A short guide to investing in the stock market

Investing in the stock market does not require large budgets or being an expert in finance. With a few simple steps and maintaining discipline, anyone can start building an investment portfolio in the stock market, even if the available capital is not that high.

In this guide, we share 5 steps to stock market investing for beginners using resources that some stock brokers have made available to the investing public.

1 – Choose a broker that offers low transaction costs

The first thing you should do is choose a brokerage house or broker that allows you to buy and sell stocks online at the lowest possible price. Today there are several online broker options with very low commissions. These alternatives are ideal for small investors.

Some providers even offer the ability to trade certain types of investment instruments – stocks and exchange-traded funds, mainly – at no cost.

Fees are usually a factor that greatly influences how investment capital is used in portfolio construction. The ability to execute trades with minimal costs or for free is an incredible relief and help for investors on a limited budget.

Another reason why it’s important to choose providers that offer low transaction costs is that commissions will eat up a large percentage of your profits.

Compare the commissions and reputation of each broker you research carefully before settling on one. Note that some of them may require high initial amounts to open an account or start trading the market. Make sure this minimum amount is less than the capital you have.

2 – What can you invest in?

Initially, it is best to focus on buying fractional shares of solid companies, exchange-traded index funds, and index funds that track a stock index such as the S&P500. Let’s take a brief look at each option:

Partial shares: A large number of brokers today allow you to buy parts of shares. It is an innovative financial product that allows investors to acquire part of the stake, giving them access to instruments that were difficult to acquire in the past if they had low available capital. For example, an investor can buy $5 of Apple stock, instead of 1 full share that might cost around $170. In this way, it is possible to build very diverse portfolios with only about $100 at your disposal.

Assets traded on the stock exchange: ETFs, so called by the acronym in English, are funds managed by financial services companies that offer access to highly diversified portfolios. These instruments are traded on the stock exchange like any other stock and generally charge a low annual fee for managing the portfolio that makes them up. ETFs have different investment approaches and methodologies. Some focus on stocks from a specific industry or country, while others simply replicate the performance of popular stock indexes like the Dow Jones or the Nasdaq 100.

Indexed mutual funds: Similar to ETFs, you can buy shares in funds that replicate the performance of a stock index through so-called mutual funds. For example, a fund that tracks the S&P 500 gives you access to the 500 largest companies in the US by market capitalization. Commissions and the minimum investment amount are usually very low.

3 – Reinvest all the profits you make

As your investments generate dividends or profits, it is ideal to reuse those funds to continue investing and gradually increase the size of your portfolio.

Instead of spending those earnings, simply reinvesting them will cause your investments to grow exponentially over time through so-called compound interest. Almost all online brokers allow their users to activate dividend reinvestment with one click. Automate this process from the start to maximize your earnings and do your best not to make withdrawals unless absolutely necessary.

4 – Use accounts that allow you to defer tax payments

There are special investment accounts such as IRAs and 401(k)s for US residents that allow you to defer paying taxes until retirement age. On the other hand, the money you deposit into these accounts is tax-deductible, allowing you to invest 100% of your savings instead of just your after-tax money.

In the case of other countries, it is important to consult local regulations to define whether these types of accounts are available in that jurisdiction. Many countries offer similar opportunities to local investors. However, some limit the type of investment instruments that can be included in the portfolios that make up these accounts.

5 – Activate automatic deposits and make a small monthly contribution

Finally, automate the occasional deposit into your brokerage account to maintain discipline. Most people find it difficult to allocate the capital needed to invest and increase their brokerage account balance. When scheduling automatic deposits, even if they are small, this task begins to be executed on “autopilot”.

Over time, these small regular contributions will add up and grow. Thanks to compound interest, such a simple habit can add up to thousands of dollars over the years. Just be sure to increase your contributions as your income increases.

Conclusion

Investing in the stock market is not difficult or requires large amounts of capital if the correct steps are followed. Choose a good broker, focus on fractional shares and diversified indices, reinvest all your profits, take advantage of tax benefits and maintain discipline by investing a fixed monthly amount. This simple formula will allow you to build a solid stock portfolio even from a small amount.