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The stock market is a beautiful thing. The biggest companies in the US willingly sell shares of ownership to ordinary people like you and me.
And sure, these shares are tiny, but they are still valuable. And if you buy the right stocks, you can expect them to increase in value over time, growing your wealth and securing a healthy retirement. Check out this net worth calculator to track your financial progress as your portfolio and wealth grows.
If you haven’t started investing in the market, it’s time to start. As they say, you should’ve started 20 years ago.
Wondering how to build a stock portfolio that minimizes risk and maximizes wealth-building potential? We answer that, along with other stock market investment tips below, so keep reading if you’d like to be wealthier.
Choosing an Account
So you want to know how to start investing in stocks? The first step is to open the right type of account. There are many different types, each with its pros and cons. Here are the most common.
1. Employer 401(k)
If you work for a medium to large-sized company, there’s a good chance that they offer a company 401(k) retirement plan. With this, your company will often match your contributions up to a certain amount of your earnings.
This can be one of the best ways to start saving for retirement, as your company is helping you save money along the way. If you have this option, this should be your priority as you being investing, though you can open other accounts later on.
The only issue that what you invest in is generally less flexible. Though, you’ll still have solid options.
If you are a business owner or self-employed, there are now Solo 401(k) plans that you can open in order to experience some of the same tax benefits of saving for retirement.
An individual retirement account (IRA) is another type of tax-advantaged account, primarily meant as a long-term retirement savings plan. You can choose the type of IRA that makes the most sense for your situation.
Some IRAs are taxed when you make the contribution, while some defer the taxes owed until you finally withdraw the money in retirement. With an IRA, you have more flexibility over what you choose to invest in.
3. Brokerage Account
A brokerage account is considered a normal investing account. You can open one up and start investing your money today.
These are not tax-advantaged, and as a result, aren’t intended exclusively to save for retirement. Rather, you should open one and contribute to it after you’ve begun maxing out your chosen retirement account(s).
With a brokerage account, you have complete control over the stocks or funds that you invest in. Shares can be sold at any time and money withdrawn, though the appropriate taxes may need to be paid.
Choosing a brokerage account is important. Today, you have many more options than ever before.
You can open an account with many mobile-based investing companies that you can manage right from your smartphone. Or you can choose a brokerage that offers the specific funds you’d like to invest in, which can save money on commission fees.
Alternatively, you can choose a turnkey private equity platform that offers alternative investments. The key is to assess your goals for investing, your timeline, and your ideal stocks, funds, or investment types you’d like to focus on.
How to Build a Stock Portfolio
Now that you’ve got your account opened up, what’s the best way to start investing in stocks? Education and patience.
Decide how much money you are going to contribute monthly. Don’t liquidate your savings or other assets in order to fund the purchase of hot stock. The market is volatile, and patience is required in order for long-term success.
That being said, here’s what to add to your portfolio.
1. Individual Stocks
You can buy stocks from companies of all different sizes and in all different industries. There are many companies you can invest in today that will provide you with the highest returns. But they also include the highest risk.
Balance these stocks out with large-cap funds, those of the biggest companies, that offer lower returns but greater stability.
2. Mutual and Index Funds
Funds are comprised of stocks from many different companies. Smart people, or nowadays, artificial intelligence, choose the companies that will yield the best results.
They are constantly removing poor-performing stocks and adding better ones. Essentially, with index and mutual funds, someone else has done all of the work for you, and you get to reap the reward.
Bonds offer much lower returns but are much safer over time. Many people choose to invest a portion of their entire portfolio, say 30%, into bonds, with the rest being stocks.
That way, in turbulent times, you have some stability with bonds.
How to Diversify Your Stock Portfolio
When it comes to investing for beginners, one of the most important tips is to diversify. You don’t want all your eggs in one basket, or you stand to lose everything you’ve invested.
So what does it mean to diversify? It’s meant as a way to protect your overall portfolio from a single point of failure.
Imagine if you invested all of your money in just two different stocks; Uber and Lyft. These are two massive, growing tech companies that can provide incredible returns.
But what happens when the global climate turns against ride-sharing services? What if ride-sharing becomes illegal for one reason or another, and these companies disappear?
Well, all of your eggs, or your money, was betting on the success of one single industry. When it crashes, your portfolio becomes nothing, and your wealth is gone.
Instead, it’s important to diversify. Yes, you can still invest in individual companies that you believe in, that are growing, that are innovating.
But it’s also important to invest in companies with long track records that are going to be around for a long time. These are often the boring stocks that you don’t think about, but they serve an important role in your portfolio.
The easiest way to diversify is by investing in index funds, where each share you have of a particular fund contains a piece of many different stocks for an overall balanced investing approach.
Fill Those Buckets
So now that you know how to build a stock portfolio, it’s time to start funding it as much as possible. There’s really no better way to spend hard-earned money than to invest in something that will provide returns for a lifetime.
So go ahead, work overtime every now and then just for the thrill of beefing up your investment accounts a little more.
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