How to Invest in the Stock Market in Six Simple Steps – Without Using a Personal Finance Advisor
Financial literacy is an ongoing problem facing Americans, especially for millennials, and for some reason, it doesn’t get the attention it deserves. At a time when millennials should be investing due to their still-ample time in the market, only 24% of millennials show signs of at least basic financial literacy. But the problem is not only with this age group. In 2020, only 55% of adults in the United States invested in the stock market. The statistics continue to get worse with 64% of Americans retiring with less than $10,000 and 70% of U.S. households not having a long-term financial plan.
Lack of knowledge about how to invest and manage their money prevents people from making choices to take more control of their lives. As a result, people work way into their retirement years. What if there was another way – what if you could even retire early? Would you?
Investing in the stock market is one of the best ways to build wealth, especially for retirement, and yet not everyone takes full advantage of what it has to offer. Unfortunately, many people are not comfortable with the key elements of how to invest. As a result, we are not investing or don’t invest enough, thereby losing out on one of the most valuable investing components: time!
Sure, investing in the stock market can be intimidating AND it has risks. But if you know some of the wheels and the levers, we can all take part!
“The beginning is the most important part of the work.” – Plato
In this blog post, we are going to go over some of the building blocks of the stock market, how it grows, and where to invest money. To be up front, the answer is investing in stock market indexes long term.
We are going to keep it simple to get you headed in the right direction – we don’t want to boil the ocean, as the saying goes. The point here is that stock market investing can be overly complicated, but it doesn’t have to be.
Read on to learn the six things to get you started on the right path toward investing and gaining more control of your life!
Table of Contents
1. What is a stock and what does invest in a stock mean?
4. What is compound interest and how does it work for investing?
5. Is there risk in the stock market?
6. Can you time the stock market?
**This post contains affiliate links and On the Move with Liza and Stephen will be compensated if you purchase after clicking on our links, with no cost to you.
Before reading this blog post, consider reading my full guide to the Road to Retirement in Seven Steps first. I created it to explain how to understand your personal finances and get you on the road to financial freedom. I highly recommend completing the activities in the post before reading this one as it has key information on how to get started with your finances. Additionally, this guide will go over the necessary steps to gain control, strategically and dynamically, over your personal financial life. It goes over debt, income, and ways to find money to invest into the stock market. Finally, it also makes a recommendation on a financial app called Personal Capital to help you understand and monitor your finances. You can also read my review on Personal Capital here.
Ok – thanks for reading. Now, on to this blog post on the basics of the stock market and how to invest.
Key Components of Investing in the Stock Market
1. What is a stock and what does invest in a stock mean?
A stock is a share of a company – a piece of a company or corporation. By owning a stock, you are a shareholder; you own a piece of the company. The number of shares you hold in proportion to the overall total number of shares will tell you the percentage of the ownership you hold in that company.
If a company has one million shares and you own 200,000 shares, you will have a 20% ownership of the company. A company could have millions or even billions of shares.
For our purposes, when we are discussing investments in stocks, it is over the long term. This post is not about day trading; this is about how to increase your wealth through long-term investments to retire or even retire early. Several studies have shown that investing in the stock market over extended periods will generate favorable returns. A return is the money made or lost in the stock market. However, a favorable return occurs from either capital gains or dividends.
When the value of the stock is higher than the original price you paid when you sell it, you have a capital gain. A dividend is when the company you own shares in provides you with a share of the profit. What they pay you is a dividend, and those are paid at frequencies determined by each company, but typically it happens quarterly.
A bond is a loan that a company takes out and is paid by investors. You make money from bonds when the company pays interest. You can also sell bonds at a higher price. Bonds are considered less risky than stocks.
Over time, one of the ways to reduce your risk on your investments is to change the percentage of stocks and bonds. As you get older and want to have less risk because you no longer have time to let the market reset, you would consider changing it to have 60% stocks and 40% bonds, as an example. When you are young and have time in the market, your percentage of stocks would be higher.
Whew! We made it through the definitions. Not too bad!
The point here is to know enough information so we can benefit from the stock market, too, for the purpose of investing in it and growing our wealth.
Next, we need to know what the S&P 500 is and how we use it to invest.
2. What is the S&P 500?
A stock market index is a group of stocks’ data compiled together to determine the performance of the stock market and give you the ability to determine how the market is performing over time. There are several stock market indices; however, for our purposes, we are going to focus on the S&P 500 only (AKA Standard and Poor’s 500 Index).
The S&P 500 Index is comprised of the largest 500 companies in the United States. The S&P 500 is used as a measure of the performance of the U.S. stock market. For a company or corporation to be a part of the S&P 500, they must meet certain eligibility requirements such as being a U.S. company, having a value of $13 billion or more, and being publicly traded, amongst other things.
The S&P 500 is rebalanced quarterly, which means that some companies are removed if they no longer meet the criteria. On the other hand, new companies will be added, meaning that the companies that underperform are removed and new companies are added. This rebalancing of the S&P 500 is great because it keeps the index organic and fresh.
Let’s look at the performance of the S&P 500 before we discuss how to invest in it.
3. Performance of the S&P 500
First, let’s look at two key points in modern times when the stock market crashed on the graph. We don’t want to sugar coat anything.
2008: The market took a big hit – the S&P dropped dramatically. As a result, many people took their money out. What does that mean?