New to investing? Don't sweat it. Learn 4 simple methods to investing with confidence so you build plenty of wealth for the future, regardless of how much money or experience you have.
A Money Girl listener, Moadd H., recently asked: “I’m 27 years old and want to invest in stocks but don’t have the confidence to do it after hearing how risky it can be. I’ve done research about different types of stocks like REITS, Roth IRAs, and mutual funds—but still feel like a rookie. If I invest $10,000 how long will it take to see a profit?”
In this post, I’ll answer Moadd’s question, review four easy ways to invest in stocks with little money or experience, and tell you the best way to own them. I’ll make it simple, so you can invest confidently and wisely to build wealth for the future.
Free Resource: For a summary of the traditional and Roth retirement account rules, plus the best places to open one up, download the free Retirement Account Comparison Chart.
What Are Stocks?
I recommend that every investor own stocks; however, there’s a right way and a wrong way to buy them. Before I answer Moadd’s question, I’ll explain in plain English what a stock is and pros and cons about owning them that every investor should know.
Companies issue stock to raise money from investors. For instance, maybe Apple wants to fund groundbreaking research, open a new division in a foreign country, or hire a crew of talented designers. If you buy shares of Apple stock, you’re buying a small piece of the company, which is why stocks are also known as equities.
If a company does well, investors buy more of its stock, pushing the price up. Likewise, when a company has lower-than-expected earnings or gets bad press, its stock value can go down quickly as investors sell shares.
There are hundreds of thousands of companies that offer stocks on different marketplaces known as exchanges. The two largest exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. As I’m writing, Apple (AAPL) stock can be purchased on the NASDAQ for $154.12 and Wells Fargo Bank (WFC) stock is on the NYSE at $55.15 per share.
Pros and Cons of Investing in Stocks
The main advantage of investing in stocks is that over time, stocks give you one of the best and most simple opportunities to make money. Although there’s no guarantee that every stock will increase in value, since 1926, the average stock has returned close to 10% a year.
Although there’s no guarantee that every stock will increase in value, since 1926, the average stock has returned close to 10% a year.
If you’re investing for the long-term, which is the only type of investing I recommend, stocks can turbocharge your portfolio and help you build wealth. No other type of common investment, such as bonds or money market funds, outperforms stocks over time.
The main disadvantage of investing in stocks is that prices can be volatile. The value of a stock can change from second to second as trading volume fluctuates. The release of a disappointing quarterly financial statement, news about a product recall, or changes in the global economy are just a few triggers that can cause investors to buy or sell stock shares, which influences price.
Price volatility is the reason stocks are one of the riskiest investments to own in the short term. However, you can greatly minimize risk by adopting a long-term, buy-and-hold strategy. Additionally, being diversified by owning many stocks, instead of just one or two, offsets risk. I’ll tell you easy ways to do that in a moment.
My advice for Moadd is to never pick individual stocks on your own—that’s way too risky. If they perform poorly you could lose your entire investment. So, leave stock picking to professional money managers who research company financials and industry forecasts for a living.
See also: Should You Pay Down Debt or Invest?
4 Ways to Invest in Stocks with Little Money or Experience
Here are four ways to create a diversified stock portfolio even if you don’t have much money or experience with the stock market.
- Buy a stock mutual fund.
- Buy a stock index fun.
- Buy a stock exchange fund.
- Buy a target date fund.
Let's dive deeper into each.
1. Buy a stock mutual fund.
Mutual funds are collections of assets managed by a professional. Shares of mutual funds are bought and sold by a fund family, such as Fidelity, Vanguard, or Charles Schwab. There are different types including stock mutual funds, bond mutual funds, and specialty mutual funds.
A stock mutual fund is an investment made up of hundreds or thousands of different stocks of different companies. It might focus exclusively on international, domestic, large, small, or growing companies. It may only own stocks in certain industries such as utilities, real estate, gold mining, or technology companies.
Having many individual stocks within a single investment gives you instant diversification and minimizes risk over time. Yes, some stocks owned within a fund may go down, but they can be offset by others that go up.
Look for terms like large cap, mid cap, and small cap in the names of stock funds. Cap is short for market capitalization, which is the value of a company’s stock shares. So, a large cap mutual fund means that it only owns shares of big companies, like Apple, Target, or General Electric.
An important tip for buying mutual funds is to look for the lowest fees possible.
All mutual funds charge fees, known as the expense ratio, to pay for costs, such as management, administration, and advertising. An important tip for buying mutual funds is to look for the lowest fees possible.
For instance, an expense ratio of 3% means that each year 3% of a fund’s total assets will be used to pay expenses. The fee comes off your potential annual return and cuts into your earnings. So, if you choose a similar fund that charges just 1% or less, you’ll reap higher returns over time.