How to and Why You Should Invest in Stocks

Certainly the first step to becoming financially fit is to start to budget.  Once you plan where your money goes each month, rather than just seeing how things turn out, you’ll find that you actually feel more wealthy because you’re using your money more efficiently.  Budgeting also helps to keep you out of debt since you need to balance your income and your spending.

Once you’ve gotten your spending under control, the next step in becoming financially secure is to grow your non-work income stream.  Having sources of income beyond your job helps shield you from the bad effects of layoffs, increases your income, allowing you to enhance your lifestyle, and provides freedom in your life because you will have money for necessities when looking for the next job or if you decide to change careers.

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Stock investing is one of the easiest and best ways to gain additional income.  With stock investing, you’re buying a stake in different companies.  You become a part owner, and with ownership, share in the profits of the company.  You make money either through dividends that the companies pay or by selling shares of the companies once they have grown and become more valuable.

Personally, I have been investing in common stocks since I was twelve, starting with a few shares in a local utility company.  When I went away to college, my parents transferred shares of stock to me (which also reduced the taxes due on the shares) rather than sending me money for tuition and rent.  I was actually able to make it all the way through undergraduate school without the portfolio value declining since I was able to make up any money I was spending with capital gains and dividends from the portfolio.  I did need to sell off a good portion of the portfolio when I went to grad school in California since things cost more, but I still had some money in the portfolio to help get me started once I graduated.

When I started investing, I invested mostly in individual stocks.  There were very few mutual funds around, and really no index funds.  Today investing is really easy since there are a wide variety of mutual funds, including low-cost index funds and Exchange Traded Funds (ETFs).  You really can’t go wrong if you regularly buy a set of broad-market index funds and hold onto them for long periods of time (like 10 years or more).

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The simple act of investing was once more complicated.  You needed to find a broker, set up an account, and learn how to place an order.  You could pay someone to manage your money for you, but more often than not, they would end up selling you expensive products that benefited them more than you.

Today it is really simple.  You can just go to Vanguard or Schwab (or some other mutual fund companies, I’m sure), set up an account online in less than 30 minutes, and then choose from among their low-cost index funds.  To start, just buy some shares of a large-cap index fund such as an S&P 500 fund or one with “large cap index” in the name.  You’ll want to minimizes fees (less than 0.25% of funds invested).  Once you have a few thousand dollars in a large cap fund, add a small cap fund such as a Russell 2000 fund.  From there you cold add a bond fund, an international stock fund, and perhaps something like a REIT fund.

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You’ll want to invest regularly since that will both ensure you get a good price and allow you to build up wealth and income over time.  You can do this by either putting an investing line in you budget each month and sending in money, or by setting up automatic drafts from your checking account.  Many mutual fund companies offer perks like low initial investments or no fees if you use autodraft.

So, what is stopping you?  If you have $3,000 or more in cash available, you could be an investor in just a few days.  While I can’t say what you portfolio will be worth at the end of a year, I can almost guarantee you’ll make more than you could make in a bank account if you buy regularly for a period of ten years or more.  Give it a try – it really isn’t hard and really not that scary once you’ve gotten started.

Have a burning investing question you’d like answered?  Please send to or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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