effective ways to build long-term wealth, making it an invaluable tool to help you save for the future.
There are a few myths surrounding the stock market, though, that could be preventing you from harnessing its full potential.
Myth no. 1: You need to be an expert to start investing
The financial world is full of jargon and hard-to-understand concepts, which can make it seem as if you're not qualified to start investing if you don't fully understand how the stock market works. Why would you throw your hard-earned cash into something you know little to nothing about?
While it's a good idea to understand some of the investing basics, you don't need to be an expert to get started.
If you're a beginner, one of the best ways to get your feet wet with the stock market is to contribute to your 401(k), if you have access to one. It's hard to go wrong with a 401(k), because most of the work is already done for you. You don't need to worry about choosing which stocks to invest in or buying and selling investments -- all you need to do is contribute money to your account.
If you don't have access to a 401(k), you can opt for an IRA instead. IRAs are similar to 401(k)s in many ways, but one of the primary differences is that they're not tied to your employer.
Myth no. 2: The stock market is too risky
It's true that investing in the stock market will always carry a certain amount of risk, but it's not as dangerous as many people make it out to be. As long as you invest wisely, you can keep your money as safe as possible.
One crucial step is to make sure you're diversifying your portfolio. In other words, don't put all your eggs in one basket. Even if a particular stock looks promising, it's nearly impossible to predict whether any one stock will soar or sink. If all your savings are tied up into this single stock and it doesn't perform well, you could lose a lot of money.
To limit your risk, try to spread your money across a variety of investments. One of the easiest ways to do this is by investing in mutual funds, which are essentially large collections of stocks bundled together into a single investment. If you're investing in a 401(k) or IRA, you're likely already investing in mutual funds. Also, this type of investment can limit your risk substantially because even if a handful of the stocks in the fund are struggling, it won't sink your entire portfolio.
Myth no. 3: You need a lot of money to start investing
When you picture investing in the stock market, you may imagine Wall Street millionaires investing hundreds of thousands of dollars at a time. But in reality, you can get started investing with just a few dollars.
Investing in a 401(k) or IRA is one of the most affordable ways to get involved with the stock market, because you can contribute as much or as little as you like, on your schedule. You may choose to invest just a few dollars a week, for example, or you can save much more if you can afford it.
If you'd prefer to invest in individual stocks rather than mutual funds, fractional shares can be a smart option. Fractional shares are small slices of a single share of stock. Some stocks can cost hundreds or thousands of dollars per share, making them unaffordable for many investors. But with fractional shares, you can invest in even the most expensive stocks for just a few dollars. In addition, because you can buy many different stocks for just a few dollars each, fractional shares make diversifying your portfolio more affordable.
The stock market can be daunting, but if you're not investing, you could be missing out on the chance to grow your savings substantially. Even if you're new to the world of investing, getting started now can help you build long-term wealth.