Some people constantly look for opportunities to increase their income. Investing in stocks can be a great way to make additional money on the side. Who wouldn’t want to have a nice little freebie to his monthly income? Today stock investing is one of the most popular ways to earn more money and improve financial situation. In this article, we will take a closer look at simple steps you need to take in order to start investing and make it profitable.
Step 1. Understand common vs preferred stocks.
Issuing common and preferred stocks is often used by business to raise money and increase cash flow. Stock investing assumes legal ownership in businesses also called security or equity.
Once you decide to put your money in common stocks, you’ll automatically be a stockholder with a proportionate share of the company’s profits. But you are at risk of losing money invested during the company’s downfall. Still, lots of investors get attracted to common stocks since the returning asset class is higher and offers more wealth.
An alternative way is to invest in preferred stocks. The dividends accumulate on a company’s preferred shares. Some investors find it more beneficial to invest in this kind of stock because it pays much higher dividend rates. However, if a company is unable to pay all dividends for some reason, claims on preferred dividends will take advantage over claims to dividends paid on common shares.
Step 2. Gamble but be aware of risks.
Investing in stocks sounds rewarding and easy. However, like any business, it can be vulnerable and subject to risks. Before you start, collect more information on shares and stocks. Be aware of risks and losses you might face.
If you invest in common stocks, don’t forget about the risk of having payments of dividends being waived by a company. It happens because preferred stockholders are prioritized over common stockholders. In this case, all forgone dividends will be accumulated and paid to preferred shareholders at some point. As a result, preferred stock dividends will be paid to shareholders prior to any common stock shareholders receiving any dividends.
If you feel like you need to know more, check it out online, or take an online course that will give you more details.
Step 3. Evaluate and analyze your actual finances.
Before investing your money, do an actual evaluation of your financial assets. You need to have a clear picture of what type of investor you are. It is important to set your priorities and decide on the level of risk you are willing to take. Also, there are a variety of assets that you might consider owning before you start investing in stocks: mutual funds, index funds, exchange-traded, or hedge funds.
Step 4. Choose your investment approach.
There are two major types of people that make stock investing: a Do-it-yourself (DIY) type and a candidate for robo-advisor. It is up to you what option to choose.
Step 5. DIY investing
If you are a retail or individual investor, use a DIY for building and managing your portfolio. Simply find a most appealing plan and go for it. In case of any questions, there is a lot of information online showing how to create the most profitable portfolio. Find a financial expert or consult your personal financial advisor.
Step 6. Robo-advisors
Robo-advisor is a service offering low-cost investment management. It is also provided by most of the major brokerage companies online. Robo-advisors have already gained a fair amount of popularity and at the top of the pick among investors. It targets consumers who want to get financial advice at a lower cost. Also, it resolves a majority of tasks that used to be handled by expensive experts beforehand.
The great tool for you to learn about the best robo-advisors would be the NerdWallet’s ratings. Additionally, you can find more information on a survey of brokers also available for review. The top and most rated robo-advisors in the USA in the recent time are Wealthfront, Betterment, Ellevest, TD Ameritrade Essential Portfolios, SoFi Automated Investing, Fidelity Go, Wealthsimple, Axos Invest, and Blooom (best for 401(k) management).
Step 7. Your job can be your asset.
Have a stable job but you are still on a tight budget? Look at it as another asset in the investment strategy. Get a retirement plan and save, let’s say, about 1-2 % of your income. Every time you receive a paycheck, these funds will be withdrawn right before taxes. You won’t even notice these contributions. In case you have annual raises, you can increase your contribution in the future. Basically, having a retirement account at work will let you use your company’s stock for allocating your investments.
Step 8. Be aware of trading fees.
Brokers have a saying «there is no such thing as a free lunch». Even though most of them try to drop or even ignore trade commissions, still this job should be profitable somehow. Well, here is the trick. They still charge you a commission every time you either buy or sell stocks. The price can range anywhere from $2 up to $10 dollars per trade. Remember, brokerage service is not a charity, so if they assure you with no trading fees, they will still make a profit one way or another.
For example, imagine you are going to buy or sell shares in company A and you decide on getting six different stocks instantly. You will be charged a commission for each one since it will be considered 6 separate trades. The top 2 commission-free trades services are E-Trade and TD Ameritrade (those are top picks for beginners).
Step 9. Consider stock investment accounts.
Most people find that the easiest way to purchase stocks is to go directly online. However, you still need a brokerage account. The process is pretty similar to setting up a banking account, so there shouldn’t be any problems. The steps are pretty much the same: filling out an application form, providing proof of your ID, choosing an option of funding an account. You can either transfer funds electronically or by doing it an old way – mailing a check. You might shop around for deposit requirements first before opening an account. Some brokerage services won’t even let you open an account with less than $1000.
Step 10. Buying stocks
Once you’ve opened your brokerage account, now you’re all set and ready to buy stocks. First, do your homework and research. Pick companies you like and learn as much as you can about them. Go ahead and review the company’s annual report or management’s annual letter to shareholders. Conference call scripts and announcements made can also be used, as well as quarterly earnings updates. Keep an eye for all the latest news that keep you up to date.
Second, find online tutorials brokers offer. Sign up for basic seminars that teach how to choose stocks. Study general terms that brokers use: ask, bid, spread, market order, limit order, stop (or stop-loss) order, stop-limit order, etc.
Step 11. Bears, bulls, and emotion control
Controlling your emotions plays a huge role in making a profit in stock markets because it affects logical decisions. This is where positive and negative attitudes become crucial. When a vast number of investors become concerned about a business, its stock price is likely to go down. And when most investors feel assured about the company’s future, stock prices are likely to rise.
There is a common term for such negative people – “bears.” Positive investors are called “bulls.” Both parties are usually driven by a wide range of feelings caused by rumors, expectations, and speculative events.
When stock prices become unstable and more vulnerable because of our expectations, tension and insecurities go up. People start wondering “Do I need to sell my position to avoid a loss? Is it a good idea to keep my stock and hope that the price will kick back? Should I buy more?”.
Just stay calm and don’t be overwhelmed with emotions since they can affect your actions and decisions.