How To Start Investing in Stocks & Mutual Funds

First we must start by differentiating between saving and investing. 

Saving is “the portion of income not spent on current expenditures.”  A person builds up his or her savings for unexpected expenditures (which is the subject of another post).

Investing is “the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains.”  These are two entirely different processes.

Saving and investing are two entirely different processes.

Let’s explore our thought process when we consider investing in stocks and mutual funds.  When it comes to any type of investing (stocks, mutual funds, real estate) we are “buy and hold” investors.  We plan on holding those assets for years if not decades. Therefore, it is important to make the most informed decisions we can make.

When investing in stocks or mutual funds, I think it is important to find investments that interest you.

For mutual funds, there are approximately 7500 different funds you can choose from (not including EFT’s which we will cover in another post).  A mutual fund is a good choice for an investor who doesn’t want to pick individual stocks but wants exposure to the stock market.  You will want to consider some of the following when selecting a mutual fund:

1. Type of Investment (dividends, value, small companies, choosing a sector such as healthcare)
2. Historical Returns (future results are not guaranteed)
3. Fund manager’s experience
4. Expense ratio

Use a resource like Morningstar to do research on funds you are interested in.

Individual stocks are another way you can invest.  It can take more work to research, and it can be riskier than investing in a mutual fund.  If an individual company has a bad month, quarter, or year, the value of your investment will be directly impacted. Whereas in a mutual fund, that risk is spread out over many companies.  A mutual fund can invest in a hundred companies. If a few companies in the fund are struggling but other companies in the fund are excelling, chances are, it will mitigate the negative impact of the struggling companies.

When my wife and I invest in individual stocks, we look at products that we like and use.  I suggest you do the same. Look at the cereal you eat, the contents of your medicine cabinet and pantry, the car you drive…you get the idea. Invest in what you know and like. 

Before you do so, you must do research on the companies you are interested in.   

Use:

1. Your brokerage account,
2. Value Line (we use this)
3. Fin Viz
4. Yahoo Finance.

When researching, look at:

1. Management
2. Dividend Yield
3. P/E Ratio
4. Earnings per share
5. Return on equity
6. Deb/equity
7. 52-week range

Personally, we choose dividend-paying stocks.  We feel that mitigates some of our risk in a down market because we are still collecting dividends on a quarterly basis.  In fact, we have structured a collection of stocks that pay us dividends every month.  With those dividends, we can:  reinvest them (buy more stock), spend them, or set them aside for income taxes.

To invest in stocks, you will need to select a brokerage account to purchase and keep your securities.  There are many options available, but look for one that offers:

1. Zero commissions charged.
2. Ability to purchase fractional shares.
3. Good research and record keeping.

We use Interactive Brokers, and their platform works perfectly for our needs.

Hopefully this basic information will give you confidence to get started.  Contact us if you have any questions.  We would be happy to help you.

Invest Money Your Way!