How to invest in stocks
STOCK trading has undergone a resurgence thanks to low-cost apps and rising company values. Stockmarkets have been rising in recent months off the back of successful vaccine rollouts signalling a return to normality and President Joe Biden’s Covid relief bill getting passed. Additionally, amateur investors sent the share price of US computer games retailer GameStop and […]
STOCK trading has undergone a resurgence thanks to low-cost apps and rising company values.
Stockmarkets have been rising in recent months off the back of successful vaccine rollouts signalling a return to normality and President Joe Biden’s Covid relief bill getting passed.
Additionally, amateur investors sent the share price of US computer games retailer GameStop and other companies soaring last month after a group on social media website Reddit wanted to stop hedge funds making money on businesses performing badly.
Buying shares lets you own a stake and benefit from the success of some of the world’s biggest brands such as Apple, Starbucks and Google.
But investing and buying shares can be risky and should not be entered into without knowing what’s at stake.
It’s essentially betting that a company’s value will go up but it’s not guaranteed and you will lose money if the share price drops. You should only invest what you can afford to lose.
Here is how to start stock trading safely.
Choose your strategy
There are different ways to invest in stock.
Traditionally, investors would use a full service brokerage such as Fidelity or Charles Schwab who would help research, buy and sell stocks.
These companies would help setup a financial plan and will help monitor and manage your portfolio.
The average fee at a full service broker is $150 per transaction, according to Investopedia.
This is pricey but covers everything from research to buying and selling stocks for you.
A rival has emerged in recent years through discount brokers such as Robinhood and eToro who will let you buy and sell stocks online through an website or app with zero commission.
They will also let you purchase fractional shares rather than a whole share.
For example, Google’s share price is more than $2,000. That’s a lot of money to spend on one stock but you could instead buy a fraction of it through a discount broker.
This means you earn a portion of a stock rather than the whole thing.
That saves you money but means you still benefit from a company’s growth even if you can’t afford a full share.
These low-cost brokers will provide research but you are responsible for your buying and selling decisions.
Check your broker is regulated
The financial services sector is plagued by scammers who may cold-call you to try to get you to purchase the latest growth stock.
It is always important to check who you are talking to and to do your own research.
Check with the regulators in your state about licensing, registration and disciplinary actions regarding brokers and brokerage firms.
You can also use the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck service to see if your firm is legitimate.
Diversify
Films such as the Wolf of Wall Street may glamorise investing and suggest you can get rich quick.
But investing is risky and you could lose all your money.
Experts suggest building a diversified portfolio with companies from different sectors and different sizes.
That way, if some parts of your portfolio are doing badly, others can take up the slack.
Investors should also avoid knee-jerk reactions when investing as you can smooth out losses over the long-term but if you cash out because of a temporary drop, you may never make the money back.
That said, there are some companies that may collapse or decline in value permanently so it is important to understand what you are investing in.
Check company company reports, Securities and Exchange Commission filings as well as press articles and broker notes so you can see where your money is going.
Don’t forget about tax
You may need to pay tax on profits you make when selling a stock.
The rate you pay depends how long you invested for.
Investors pay tax at their federal rate on any profits from stocks sold in under a year.
The rates on profits from shares held for more than a year than a year tend to be lower at 0%, 15% or 20% depending on your income and filing status.
You also need to pay tax on dividends.
If you want to reduce your tax bill, you could instead invest in shares through an individual retirement account with your broker or bank or a 401(k) from your employer.
Any gains in these accounts aren’t taxable while invested.
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