How do you invest in stocks, bonds, ETFs, and mutual funds

By: Jimmy Fuentes

Okay, this guide is meant for beginners (duh) who want to take the first step in investing but don't know exactly how. This guide will also be very comprehensive. The answer won't just be "Oh, you open up an account with a brokerage and start investing." End of the blog, see you in two days. No, but rather have you think, think about the reason as to why you're investing, give you some strategies or ways you can go about investing, and mention a few common investment options out there. 

Figure out your goals and write them down (I'm serious, writing your goals down is effective)

The overall goal is for you to make some wealth and use it at your leisure. Do you want to retire? (Yes) do you want to fund your education or your child's education? (Yes) Do you want to use your share of wealth to create a business, travel, or donate to charities? (Yes) whatever it may be, write it down, and it's more than okay for you to have more than two or more objectives (tenacious you, I'm proud of you :)) OKAY! Let's move on to the first step, getting out of debt

 Cheesy stock chart

Cheesy stock chart

Get out of any debt you might have.

The sad truth is, your debt is slowing and weighing you down from you gaining any massive returns from the market, as a good lump of your income goes to paying off your debt. You can approach paying off your debt in three ways. DISCLAIMER: I DO NOT SUGGEST YOU DO THE THIRD OPTION FYI CAUSE YOU MIGHT POTENTIALLY F*CK YOURSELF OVER AND I SAY THIS IN A VERY CONCERNED MANNER. TAKE IT WITH A GRAIN OF SALT. 

  1. All of your debt is paid off before you begin to save to invest. 
  2. Pay off all your debt and use some leftover money to invest. 
  3. Pay the minimum on your debt (you see why I tell you this can be VERY BAD? Not advisable) or a small fraction and invest the rest of your cash you have left over. Your returns are then used to pay off your remaining debt. (Not advisable like I said, some folks took this #YOLO approach and it could screw you over, some were lucky and managed to pull through.) Plus, loans and credit card bills tend to have higher interest rates, so you somehow must make a return exactly or higher than the interest rate on your debt just to break even AFTER TAXES.

Budget, budget, and budget

OKAY! Now that your debt is out the way and hopefully never making way into your e/mail again. Figure out how much money are you willing to place aside every month to invest. It doesn't have to be this stupid amount of $1000 or even $500 it can be SMALL, like $50 a month type small. With that kind of money, you can purchase one share of Coca Cola ($KO.) If $50 still sounds like a lot, then place $20 in your brokerage account (more on that later) and at the end of 6 months or a year, you'll have some cash waiting in your account to get invested. Moral of the story, there is no right or wrong answer on how much you need to start investing. Just as long as you are sure and willing to accept the risks that come with investing and that you start investing. Can you stomach a loss in your investment account without having to panic?

Finding an account!

Okay so, you wrote down your goal(s), paid off all your debt, and figured out how much you are willing to invest every month or so. NOW, it's time for you to find a brokerage account. What's a brokerage account? Basically, it's some platform or a*shole (most likely platform) that can maintain your deposits of cash (almost like a bank) and where you can pick and legally start investing in publicly traded companies. NOW, this can get really tricky since there are A LOT of brokerages out there wanting to be at your service and choosing can get a bit overwhelming (not really, it's like choosing your first bank.) 

Just keep in mind on some certain key components when you're looking out for a brokerage that may or may not make your investing experience delightful. 

  • Commission fees 
  • Any account fees (like annual fees or inactivity fees)
  • What your trading style is and what platform is appropriate for said style (more on trading styles in a bit)
  • Customer service/support
  • Education platforms or any platform that can help you make better trading/investing decisions

Here is a quick list of highly respected and notable brokerages that have been providing outstanding service, support, and a well ran trading platform.

Take a glance at their sites, read more on/about the site, find what is comfortable for you and what you believe will suit your investing needs.

Strategies, styles, and what to invest in.

I've preached this before and I'm taking my BIAS to this site as well, it's the only thing that has been proven to be effective and work. I understand that others have gotten fairly wealthy using different strategies, but nothing, I repeat, nothing has yield billions of billions of billions of dollars when you BUY AND HOLD. It's been preached by every board member in Berkshire Hathaway, it has been preached by Peter Lynch an old mutual fund manager at Fidelity, John Bogle founder of Vanguard, Philip Fisher. They all made their wealth by buying and holding their shares of whatever company they might have invested in. Invest when the markets are up, invest when the markets are down, invest when there is a correction, the point is to stay on course and let compound interest work it's magic. At the end of the day, what only matters is what you feel comfortable with and reaching your goals. (Which I'm hoping you did write down.)

Styles:

  • Swing trading: You buy shares of a certain company for a few seconds or minutes, then sell those shares, and invest in a new company. The position in the company is usually not held for longer than one trading day. The way you make a profit is by waiting for the share price to go up a few cents (or dollars) and sell as soon as the swing trader thinks it's reached its peak.
  • Value investing: The investor seeks companies that they believe the markets have undervalued. Trading at a very low price, the value investor purchases as many shares of this company and waits for the market to correct its price (technically upward) for the value investor to sell their shares and make a large profit. These positions are held for about 3 months - 2 years. 
  • Growth investing: The growth investor seeks for a company that is growing faster than average growth rate, either in the industry or the overall average of every publicly traded company. They focus entirely on how fast the company becomes profitable over time. Positions are held for 3 months - 2 years.
  • Buy and hold investing: The buy and hold investor seeks for a company that has a competitive advantage over other companies, a portion of the market share in their industry is mostly or entirely dominated by the company, has a belief that the company is well run and has potential growth in the years or decades that follow, and usually, pays a good dividend to reinvest back into the company. Positions are held for 1 year - 10 years. 

Strategies:
For the buy and hold, growth, and value investor I always advise them to read a companies balance sheet, income statement, and cash flow statement, the companies 10-K and 10-Q. For the swing trader, graphs are your best friend, news on a certain company (good or bad) are your best friend. Figure out patterns on graphs and know when the share price is about to go up is beneficial for the swing trader. Being aware of what news/headlines written about the company may hinder the price, know when you hear bad news or good news. 

What to invest in:

  • Stocks: Ownership of a publicly traded company. Claim of a companies assets and earnings
  • Bonds: Essentially, an IOU, money (your money obviously) given to a certain corporation, government, program, treasury. Your money is returned to you at a certain time with interest. 
  • Mutual fund: A managed fund ran by a professional money manager, who usually invests in stocks and bonds on your behalf. 
  • ETF's: A basket of securities like a mutual fund, but are, however, not professionally managed.

More on mutual funds and ETFs HERE

Research!

Before you find a place to invest your money in, make sure you do some research beforehand. If it's an index fund, then make sure it's a low cost fund that won't eat out of your investment over time. If it's an individual stock then be sure you read over the companies financial statements, who their board of directors are, and if you understand the business model. If it's a mutual fund, figure out the track record of the money manager behind your mutual fund, the cost of the mutual fund annually, and any other fees that are in within the fund. If it's a bond, then figure out for how long you need to hold the bond for until it matures, what the interest rate on the bond is, and what type of bond it is (municipal, treasury, government, etc.) 

Final thoughts

The point is to get started and pursue that goal of yours. You don't have to be a rock star at investing, it's more than fine to just being average and have an average return on your portfolio. Having an 8 - 10% return on your portfolio year after year is still amazing returns and can do wonders to your net wealth. The point is to get started and pursue that goal of yours!