One of the biggest reasons people don’t achieve financial success is that they fail to get started! We all know that we should be saving and investing but by the time we get our first job we usually don’t know where to start. Not knowing how to start investing in the stock market can lead to feeling overwhelmed. I have talked to many who say that they feel intimidated by the stock market and so they just don’t invest in it. Instead, they dutifully start a savings account or begin investing in Certificates of Deposit (CDs) at their bank.
But that is usually not the best approach.
Avoid the Bank
Getting financial advice from a bank is one of the worst things you can do. I know that seems counter-intuitive but it is true. Banks will usually send you over to one of their “investment specialists.” These are essentially sales professionals who have been trained on matching the bank’s products to the needs of their customers. This usually doesn’t result in the best advice and will often lead to them seeking to persuade you to use as many of their products as possible to maximize the bank’s revenue. You will end up discussing various bank accounts, credit cards, loan products, CDs, bonds, and possibly, just possibly, their in-house stock brokerage (which happens to have HUGE fees).
Your best bet is to skip this high pressure sales presentation which is designed to get you into debt!
Open an Online Brokerage Account
Instead, you should look to open up an online brokerage account. Here are the reasons this is the best way to go:
- It is an account just like your bank account where you can put money in and take money out as you please; including transferring money electronically to your bank account
- These accounts usually allow you to trade for $15 or less for stock or mutual fund trades
- There is research and advice on the website free of charge (it is already part of the fees for trading)
- You have complete control over your investments
- Easy access to brokerage statements and information related to your investments
- Instantaneous results – you don’t have to call a bank or broker when they are in the office or wait for them to respond to you
- This is generally the lowest cost option
- Many online brokerages are very sophisticated in their product offerings – they offer stocks, bonds, futures, mutual funds, exchange traded funds (ETFs), options, futures options, etc.
- You can take loans against your brokerage account if you need to
Some of the items listed above also apply to a bank or a standard brokerage account. But I have always thought it is better to have access to the tools the best brokerages provide and have the added control and convenience that you can get from an online brokerage.
If you don’t feel comfortable starting an online account because you are new to it don’t worry! You can find a stock broker who will gladly get you started. Just be prepared to meet with them at their office and pay some fees to get started. Having to invest some time and money up front is much better than not getting started at all.
Picking on Online Broker
If you do decide to use an online broker you can do an internet search for brokers and research which brokerages are the best. I recommend using the search term “online brokerage rankings” and skipping the first few advertisement results and then finding an up-to-date review of the various brokers out there. Here are some things to consider:
- How much support do you want? Some online brokerages offer broker-assisted trades in case you feel like you need help. Others offer a great deal of research. Still others are low-cost providers and have a bare bones approach in order to keep their fees low
- How much do you want to pay per trade?
- Which products will you invest in?
- What are the minimum account requirements? Many brokerages will want you to have $5,000 or more to start. But some will open an account with as little as $500
- Are there other restrictions or minimums? Brokerages may vary in the minimum account value required to have a margin account, trade futures and options, or use other products
- Reach out to friends and family or read some online forums to get a feel for what other people are saying and their experiences with the different sites.
Open an Account
This is really not hard. But it ends up being the reason most people don’t take control of their investments. Opening an investment account seems very intimidating: but it really isn’t. Think of it as simply opening another bank account. However, with this account you can sign into the website and choose to move money to various investments. That’s it.
Most online brokerages have a very easy step-by-step process to open an account. Look at the example below:
You will basically fill out the forms and tell them what kind of account you want and they will tell you what you need to do to get money into the account for it to be started. The various types of accounts that exist are primarily to allow for certain specialized retirement accounts, business accounts, or accounts set up for minors. But to get started investing you can just pick the cash account and ignore all the rest.
A note on cash account vs. the cash/margin. A cash account means that you can only buy investments up to the value of the cash that you have in your account. This makes sense and is intuitive. However, you could also apply for a margin account which allows you to borrow money to invest even more. Or you can just borrow against your investments and take the cash out. Please don’t do this for your first account. Margin can be a powerful tool and is very useful in many situations. But for the first-time investor it is a needless complexity which can introduce a great deal of risk and interest expense!
Funding Your Account
Once you have decided which brokerage to use you will need to fill out an application and fund your account. This involves filling out a form and sending it to the brokerage with a check for your initial deposit. Once you do this it should be the last time that you need to send anything in the mail. You should include in your application the request to link your brokerage to your bank account and send a voided check for this to be set up. Once this is set up you can easily transfer money back and forth electronically.
My personal recommendation for which brokerage to use is OptionsXpress. This is the brokerage I’ve been using for over ten years and has just about every product that you could want and it has very reasonable prices. I have also been very pleased with their support and attention to my needs. They have reached out to me proactively several times to get suggestions for improvements and make sure that I was satisfied. I have never had any problems with execution of trades. I’ve also been impressed with the research that is available on their site and the fact that they are continually adding more research.
OptionsXpress was also recently purchased by Charles Schwab and therefore has even more support and an even bigger brokerage behind it. I think this is going to provide opportunities for clients who want assistance or may need the services of a larger brokerage to get the best of both worlds.
Your First Investment
Once you have your account there are literally thousands and thousands of different investments to choose from. Thankfully, you only need to invest in one!
I am going to recommend that you invest in one simple low fee mutual fund which will be represent 500 of the best united states stocks and which represents all types of businesses. There is a company called Standard & Poor’s which keeps this broad list of 500 companies.
The list is called the S&P 500 and is often quoted in the financial news to represent how the stock market as a whole has performed. You might read something like, “It was a good day on Wall Street today with the S&P 500 increasing 2%.” This means that, on average, the 500 stocks increased 2% and shows a positive movement in the overall market.
Instead of having to wonder if your particular stocks have done well you will already know. Since you purchased the S&P 500 fund you will know that your investment increased 2%.
You will never have to worry about selling and buying stocks based on the latest fads or new technologies. This is because the list of 500 stocks in the S&P 500 is being updated for you.
I own an index that recently added Apple. I had always wondered if I should buy Apple stock or Exxon. But guess what? I already own them. That’s because I own an index fund.
To be very specific, I am recommending you buy the Vanguard S&P Exchange Traded Fund (ETF). To buy this fund in a brokerage account you will need the ticker symbol to enter your buy order. The ticker symbol for this fund is VOO. A ticker symbol is simply the short grouping of letters that traders use to quickly identify a particular stock or fund.
Think of all the time and energy that you will save by not having to worry about researching companies in various industries, analyzing sales trends, or learning about the newest technologies! Instead just continue to buy this index fund and you will have a partial ownership in 500 companies. This takes care of diversification as well. Having broad exposure to 500 companies means there is very little impact if one of them goes bankrupt.
Have more questions about starting a brokerage account? Let me know and I would be more than happy to help you.