The world of investing can be a daunting prospect. Getting started is truly the hardest step, with many budding shareholders left rooted to the spot as they struggle to figure out a plan.
Unfortunately, if you came here looking for the big secret, I’m afraid you’re only going to be disappointed. The truth is, there’s no “best way” to buy stocks. However, despite there not being a singular best way to invest, there are certainly some rules and guidelines that can make your experience as seamless and comfortable as possible.
First, let’s look at the things that you simply have to do – the necessities.
1. Set up a brokerage account
To invest in the stock market you need a brokerage account. Setting one up is much like setting up a bank account. We have a detailed article on it here if you want to read about the finer points of choosing a brokerage and getting fully set up.
2. Fund your brokerage account
The next thing you have to do is add money to your brokerage account. Again, we have a detailed article here about the different options and some considerations to make before doing so.
3. Buy a stock
This one should be kind of obvious, but sometimes people wait too long before buying their first stock. While there’s nothing wrong with exercising some caution, timing the market has been shown to be less profitable than just buying and holding long term. Here’s our guide on buying that stock and taking the first true step on the way to financial freedom.
Now that we’ve covered the necessities it’s time to take a look at some other factors that can greatly influence the way you buy stocks. The type of investor you become is totally up to you, but we’re here to lend a helping hand.
1. Establish your risk tolerance
One of the first things to figure out is your own personal risk tolerance. Investing has some inherent risk built into it. Unfortunately, not every company you buy into is going to be a winner. However, you can mitigate this risk if you want by tailoring your portfolio. Two easy ways to do this are to invest in ETFs and blue-chip stocks.
ETFs allow you to invest in multiple related stocks at once, lowering the risk that any individual stock failing will negatively affect your account. A great example is the Vanguard S&P 500 ETF (NYSEARCA: VOO) which tracks the 500 largest companies that trade in North America.
Blue-chip stocks are huge companies with stellar reputations. While investing in them is unlikely to bring about massive growth, you can generally be confident that your money is relatively safe as it’s unlikely these companies will fail any time soon. Some great examples of blue-chip stocks are Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT).
If you decide you have a larger risk tolerance you can focus on companies that are in more of a growth phase. Innovative young companies, like Rivian (NASDAQ: RIVN) or Roblox (NYSE: RBLX), have a much higher potential to fail but could also multiply your money in a matter of years if they realize their massive potential.
2. Establish your circle of competence
One of the best ways to ensure a healthy relationship with the stock market is to invest within your circle of competence. This is a mental model coined by Warren Buffett that involves using the knowledge you already have to guide your investment decisions.
For example, if you’re an avid gamer, investing in gaming companies would be wise. If you work as a software developer, you could be able to put that knowledge to use in picking software stocks that have massive potential.
This is arguably one of the best ways to invest in stocks as it allows you to make informed decisions and hopefully avoid costly mistakes. By leveraging your own personal bank of knowledge you can find the investments that work best for you.
3. Have fun
We truly believe that investing can be fun. One of our Golden Rules is to buy what you believe in. By doing this you’re becoming a part-owner of companies that you know and love. You should be excited to see them grow as both a consumer and as a shareholder.
This is the best way to buy stocks. Buy companies you love, buy companies that you believe in. When you’re able to have fun investing, that’s when you know you’re investing the right way.