A lot of young adults in their 20s are not sure how to start investing in the market. Many young adults just don’t understand the market and think it is too complicated and not worth their time. I too went through the phase of not knowing how to get started in the market and want to share my experience and some steps to get started.
Step 1: Save Some Money
You should save some money to get started with. This can be $500, $1,000, or even more. Just start with what you are comfortable with. For me, I decided I would start by putting $1,000 in the market. I was comfortable with this amount and was easily able to come up with the $1,000 to invest.
Step 2: Select a Brokerage
In the internet age, there are plenty of discount brokers available. Some of the well known discount brokers are E-trade, Tradeking, TD Ameritrade, Scottrade, Fidelity, and Sharebuilder. There are plenty of other brokers out there, but this is a good list for you to start with. You should look at the websites of each of these brokerage firms and see what the fees are. You should pay particular attention to the commissions. If you become a frequent trader, these commissions can eat into your profit. Also, you should see what the account minimums are for each of these brokerages. If a brokerage requires a minimum account balance of $3,000 and you are starting with $1,000, you can cross that one off your list.
Personally, I use two different brokers. I use Vanguard because my 401k account is with them and they offer me discounted trades on my brokerage account. In addition, there are no commissions when I trade a Vanguard ETF. My second brokerage account is with Tradeking. To date, I haven’t had any problems with either of these brokerages.
Once you make a decision on a brokerage, go ahead and sign up. You will have to fill out a few forms and it will likely take a few days for your account to get setup.
Step 3: Risk Tolerance
I think this is an important step to decide on your risk tolerance. I am sure you have all heard the saying “the greater the risk, the greater the reward.” Well you have to think about this flip side of this as well; you’re taking a greater risk and thus may lose more than you would in a less risky investment.
Now that said, I don’t recommend that any new investors start picking individual stocks. This is a bad idea if you have no experience. You should start with an ETF fund that tracks an index. This is known as passive investing and will ensure that you have a well diversified investment and are not exposed to any one stock.
For me personally, I was willing to take more risk with my initial investment. However, I still went with a passive ETF fund because I had limited experience. CD’s are a great low-risk investment too.
Step 4: Select an ETF
I am going to limit this article to discussing passive ETFs in this article.
First, look to see if your brokerage offers commission free ETF trades. Some do offer this. Now let’s take a look at some of the ETFs I considered when I first started investing.
Vanguard S&P 500 ETF (VOO)
iShares S&P 500 Index Fund (IVV)
Vanguard Mid-Cap ETF (VO)
S&P MidCap 400 Index Fund (IJH)
S&P SmallCap 600 Index Fund (IJR)
Vanguard Small-Cap ETF (VB)
There are many other ETFs available that you can invest in. These are just a few that I looked at. When you are looking at different ETFs, pay particular attention to the expense ratios of the ETFs. You want to look for ETF funds with lower expense ratios. Also, be aware that small cap stocks have more volatility and less stability than large cap stocks. However, they have a lot more growth potential. This is why you need to decide on your risk tolerance.
Instead of buying an ETF that tracked the S&P 500 index, I was willing to take the risk of more volatility in small cap stocks. Thus, I bought the Vanguard Small Cap ETF.
Step 5: Buy the ETF
You decided your risk tolerance and looked at your ETF options. Now it’s time to place the buy order for your ETF. There will be instructions on your brokerage firm’s website to guide you through this process. Once you place the order and it is filled, you will officially be invested in the market!