If the idea of investing feels intimidating or overwhelming, you're not alone. Lots of people shy away from investing because they believe it's too complex, risky, or requires a lot of money to begin. However, that doesn't have to be the case, nor should it be.
Investing can actually be as simple and straightforward as you want it to be. Here's a guide to helping you get started.
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Try to get an understanding of how stocks work
Shares represent ownership. When you buy a company's shares, you're buying partial ownership. For example, if a company has 1 million shares and you own 100,000 of them, you'd own 10% of that company.
As a shareholder, you benefit from the company's growth and success. When the company performs well, its stock price ideally increases, causing the value of your investment to grow as well. The opposite is also true. Poor company performance could cause your investment value to drop.
An increase in stock price is only one way to profit from stocks. The other is dividend payments, which are paid out to shareholders periodically (usually quarterly) from a company's profits. For every share you own, you'll be paid a specific amount set by the company each year.
Get an idea of your goals and risk tolerance
You'll want to have an idea of your goals and risk tolerance because that'll help determine what types of stocks you build your portfolio around. For instance, if your goal is to receive consistent income from your stocks, you should look into stocks that pay dividends. If your goal is to find the next big thing that can produce Amazon-like returns, you should look into younger growth stocks.
Knowing your risk tolerance means you're not making investments you're uncomfortable with, which is very important. For example, a risk-averse investor may want to steer clear of younger growth stocks because they're unproven and come with more risks than blue chip stocks. It's much easier to have faith in Coca-Cola than in an unprofitable stock in a newer industry.
It's essential to know your goals because that could significantly affect your investing approach. Someone investing to save for their child's college tuition may take a different approach than someone investing for retirement because the time horizons are likely different.
Your goals help create your "roadmap." Once you have a clearer understanding of what you want out of investing, you can make more informed decisions that complement that.
Start off covering a lot of ground at once
If not knowing what to invest in keeps you from starting, it's good to start with an investment that doesn't require too much thought or research. A good starting place is a broad exchange-traded fund (ETF).
An ETF is a type of investment that holds many assets within it. It trades on the stock exchange like an individual stock. Just as you can buy shares of Apple on the stock exchange, you can buy shares of an ETF, but the ETF itself holds shares of hundreds or even thousands of different individual stocks.
Let's look at the Vanguard S&P 500 ETF (VOO 1.00%), which contains around 500 of the largest public U.S. companies by market cap. When you invest in the Vanguard S&P 500 ETF, your money is spread out among all the companies it contains.
Investing in a broad ETF is good because it can provide instant diversification with a single investment. A diversified ETF like the Vanguard S&P 500 ETF can give you exposure to the broader U.S. stock market, ensuring your portfolio's success doesn't rely on too few companies or industries.
For some people, the hardest part about investing is starting. The Vanguard S&P 500 ETF allows you to start investing and can be your portfolio's foundation while you're still getting an idea of your goals, risk tolerance, and what to look for when researching individual companies.
