So, you’ve put aside a good portion of money in savings, and now you’ve reached the point where you think it’s time for your money to make money. You could put it in a savings account, but let’s be honest: those don’t make a lot of interest, and if you’re young, you can probably handle more risk, so savings accounts as a money-making plan aren’t worth your time. If you’re new to the stock world, your best and simplest bet is to invest your money in the big companies: companies you know won’t go bankrupt anytime soon, and will still give you a decent return overtime. These are companies like Microsoft, Apple, Amazon, and others. You know they aren’t going anywhere, but they still can give you a good return on investment.
Making a profit from the Stock Market, at its most basic, is the same as making a profit from anywhere else: you want to buy a stock when it’s undervalued, hold it, and then hopefully sell it off when the stock has climbed in value and you can make a tidy profit from it. Buy low, sell high. Sound familiar? However, before you go investing, you ALWAYS need to keep one thing in mind: never invest money you can’t lose. You have an extra $1000 and decide you want to risk it? Sure. But don’t invest your rent money in the stock market hoping to get some quick returns, because you could end up losing it all.
Some terms you’ll hear a lot when investigating stocks are the P/E (Price/Earnings) ratio, which is how you can tell if a stock price is over or under-valued. You get these by dividing the market value of each share by the earnings per share the company makes. The general rule is, the higher the number you get from this, the more tendency toward the stock being a Growth Stock, so there’s no harm investing if you think there’s potential. There are other methods, such as the PEG ratio, but P/E will see a beginner investor through their first few trades.
Speaking of trades, before you do any trading at all, you’ll need a broker. A Stock Broker is someone who buys and sells stocks on your behalf, and typically keeps your portfolio for you. You can buy into ETFs, which are pre-selected portfolios managed by professionals and these tend to do quite well. They require no management on your part and can provide a nice ROI over the course of several years. If you have more time to let the money roll in, these are a great starting point. However, if you’re determined to manage your own portfolio, you’ll want to get a broker account that doesn’t charge too many fees, because fees cut into your profits. The two best options you have are E*Trade and Merrill Edge. Both charge very little fees and can occasionally give you free trades if you meet certain thresholds, making them great starting points for the beginner investors.
Consider your options extensively before you make your first investment, though. If you have a lot of time, consider going for a longer-term investment, such as a government bond. These tend to be taxed very little, if at all, along with having great security. Meanwhile, the tax you pay on short-term Capital Gains vary depending on your state, but you still have to pay them, no matter where you live in the United States, in addition to having more volatility. And no matter how tempting it is, just say NO to penny stocks or other unregulated stocks (also known as OTC stocks). They are extremely volatile and you’re much more likely to lose whatever you put into them than you are to gain anything substantial.
It’s not everything, but that’s the run-down of everything you need to get started. So, go out there, make your first trades, and start making money!