New to Investing? Here Are Your First 3 Steps

Investing in the stock market for the first time can be an intimidating step. Throw in record unemployment, a global pandemic, and enough market volatility to rattle even the most seasoned investor.

Yet even in the midst of such turbulence and uncertainty, younger people say they want in. Personal finance site Money Under 30 surveyed men and women ages 18 to 39, and found that 61% say that now is a good time to invest.

Before diving in for the first time, it’s important for new investors to set themselves up for success by creating a roadmap. Think of it as a long car ride: Before setting off, you make sure the car is in good shape, the tank is full, and you have clear directions to your destination. It’s the same with investing. Before buying your first stock, follow these three simple steps:

Step One: Are you ready to invest?

Before getting into the market, make sure that the rest of your financial life is in order. That means paying off as much debt as possible and not just making minimum payments. The more aggressive you can be about repaying debt, the sooner you will free up money to invest.

It also means that you should have, as a general rule of thumb, three to six months of savings set aside to cover all living expenses in the event that you lose your job or experience some type of emergency that upends or wipes out your monthly income.

As any financial advisor will tell you, investing in stocks is a good way to build wealth over the long term. For the 10 years ending in July 2019, the annualized average return for the S&P 500 was a robust 14.7%. That doesn’t mean it was a straight shot up, but for investors, it was a stellar decade. However, it doesn’t make sense to invest if you’re still putting rent and groceries on a credit card that isn’t paid off in full each month, or don't have a financial cushion in case of emergencies. In other words, fill up your gas tank before hitting the road.

Step Two: Set your investing goals

Once you’ve determined that you’re ready to invest, it’s time to decide your investing goals. Sure, you want to make money, but for what? Are you building up a retirement nest egg? Or, are you saving up for something more immediate, like a good vacation or a cool car? The timeframe in which you plan to use that money matters a great deal. This is where the "destination" in your roadmap comes into play. If you're planning for something much further down the road, then you can take advantage of a tax-deferred account, for example. But if your destination is much closer to home, then an alternate route works better.

Long-Term Goals

A tax-deferred account is the best way to sock away money for retirement, but remember that this money is largely untouchable for decades. The easiest way to do this is through an employer-sponsored 401(k) plan. If your company offers one, it’s the most convenient way to make regular contributions straight from your paycheck. And if your company offers some degree of matching? That’s even more of a reason to participate because it's free money deposited right into your account.

Be sure to also learn more about other types of tax-deferred accounts, such as IRAs and Roth IRAs.

The idea behind them is all the same: Put your money in these accounts now, and let them grow over time. Thanks to the power of compound interest, even small amounts put away today can build up to substantial wealth in the long run.

Short-Term Goals

For other goals -- such as saving for a wedding, a house, or even getting funds to start your own business -- a taxable account is a smart strategy. Unlike a 401(k), the only restrictions into buying and selling is how much money you have, and how much you're willing to pay in taxes. Mutual funds and exchange traded funds (ETFs) that track the stock market like Vanguard Total Stock Market Index Fund (VTI) offer good diversification. Since ETFs trades like stocks — meaning you can buy and sell them whenever you want in a given day — they also offer quick liquidity.

As for stocks themselves? You want to buy shares of Apple or Tesla? You can certainly do that, but make sure that you're doing your proper research into each company. What you know about this company might not be what Wall Street cares about. For example, a company might report a record profit in one quarter, and yet its stock might tank. Why? Because Wall Street analysts are looking at forward-looking statements and trying to understand its overall financial health, and they may not like what they see in the future.

Plus, you've heard the expression, "Don't put all your eggs in one basket," right? It’s important to diversify because stocks, more than funds, are extremely volatile. Remember Enron? Shares were worth $90 in August of 2000, but plummeted to less than $1 per share by November of 2001. Cases like these are rare, but declines in stock prices happen all the time. Not every company is a winner, which is why if you're not sure about what to invest in, a fund can be the safer choice.

On the other hand, if you had invested $1,000 in Apple in July of 2010, its value would be $17,500 as of August 9, 2020. Not too shabby. You can learn more about investing in stocks here.

Step Three: Open an investment account

Once you’ve determined your investment goals, you’re ready to open an investment account and there is no shortage of online investing platforms to choose from. Among the most popular today include:

• Ally
• Betterment
• Charles Schwab
• E*Trade
• Fidelity
• Firstrade
• Interactive Brokers
• Robinhood
• TD Ameritrade
• TradeStation
• Vanguard

Almost all of these are free of commissions on trades (meaning, they won't charge you every time you buy or sell a stock) and have no account minimums to get started. That makes them ideal for new investors.

When choosing an online broker, it’s important to look not just for the lowest fees, but to also take the time to find sites that offers robust learning tools for beginners, including webinars, tutorials, and on-call chat and phone support. All of these online brokers also offer more sophisticated trading choices including options -- tools that you might want to access as you get more familiar with investing. And with robust mobile apps, these online platforms also allow investors to view, trade, and manage accounts from a smartphone.

Final word

Once your finances are in order, and you have a destination in mind for your money, you can make your money work for you. It’s important to do your research and stay consistent -- don't make panicked moves. Stocks will go down at times, so make sure you can afford any potential losses. But in the long-term, the stock market offers far better returns for your money than any savings account could.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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