1. Can I invest if I don't have much money?
There are two challenges to investing small amounts of money. The good news? They’re both easily conquered. The first challenge is that many investments require a minimum. The second is that it’s hard to diversify small amounts of money. Diversification, by nature, involves spreading your money around. The less money you have, the harder it is to spread. The solution to both is investing in stock index funds and ETFs. While mutual funds might require a $1,000 minimum or more, index fund minimums tend to be lower (and ETFs are purchased for a share price that could be lower still). Two brokers, Fidelity and Charles Schwab, offer index funds with no minimum at all. Index funds also cure the diversification issue because they hold many different stocks within a single fund. The last thing we'll say on this: Investing is a long-term game, so you shouldn't invest money you might need in the short term. That includes a cash cushion for emergencies.
2. Are stocks a good investment for beginners?
Yes. In fact, everyone including beginners should be invested in stocks, as long as you’re comfortable leaving your money invested for at least five years. Why five years? That's because it is relatively rare for the stock market to experience a downturn that lasts longer than that. But rather than trading individual stocks, focus on stock mutual funds. With mutual funds, you can purchase a large selection of stocks within one fund. Is it possible to build a diversified portfolio out of individual stocks instead? Sure. But doing so would be time-consuming it takes a lot of research and know-how to manage a portfolio. Stock mutual funds including index funds and ETFs do that work for you.
3. What are the best stock market investments?
In our view, the best stock market investments are low-cost mutual funds, like index funds and ETFs. By purchasing these instead of individual stocks, you can buy a big chunk of the stock market in one transaction. Index funds and ETFs track a benchmark for example, the S&P 500 or the Dow Jones Industrial Average which means your fund’s performance will mirror that benchmark’s performance. If you’re invested in an S&P 500 index fund and the S&P 500 is up, your investment will be, too. That means you won’t beat the market but it also means the market won’t beat you. Investors who trade individual stocks instead of funds often underperform the market over the long term.
4. How should I decide where to invest money?
The answer to where to invest really comes down to two things: the time horizon for your goals, and how much risk you’re willing to take. Let’s tackle time horizon first: If you’re investing for a far-off goal, like retirement, you should be invested primarily in stocks. Investing in stocks will allow your money to grow and outpace inflation over time. As your goal gets closer, you can slowly start to dial back your stock allocation and add in more bonds, which are generally safer investments. On the other hand, if you’re investing for a short-term goal less than five years you likely don’t want to be invested in stocks at all. Consider these short-term investments instead. Finally, the other factor: risk tolerance. The stock market goes up and down, and if you’re prone to panicking when it does the latter, you’re better off investing slightly more conservatively, with a lighter allocation to stocks.
5. What stocks should I invest in?
Cue the broken record: Our recommendation is to invest in many stocks through a stock mutual fund, index fund or ETF for example, an S&P 500 index fund that holds all the stocks in the S&P 500. If you’re after the thrill of picking stocks, though, that likely won’t deliver. You can scratch that itch and keep your shirt by dedicating 10% or less of your portfolio to individual stocks.
6. Is stock trading for beginners?
While stocks are great for beginner investors, the "trading" part of this proposition is probably not. Maybe we’ve already gotten this point across, but to reiterate: We highly recommend a buy-and-hold strategy using stock mutual funds. That’s precisely the opposite of stock trading, which involves dedication and a great deal of research. Stock traders attempt to time the market in search of opportunities to buy low and sell high. Just to be clear: The goal of any investor is to buy low and sell high. But history tells us you’re likely to do that if you hold on to a diversified investment like a mutual fund over the long term. No active trading required.
