How to Invest in the Stock Market with Little Money and Knowledge
The stock market can seem like a mysterious, scary abyss if you don’t know much about investing. However, with some research and willingness you could be the type of investor that invests regularly and confidently. Even if you have no idea about what terms like Dow Jones or low-cost index fund means, you can start investing today.
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Yep, the internets make it pretty easy to get going with your investing ventures. So, if you are ready to take advantage of the power of the stock market to grow your money, then here are some steps to follow.
1) Understand the Time Value of Money
Before your start investing, I think it’s important to understand how the time-value of money works. If you don’t know that, you probably won’t be motivated to sock away money for any length of time.
So, let’s see a few examples in action.
Let’s say you have $1,000 in a savings account from 2000 to 2010. After ten years, that $1,000 would be worth about $1,300. If you had invested that same amount of money in the following stocks over the same span of ten years, your yield would be:
- Nike (NKE): $2,943.89
- Apple (AAPL): $8,201.63
- Clorox (CLX): $1,527.65
- Walmart (WMT): $8,685.77
Can you see the power of “planting” you money in a business and letting that money “grow” over time? That’s why it’s important to start investing ASAP. The more time you have, the more money you can amass. There’s no better time to start investing than the present!
That’s why there’s no better time to start investing than the present!
Here are the calculators I used to come up with these numbers:
Ready to make your money grow? Let’s keep going.
2) Open an Investment Account
The first thing you need to do is open a trading account. I use TradeKing.com because they are one of the lowest-cost providers out there. Instead of $10 or $15 per trade, you’ll pay about $5 per trade. Open your TradeKing account here for free.
3) Start an Automatic Transfer to Your Brokerage Account
Even if you are not ready to buy any stocks yet, I always say, “Be ready, so you don’t have to get ready.” Start transferring cash to your brokerage account each paycheck so when you are ready to purchase some stocks, the money will be there.TradeKing.com makes it easy to set up an automatic transfer from the account that you choose.
Every once and awhile some event will cause a dip in stocks (i.e. stocks go ‘on sale’) and you want to have money available to buy stocks that are cheaper than usual. Also, you want to make a regular habit of going into your account and buying stock. I would say three to four times a year is ideal. This way, you also minimize your trading fees.
4) Create a Savings Flow
If the automatic transfer won’t work for you or you need a way to add some “umph” to your saving, to create what I call a “savings flow.” Use an automatic savings app like Digit to stockpile money in small amounts, then cash out every six months or so. I once had $500 in my Digit account that I transferred to my daughter for her birthday. She was able to buy stock with that cash I gave her. I like Digit because it takes money from your
I like Digit because it takes money from your regular checking account in small amounts (like swiping for a latte ) that you won’t miss and keeps it in an FDIC -insured account until you need it. If this method of saving works better for your, click here to open your own Digit account. Don’t forget, however, to transfer your savings to your TradeKing.com account so you can invest the money you save up with Digit.
5) Buy Your Investments
Now, this is where most people may get a little apprehensive. They feel like they know nothing about stocks and the stock market, so they don’t know which stocks to buy. Here’s a hack that will make investing and buy stocks super-duper easy.
Ready for it?
Index funds are “buckets” of a bunch of stocks across different industries. Investing in an index allows you to minimize your risk and execute DIY investing with ease. You don’t have to go sifting through stock screeners looking up ratios or other metrics to make decisions on. In an index fund, all the work is done for you.
Investing in index funds will super-simplify your investing strategy. You don’t need to know about individual stocks or how to analyze income sheets. You just need to know that the stock market exists and that if you plant your money seeds, the money will grow. Now that you have a trading account, you can buy what are called, exchange traded funds.
There are many indexes you could invest in:
- The S&P 500
- Russell 2000
- The Dow Jones
Using this investing calculator, we can see that investing in $10,000 any one one of these indices from 2000-2010 would yield:
- S&P 500 (GSPC): $11,603
- Russell 2000 (RUT): $12,598
- The Dow Jones (DJI): $9,182
- Nasdaq (IXIC): $5,493
NOTE: Index investing is typically less volatile (doesn’t change as much) as investing in individual stocks. You will notice the returns here are smaller than investing in some individual stocks. This is the trade off you make for keeping your initial investment “safe.” If you are not prepared to take on the risk of investing in individual stocks, you will also not be able to partake in the higher gains of individual stock purchases when they occur. You’ll have to figure out the level of risk you are comfortable with. For example, we personally keep individual stock investments at no more than 10%-15% of our entire portfolio.
Once you figure out the index you’d like to invest in, purchase shares in that index as the money comes in. We like Vanguard index funds because they are low-cost.
Here some examples of Vanguard ETFs you could buy:
Check out the 10-year returns (from 2006-2010) on $10,000 invested in these funds:
Just imagine the returns if you had invested $100k or more in these funds! Again, that is why it is important to start investing today. Time= money in more ways than one!
6) Track Your Returns
Now that you’ve put some money into the stock market in either an ETF or individual stocks, you’ll want to track your investments along with your net worth.
This will allow you to:
1) gawk in wonder and amazement at the growth or your investments 2) make changes to your investment approach to get better
2) make changes to your investment approach to get better yields.
Personal Capital is a free tool that will aggregate all of your investments, track your fees and categorize your spending. Plus, you get regular email updates that apprise you of your holdings, spending patterns and other information pertinent to your financial situation. You can sign up here for free: Personal Capital.
If you’d like more information on investing, enter your information below and I’ll send you some free video tutorials on opening a brokerage account along with information on further educating yourself on investing: