How to Invest and Grow Your Wealth in the Stock Market
If the idea of investing in the stock market makes you fearful or confused about how to make the right moves, you’re not alone.
Even though investing in the stock market can be more complex than other investment strategies, done correctly, it can produce meaningfully higher returns than savings accounts, cash or similar alternatives.
If you are able to save from your earnings and commit to sticking to a long-term horizon, the stock market and other long-term investments can be an excellent way to grow your nest-egg.
If you’re thinking of investing for the long-term, you’ll need to decide how you will choose and manage your investments and then set up an investment account.
Here are some of the fundamentals involved:
Doing it yourself or working with an advisor
Do you want to pick and manage your investments yourself or would you prefer to have an experienced advisor do it for you? The first option can be good for those who have an interest in, time for and existing knowledge of the stock market. In addition to the above, you also need to have the right temperament and personality to be able to stay calm during the inevitable fluctuations that come with managing your investments on your own.
An experienced advisor who can do it for you (and at a level beyond the capabilities of most individuals) is usually a better option for those who might lack the time, personality, knowledge and/or interest to do it by themselves successfully.
After you research the alternatives, you can always start with one of the options that seems the best for you and switch if your experiences or your circumstances changes.
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Choosing an investing account
Whether you do it yourself or work with an advisor, you will need an investment account at a reputable firm to hold your cash and investments. Of course any experienced advisor will assist you to create your account if professional help is appropriate in your circumstances.
Most individuals set up one or more brokerage accounts to hold their savings and investments. Brokerage accounts come in multiple types, whether individual or joint and whether taxable or tax-deferred.
One of the most popular types of tax-deferred brokerage accounts is the individual retirement account or, IRA for short. Among other purposes, an IRA can help you move money from a prior employer 401k retirement plan without triggering any taxes.
Of course there are many brokerage firms and accounts to choose from. Before selecting the firm to hold your accounts, it is important to analyse the brokerage account options for factors such as investment selection, costs, tools, and research support.
Discount brokerage firms such as Charles Schwab, Fidelity Investments, and TD Ameritrade provide a great deal of functionality while also offering low cost trading. Other firms such as Interactive Brokers and Folio Institutional offer low cost trading but also powerful technology and tools for online trading.
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Stocks or mutual funds?
If you've chosen to work with a good advisor, you can disregard the rest of this section and enjoy a cup of calming herbal tea. For the DIY'ers, it’s going to be particularly helpful to understand the difference between stocks and mutual funds.
Individual stocks – Higher complexity – potentially higher return and risk. You simply choose a company you want to invest in and buy some shares. This requires time and research and sometimes a strong stomach as well. Done incorrectly, this option raises multiple challenges and risks so it should not be approached lightly. You should make sure to have enough different stocks to give you diversification to withstand the risk of choosing some companies that don’t end up doing as well as you had hoped.
Mutual funds – Medium Complexity – lower control and flexibility. These let you purchase a bundle of various stocks, bonds, real estate or other investments in one go. You will hold small amounts of shares in many different companies though your ownership in the pool of investments called a mutual fund. Of course, the fund costs to create and maintain the pooled structure (also called the “expense ratio”) are passed on to you and the thousands or millions of other investors participating in any given fund. Some funds are higher cost and some are lower cost – the value of each fund is based on a calculation called the Net Asset Value (or NAV for short) and this number is calculated once per day.
Exchange-traded funds – Medium complexity - This is a type of mutual fund that trades on a stock exchange, much like a stock. However, unlike a stock it does not represent ownership in one company but rather like a mutual fund it is a pooled investment with holdings in potentially many different companies. Like mutual funds, ETFs also have expense ratios but they trade whenever the stock market is open.
No matter which option or options is right for you, there are thousands of choices in each category in the United States markets alone and even more globally, so research and thought is required to select better options to meet your goals and objectives.Done correctly investing for the long-term in any of the above categories of options can lead to life changing results for you and your loved ones.
About the Author
Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.
Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.