All you need is an online discount brokerage account, some money to invest, and a low cost Index Fund such as an S&P 500 Index ETF (Exchange Traded Fund) that tracks broader market. Think of ETF as a basket of stocks that you can buy a share into and get an instant diversification. It is also more cost effective than buying individual stocks, and probably the best option for people who just want to invest in broader stock market and do not have time to study and track individual stocks. Read more about Index Funds/ETFs in a later blog post: Intro to Investing in Index Funds
Also you don't even need a lump-sum of money to get started as most online brokerage accounts will let you open an account with a balance as low as $0. You can put money in the brokerage account as part of your regular paycheck contribution and build your investment account over time, just like a retirement account.
Time in market is more important than timing the market. The sooner you can start investing, even in small amounts, the better chance you will have for a bigger return down the road.
Here are some simple steps that can help you get started:
Step 1: Make Sure you are ready to invest
Read my early post Am I ready to invest in stock market?. It talks about having enough money set aside to cover regular expenses and any emergencies. Payoff any high interest consumer debts such as credit card loans as it does not make sense to invest in stocks with 7-8% return when paying 19-20% interest on credit card balance. Having a high interest debt and trying to invest in stock market is like trying to race a car with brakes on.
Step 2: Open a Brokerage Account
Nowadays, all you need is an account with an online discount brokerage to start investing. When I started investing in 1997, there was only one major online brokerage and it was E*Trade. Now, we have so many discount brokerages that it is hard to pick one. I like to go with the big brokerage firms that have been around for a while and have a large customer base. Also, as more and more people are investing by themselves, there are many new discount brokerage firms that have sprung-up recently that offer very cheap commissions without all the frills of a full-service brokerage. A full-service brokerage is how most people used to trade in the past where you would talk to your broker to get an advise on when to trade or what to buy whereas a discount broker is where you are the one who is making all the decisions. In terms of overall cost of trading, the discount brokerage charge reduced fees or commission, as they do not provide investment advice.
If you feel that you would rather have an investment adviser making the decisions on your investments then you should go with a full-service brokerage firm such as Edward Jones, UBS, Merrill Lynch, etc. However, if you want to save thousands of dollars in advising fees and want to take charge of your own investments then discount brokerage would be more suitable.
I have never used a full-service brokerage firm and have always managed to invest myself using a discount brokerage and it has worked quite well for me.
For my investment needs, I use discount brokerage firms such as E*Trade, Fidelity, and TDAmeritrade. All three are well known and have been around for a while. They provide quite similar features and pricing ($7.95 - $9.99 for online trades) and access to a slew of low cost Index funds. Below is a quick review of these brokerages based on my own experience.
E*Trade - I have been using E*Trade for almost 20 years and have had no bad experience. I mainly use them for my stock portfolio and have found them to be very consistent over the years. Their website is user friendly and easy to navigate. I have used their customer service both via phone and through their website, and have found them to be very professional and prompt in responding to questions.
Fidelity - I have been with them for about 17 years as my former employer used them to manage employee retirement accounts. I have also been using their brokerage service for the past 6+ years. They are slightly cheaper in their commission rate than the other two. They have a good selection of commission-free ETFs which includes low cost S&P 500 Index and dividend funds. My overall experience with them has been mostly good and consistent. If you already have a retirement account (e.g. 401k or IRA) with Fidelity, it may be easier to just open a brokerage account with them, as they would already have all your information.
TDAmeritrade - I have been with them for only a couple of months. I use them for my HSA investment account as well as a standard brokerage . They have commission-free Vanguard ETF funds which is a big plus as Vanguard has some of the most popular and low cost Index funds. I have used their customer service once when I was first opening the account and found the service rep to be quite helpful. I find their website and trading tools to be quite easy to use. So far, I like TDAmeritrade and find them to be comparable in features and overall value to the other two brokerages.
I believe any of these three discount brokerages could provide a good place to start investing. However, for someone just starting out, Fidelity or TDAmeritrade may be a better choice as they offer some of the most popular Vanguard and iShare Index ETFs commission free. Commission-free is important for someone who will be building their portfolio using dollar-cost-average method (i.e. making small contributions into the account and buying shares in small quantities over a long period). E*Trade also have 100+ commission-free ETFs; however, they do not seem to offer Vanguard or iShare ETFs as commission-free.
Step 3: Fund your Brokerage Account
A brokerage account can be funded using either a check deposit or an electronic transfer. Electronic transfer (ACH) is the most convenient way to move money between brokerage and bank account.
I used to have part of my paycheck direct deposit into my brokerage account. That way I always had some funds in my brokerage account ready for investing. Direct deposit is also a good way to automate savings for investment.
If you buy dividend paying stocks or ETFs, the dividends can be reinvested to buy more shares. Actually, dividend re-investment can accelerate the growth of your investments over a long period. Dividend re-investment is how I fund my HSA account now as I don't have a paycheck anymore. See my earlier post on HSA: Create tax free supplemental retirement account using HSA
Step 4: Familiarize yourself with your New Account
Before you go and start buying stocks, you should get familiar with your brokerage account and the features it offers. Make sure you have reviewed the account fee schedule; it will tell you how much it would cost to make a trade or if there is any account service fee, etc.
All three brokerages I mentioned above have a Learning/Education Center where you can attend Webinars or watch training and introductory videos on how to use your brokerage account and simply how to invest. I would just focus on simple stock and ETF trades and stay away from Options or Margin type topics.
Step 5: Buy Some Shares
To buy a share of a stock or an ETF, you need to know its Ticker symbol. For example, let's say you want to buy a few shares of Microsoft. Microsoft is has a ticker symbol of "MSFT". A ticker is what identifies a stock on the trading floor and what you will enter on the Trade Ticket. A trade ticket is what the brokerage will ask you to fill out online when you decide to buy or sell a stock or an ETF. Think of it as an order ticket where you would fill out what you want to buy (stock Ticker symbol) and how many shares you want to buy. Fields like "Order Type" tell the brokerage whether you want to Buy or Sell a stock/ETF using current market price or do you want to specify your own price. The "Expiration" field tells the brokerage how long to keep the order open in case it doesn't execute right away. You can learn more about the order ticket and all the options that your brokerage supports at your brokerage's learning center. Here is an example of what a trade ticket normally looks like:
When buying a stock, you need to make sure you have sufficient funds in your account to cover your entire buy order, which includes commission-fees. Here is how to calculate total fees to execute a single buy order of say 10 shares of Microsoft stock trading at current market price of $58.30 with brokerage commission of $9.99:
Total Cost = CurrentStockPrice * NumberOfShares + Commission
= $58.30 * 10 + $9.99 = $592.99
As you can see commission is charged per trade; therefore, the more trades you make the more you will be paying in commissions. This is where commission-free ETFs come very handy; especially, when investing frequently in small amounts.
When you enter your order, the brokerage will show you the total cost of the entire order and would ask you to verify the order before execution. Normally, at this time if your order exceeds the money available in your account, the brokerage will reject your order, and you would need to resubmit it with the number of shares reduced.
When an order/trade ticket is submitted correctly, it would normally execute within a few seconds. These brokerages are super fast in their execution of trades. Therefore, make sure you only submit the ticket when you are absolutely sure you want to trade as you may not get the opportunity to cancel an order after it has been submitted.
Step 6: Confirming and Tracking your Trade
Once the trade has been entered in the system, the status of the trade can be checked to see whether it has been executed or still waiting on execution. Once the trade has been executed, the order status will tell you how many shares were executed and at what price. If you bought new shares, those shares will show up under the portfolio link within your account. Note that even though the trade was executed immediately, the transaction itself is not settled yet. It usually takes up to three business days to settle a trade. Only after a trade is fully settled, you will see update to your cash balance in the brokerage account. When selling a stock, all proceeds from sale are available for withdrawal after the settlement date. Your account cash balance status will be updated as your trades are settled.
Step 7: Monitor your Portfolio
A brokerage firm is required to track the cost basis for all trades. The cost basis is the total cost you paid per trade and is used to calculate your total loss or gain on the stock. After buying a stock, your portfolio should show you the actual cost basis and the unrealized gain/loss based on current stock price. As the stock/ETF goes up and down in price, your portfolio would update the gain/loss numbers. Overtime you will be able to see whether you are making money or losing money and what your return is like on any given stock that you own. Also, note that all gains/losses are unrealized till you actually sell those shares. Unrealized gains/loss means that they are on paper only. Only after you sell a stock, the gains/losses will materialize.
Well this is all I have in terms of steps to get started on investing in stock market. It is always good to start slow, and buy only a few shares of your favorite stock/ETF and see how you feel about market going up and down. It takes a while to get used to it, but once you understand that day-to-day stock price fluctuation has no effect on your investment (unless you decide to sell it), you will get a hang of it.
Hope this post was helpful. Feel free to share your investment experiences or how you got started.
Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Please use your own judgment or seek a licensed financial advisor before investing. You, the reader, bear responsibility for your own investment and financial decisions. Any mention of brokerage firms in this article is mainly to share author's own experience and is not an advertisement or endorsement.