I love investing in stocks. Not only is it intellectually stimulating, but -- huge spoiler here -- you can make a lot of money while doing it. An individual who deposits $10,000 annually into a brokerage account that grows at 10% compounded annually will have close to $13 million 50 years later. I plan to follow a similar path with my savings.
Don't expect overnight success, and keep your time horizon extended out decades. This will allow you to build up wealth steadily over the years. But how should you start? This question may seem hard for individuals, but for anyone with experience, the steps are clear.
I've covered stocks for 10 years. This is the single best way a new investor should start.
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How to invest in stocks the right way
Starting with the absolute basics, any individual can open a brokerage account by linking their bank account and verifying information such as a Social Security number. When choosing a brokerage, there are many options for investors, but the one factor you need to consider above all else is zero-fee stock trading. If you are buying and holding stocks, zero fees on your purchases can add up significantly over the long term. Many brokerages, such as Robinhood and Interactive Brokers, offer this to clients.
When choosing stocks to buy, the process may seem more difficult at first glance than it is in reality. There are tens of thousands of stocks you can buy around the globe, so how do you pick which one you want? When beginning to build a portfolio of individual stocks, I would recommend starting with companies you already know well and think highly of. This may be a technology player, like Apple, or a restaurant you like; it doesn't matter.
If you know the company, it makes it much easier to buy as an entry-level stock. Save the hidden gems for when you have more experience.
Image source: Getty Images.
Diversification, but not too much
You have probably heard about how diversification can help as an investor. This is true, up to a point.
Certainly, it is ill-advised to put all of your investments into one stock. That is a very risky portfolio, as it could lose value if your analysis is wrong. However, there is also the downside of having too many stocks in your portfolio as a beginner. This can feel cluttered and overwhelming, and it can bring your returns directly in line with stock market indexes, which can discourage any beginner.
I would recommend that a beginner start with around 10 stocks in a portfolio and aim to increase this number over time. With a time horizon measured in decades, there is no need to try to rush and find a bunch of stocks at once. You can build a durable portfolio by only finding a couple of new stocks each year.
Start small and build over time
If you have never invested in individual stocks but have a lump sum of savings you are looking to put to work, the worst thing you could do is pour everything into a few stocks at once. I think this adds unnecessary risk that can be mitigated by using dollar-cost averaging -- investing the same amounts at regular intervals regardless of market conditions. Savings can also be replenished with fresh income.
Let's say you have $100,000 to invest in individual stocks. To begin, you might want to divide your savings and invest $10,000 each into 10 different stocks for your first purchase. Then, save the rest of your buys over a full year, which will help diversify the timing of your investments. Once you deplete this lump sum, you can regularly dollar-cost average into positions.
Investing in stocks is not difficult, but there are basic mistakes people can make, such as using a high-fee brokerage, having too little or too much diversification, and not dollar-cost averaging, that will hurt their returns.
So what are you waiting for? Open up a brokerage now and start compounding your savings.
