Step 2: Know your risk tolerance.
Do you like rollercoasters? Is the tilt-a-whirl more your idea of an adventure? Or is the merry-go-round exciting enough for you?
If you choose the merry-go-round, the stock market is probably not for you. At least not directly. You will probably want to talk to a financial advisor or financial planner and have them manage your portfolio for you.
If you have a low risk tolerance managing your stock market account could lead to anxiety and panic attacks. If you are determined to DIY, consider mutual funds that include bonds. Bonds are lower risk than stocks or index funds. You will pay higher fees, so once you feel comfortable with the price fluctuations of mutual funds, you can try some index funds and work your way to higher risk options from there.
If you are a tilt-a-whirl or rollercoaster, start with companies you know, that you enjoy using, that share your ethics and values, and that pass the Motley Fool “snap test” (meaning that if you snapped your fingers and they disappeared tomorrow they would be missed).
You may also want to consider index funds. These are higher risk than mutual funds, but also have lower fees because they are not being actively managed by someone trying to beat the market.
If you are a rollercoaster, you may want to try some lesser known companies. You may even want to delve into options, futures, forex, IPOs (initial purchase offers, meaning the company is brand new to the stock market), and other, potentially more volatile offerings.
What is the big deal about risk? Well, the greater the risk, the greater the potential reward, but also the potential loss of your investment.
You hear about the people who bought shares of google, apple, tesla, and so on, before they were well known and saw their investment increase 10, 100, or even 1,000 times. But, for every one of these “make it big” stories, there are hundreds of people who invested in an unknown company only to have it crash and burn and they lost what they invested.
ACTION STEP: decide how much you want to set aside each week or month to invest and what types of stocks you feel comfortable investing in.
If you decide to invest in individual stocks, think about what companies you might want to purchase. You can always watch it for a week or two before buying.
Check out the historical graphs that come up with the stock ticker symbol (the unique 2-5 character name given to each publicly traded stock on the market). Looking at the last 3 months to a year can give you a good idea of how volatile the stock is and what to expect to purchase it for.
I had a young investor go through a number of options before deciding to purchase the company that owned her favorite car. She googled “stock price” after the name of almost a dozen of her favorite brands before finding one that was publicly traded.
Unfortunately, you cannot buy shares of your favorite brand if they are not listed on the stock market.