“If you do not find a way to make money while you sleep, you will work until you die.” – Warren Buffett.
Investing is the centrality of personal finance. An individual can take charge of their personal finance by earning and saving as much as they can, but if they do not invest, the return on their efforts will still be abysmally poor.
Investing ensures that your earnings and savings are optimally allocated to ventures that can pay off reasonable returns. On those returns, you can plan your retirement and never have to work again in your later years.
Those ventures can be a business, physical assets such as real estate, and tradable financial instruments including stocks, bonds, certificates of deposit (CDs), commodities, exchange-traded funds (ETFs), mutual funds, precious metals, and even cryptocurrencies. When you invest, you expect an income or a profit.
Understand Investing
Investing is allocating resources to an asset or different types of assets for a return. The return can be a steady income (e.g. dividend) or appreciation of the price for which the asset was bought (e.g. capital gain).
Investing requires balancing risk with return. As a rule of thumb, low-risk assets tend to generate low returns while high-risk ones tend to generate high returns. As a potential investor, you are expected to put that in mind when choosing the assets you want to invest in. On the low end of the risk-return spectrum are certificates of deposit (CDs) and bonds while on the high end are stocks, commodities, and cryptocurrencies.
Different types of the same asset can carry different levels of risk and return. For example, micro-cap stocks tend to be riskier and more volatile than blue chip stocks. However, they tend to deliver better returns.
How to Start Investing
Having understood what investing is and the need for it, you need to also understand how to rightly go about it. Here are the two most important steps.
Understand your investment options
Why do you want to invest? Is it for retirement or towards your children’s education? What is your risk appetite like? The answers to these questions will determine the investment options you will go for.
If you will be investing for retirement, you might consider one of 401(k), traditional IRA, modern IRA, standard investment account with a broker of your choice, or an employer-sponsored retirement account. Having decided that, then you should, with the help of a financial advisor, determine the assets you will be most heavily investing in.
Whether stocks or bonds, mutual funds or exchange-traded funds (ETFs), you should seek to thoroughly understand the potential return and associated risk of your chosen asset.
Choose the right broker
You can be clear about your investment goals, but if you do not invest with the right broker, you might still not be able to achieve them. Based on regulatory status, trading platforms and conditions, and fees, the best online brokers are eToro, Fidelity Investments, TD Ameritrade, Interactive Brokers, and Charles Schwab.
Especially as a newbie, it can be difficult to know the best brokerage platform to use. The competition in the industry is stiff and many options are available to you. However, based on features such as usability, trading technology, and fees, you can pare down the options and choose the best. So, here we highlight the top 5.
eToro
eToro is a top-tier broker registered with the top-level regulatory authorities, UK’s Financial Conduct Authority (FCA) and the Australian Securities and Investment Commission (ASIC).
Its comparative advantage is the social trading service it provides. The eToro’s innovative CopyTrader tool enables an investor to automatically copy other investors’ trades. As a result, it can help you find investors whose knowledge and professionalism you believe in and replicate their actions in real time. eToro makes a wide range of financial instruments available to its clients, including the most traded cryptocurrencies.
Moreover, the broker offers zero-commission stock trading. Also, its CFD and forex trading fees are low. However, the broker’s non-trading fees can be high: it charges as much as $10/month after a period of one-year inactivity and a $5 withdrawal fee.
Fidelity Investments
If you are looking for a broker that offers financial planning and advice, straightforward pricing, and robust investing tools, Fidelity Investments is your best shot. Based on the Fidelity Retirement Score which is based on your answers to 6 questions the broker supplies, you can see the Individual Retirement Account (IRA) option that might be right for you.
With Fidelity, you can either manage your investment yourself at no account fee or minimum deposit restriction or contract them to do so for you for an advisory fee.
Fidelity Investments provides its clients with tax-smart investing which is designed to help you keep more of what you earn, fixed income solutions that may save you up to $15 per bond, zero expenses on index mutual funds, and zero commission on online trading for US stocks and ETFs.
TD Ameritrade
If you are a beginner, then TD Ameritrade should be your choice. TD Ameritrade is renowned for its industry-leading education and research. There are tools such as the Market Edge which offers timely information and technical analysis of the markets, ETF Market Center and Stocks Overview which are respectively tailored to help you monitor your ETF portfolio and stock positions,
Screeners with which you can find stocks, options, mutual funds, or ETFs that meet your predetermined selection criteria, and Market Java for daily market news.
The broker provides multiple platforms so no matter your expertise level, you will always get a fit. The interface of its proprietary desktop trading platform, Thinkorswim, is intuitive enough for beginners to use. Finally, its fees are reasonable. There are no commission, no platform fees, no data fees, and no trade minimums.
Interactive Brokers
Via its award-winning platform and services, Interactive Broker provides the opportunity to invest globally in stocks, options, futures, currencies, bonds, and funds. Its IBKR’s powerful suite of technology helps you optimize your trading speed and perform advanced portfolio analysis.
It offers different account types from which you can choose: individual account, joint or trust account, retirement account, family advisor, non-professional advisor, and institutional account. Perhaps, Interactive Broker’s best offer is its transparent, low commissions starting at $0 and low financing rates which help to minimize costs and maximize returns.
However, some clients can have their access to its platform or some of its functions restricted. For example, IBKR Lite clients can’t use IBKR’s SmartRouter. Moreover, inexperienced investors may struggle with its intimidating interface.
Charles Schwab
Charles Schwab is a full-service broker with millions of clients investing trillion dollars worth of assets. The broker charges $0 on listed stocks, ETFs, options, and mutual funds.
Plus, there are no trade or account minimums and there is a satisfaction guarantee. With Charles Schwab, you can choose how to invest: do you want to manage and trade your own investments?
Do you want to use automated investing and professional guidance? Or do you want plan and invest with an advisor? You are free to choose. And, with the customizable, tax-efficient Schwab Personalized Indexing, you can employ a personalized direct indexing strategy to separately manage your account.
However, Charles Schwab’s forex and cryptocurrency catalogue is poor, if not non-existent. And, its effective base rates can be too high for those trading on margin.
Regardless of the broker that you choose, it is still very important to understand what you are doing.
If you want to invest in the stock market but are not sure where to start, I recommend you this eBook. Simple and straightforward for beginners.
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Hope this was useful for you! If so, hit the like button to make me feel good. Please note that the above content is not an investment advise and shall be considered only for informative purpose.
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