How to start investing in to stock market? Basically, all you need to start investing is some money and an internet connection. If you are completely new to investing, index funds may be the safest option for you instead of individual stocks. In this post, I will briefly walk you through the world of investing in index funds and stocks.
You can also invest in cryptocurrencies, real estate, and many others, but I suggest you start with low-cost index funds. Index funds are well diversified and have had steady returns over the past. One of the most popular options is S&P 500 index fund.
The chart shows only the price of the stocks and doesn’t include dividends paid during that time. With all the dividends reinvested into the index, the average return for the year would be over 12%. However, inflation will take its share of this return. The inflation-adjusted return for the period would be still over 8% per year on average (which is still very good).
What is investing and how it works
Let’s get to the basics of investing. Whenever you buy a stock or index fund, you are buying a share of a company, or with index funds, fractions of shares of a lot of companies. Let’s take a single stock, for example. You will buy the shares from a former shareholder and in this way become part owner of the company. Because you own a part of the company which shares you bought, part of the profit the company makes belongs to you.
Companies will pay the profit to shareholders as dividends or reinvest it into the business. This helps the company grow and therefore the value of your shares will rise, since the company will be overall more valuable. Of course, there is a downside, if the company does not perform well, the stock price will fall, and therefore the price of your shares will probably fall as well. You risk your money to get the returns. That’s the principle of investing.
The price of what people are willing to pay in the stock market will not always be the same as the real value of the stock. This is basically how the stock market is supposed to work. The same applies to index funds, but you just own a smaller portion of a lot more companies and this diversifies the risk.
In S&P 500’s case, you will own shares of 500 different companies. Usually, funds will reinvest any dividends they get from the companies. If the funds reinvest or pay dividends to you, this is told in the brochure of the fund. You should always pay close attention to what the fund brochure is telling you.
How to invest in index funds?
To get started with index funds, first you should have a broker that offers index funds. The selection of brokers varies in different countries, and chances are there are several in your country.
Compare the funds they offer. You should look for funds that have no deposit fee and no withdrawal fee.
Yearly fees for the fund should be less than 0,5%. Of course, the closer the fees are to 0, the better. In a short period of time, a 1% fee might not look that bad, but in the longer term there is a big difference between a 0% fee and a 1% fee. The difference is even greater with 0% and 2%. Here are some examples:
1000 dollars in 25-year period with 8% yearly return would be:
- 6 848.48 $ with 0% fee
- 5 427.42 $ with 1% fee
- 4 291.87 $ with 2% fee
This effect will be much larger in a 50-year period:
- 46 901.61 $ with 0% fee
- 29 457.03 $ with 1% fee
- 18 420.15 $ with 2% fee
Therefore, you should find as low fee index funds as possible for long term investing. As you can see, in the longer term, that 1 or 2 percent fee that didn’t sound as bad at the beginning, took a big chunk of your returns. One alternative to index funds are different kinds of ETF’s, but let’s talk about them another time.
More about how fees affect your returns over time you can read in this post.
How much money do you need to start investing in stocks?
The amount of money you need to start investing in stocks depends on a lot of fees you must pay when buying stocks. Some brokers offer flat fees. For example, 5 dollars per trade. Others use spreads, without flat fees.
Here is an example of spreads. If you want to buy a share of Example Company, the current market price is 500 dollars per share. You can buy it for 500,5 dollars and sell it for 499,5 dollars, meaning there is a 1 dollar spread, which is the brokers cut of every trade.
Depending on the money you are going to invest, you should consider which one is a better option for you. Obviously, the brokers you can choose from are different in different countries, as well as the regulations of the markets, so look at your local selection of brokers, and compare them.
I would say that the money you pay as fees when buying a stock should be less than one percent. That means if the broker has a flat 5-dollar fee, you should buy at least 500 dollars’ worth of the stock. This is, of course, just my recommendation, not a rule. If the broker uses spreads, you can buy smaller amounts, even starting with just a few dollars to test the waters.
Summary of How to start investing in to stock market
- You need some money and an internet connection
- Choose what type of instrument you want to invest in. Index funds may be the safest option for beginners, but you could also try stocks to keep things interesting. My own strategy is that 80% of the money I put into the stock market I put into index funds, the rest 20% I put into individual stocks. The reason behind this is that it will keep my interest high as I can see how my own picks perform.
- Compare your country’s brokers and their fees on the instrument you chose to start with
- Open the account and start your journey of investing
- If you want to calculate yourself, how much your money could grow in a certain period of time, here is a good calculator I use: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
- I made a post about investing straight in stocks. You can read it here
- Other investing-related posts can be found here.
Hopefully this was helpful to you, have a nice day.
This is not investment advice. I’m sharing my own thoughts and I hope they can be useful to you in your research. Past returns are not a guarantee of future returns. Always do your research before risking your hard-earned money.