Introduction to the Stock Market Part II. Investing
In the second installment of "Introduction to the Stock Market", we discuss the basics of investing in the stock market.
By Kaitlin Meyer — March 30, 2023
By investing in the stock market, one can buy shares of stock in public companies and profit from the success of these companies. Check out the first article in this series for more general information on what the stock market is and how it works. Even if you can only invest a small amount of money, investing as a student can be an excellent way to save for retirement, tuition, or in general, to guard against inflation.
Decide on Investment Goals
Setting investment goals is important to know what to invest in and how much to start investing. Each person's risk tolerance and budget will inform these goals: are you more comfortable with high-risk situations? This might lead one to invest in aggressive growth stocks, while a lower risk tolerance might lead to more stable stocks, such as a large cap. Differing budgets will also affect investment goals. Most stocks and index funds, which invest in multiple companies, require a minimum investment amount.
The other major component of setting an investment goal is the purpose of the investment: are you trying to save for a house? College? A car? Retirement? How far out are you from needing to liquidate these investments? For example, if a young person decides to start investing to save for retirement, they might start by investing in aggressive growth stocks and switch to less volatile stocks later in life as they get closer to retirement. Similarly, if a high schooler is saving for college, it's probably not a good idea to put that money in a high-risk environment, as it will be needed for tuition in the short term. Setting your investment goal will depend primarily on your situation in life and what you are saving.
In short: investment goals should be guided by the purpose of the investment and your risk tolerance and budget.
How to Invest
Once you have decided on a budget and general investment goal, you can start investing money! There are four general steps to this process: deciding on your investing style, actually opening the account, choosing what to invest in, and managing your portfolio.
Investing Style
There are three general options when it comes to choosing an investing style:
- You can choose which stocks and funds to invest in yourself.
- You can hire an expert to manage your investments.
- You can invest in your employer's 401k.
The first option, choosing what to invest in yourself, is more time consuming and requires research not only on which stocks to invest in but also on what kind of account to open in the first place.
One of the best do-it-yourself options is to open an online brokerage account, which allows you to open several different accounts. The second option, hiring an expert, is a little more expensive but is an excellent choice for those who do not have time to research stocks and compete with full-time investors. Investing in your employer's 401k is the easiest third option: there is no research necessary, and you are not paying someone to manage investments. This is a great option for your first investment.
Open an Account
Your investing style and goals will dictate what kind of account is best to open. The stock market has four general kinds of investment accounts: standard brokerage accounts, retirement accounts, education accounts, and employer-sponsored retirement plans. While all these accounts have subcategories, deciding on the broad investment category is an important first step. A standard brokerage account is a general investment account, and any profit or investment liquidated has no requirements attached to it.
In other words, it does not need to be spent on retirement or education; it can be used for anything. Since it does not fall under education or retirement, this account is fully taxable, meaning that taxes will be collected on the money you invest and make from the account. If you already have a healthy retirement account and are not saving for college, this might be the appropriate one to open. If you are opening your first investment account, the best option is to start a retirement account or save for education.
SAGE Scholars offers several resources on starting an investment fund for education. Regarding retirement investments, there are two main options: the traditional IRA and the Roth IRA. A traditional IRA does not tax income that goes into the account but makes tax money that comes out of the account. For this reason, traditional IRAs are usually chosen by those midway through or late in their careers, as they are investing more at once than they will be pulling out in their retirement. Roth IRAs are a good initial choice for those early in their careers who might not invest as much money in the account. For these people, it's more advantageous to pay taxes on the front end since they aren't depositing too much money at once.
Choosing What to Invest In
This step is mostly only applicable if you are managing your investments. However, knowing a little about the stocks you invest in is always good, even if you are just participating in an employer's 401k. Sorting through different types of stocks and funds and deciding where to invest can be overwhelming. If you manage your portfolio, one of the best first investments is an index fund.
Index funds facilitate investment in several different companies. More specifically, they are designed to track different stock market indices, such as the S&P 500 Index. For more information on a stock market index, refer to this series's first article. These funds can be a great choice as they generally track the stock market's average performance and do not heavily invest in any stock or sector. This means that if one stock that is part of the index fund tanks, chances are that another stock or stocks will balance out this loss.
Manage Your Portfolio
For the most part, managing your portfolio means leaving it alone. Stocks are long-term investments unless you try to play the market-by-day trading. This means that the best thing is usually to sit out the ups and downs of the market. If you sell all your stocks in a downturn because you are worried about losing all your investment money when the market grows, you won't be able to buy back in for the same amount. While worrying about the market's daily or monthly ups and downs will not be advantageous to you, re-evaluating your portfolio every few years is a good idea. Reevaluation allows you to check in and ensure that your investments align with your financial goals.
For example, if you are nearing retirement, move your money to a more stable investment as you are planning to live on this investment. Having a volatile retirement investment, while perfectly acceptable when retirement is many years away, is not a good idea while you are retired.
While this article provides the basics of investing in the stock market, there is always much more to learn. If you choose to invest without a financial advisor, don't be afraid to research before making your first investment. It's never too early to start an investment account. Even if you can only afford to add a small amount each month, your investment will grow over time.
Kaitlin Meyer
Kaitlin Meyer is a Master's student at Ohio State University (OSU), and is writing a thesis on snow microstructure inspired by her love for skiing. She earned a B.A. in Liberal Arts from Wyoming Catholic College (WCC).
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