Simple Step-by-Step Guide for Making Your First Investment

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3:06It's time for some money rehab.

3:14Hey, it's Morgan, the executive producer of the show, and happy new year, everyone. As we look back on 2024, we are going to share some of our favorite episodes from the year. Today, you're going to hear the biggest deep dive Nicole has ever done on how to invest in the market. Enjoy. my dms are always open for questions as i hope you know and probably the most common question i get isn't what to invest in but how to invest so i'm going to walk you through step by step how to make your first investment and i'm going to be thorough here so if you need a cheat sheet when it comes time to make your first investment i'm also going to include a doc in the show notes that summarizes all of this good info so let's start at square one in order to invest you're going to need a brokerage account.

4:00A brokerage is essentially a middleman or middlewoman institution between you and the stock market. When you want to buy or sell stocks, you can't just walk into the New York Stock Exchange and shout your order like in the old days. You can't invest through your bank account either, and you definitely cannot invest in Apple stock at the Apple store. A brokerage is really the only way to get this done, and a brokerage can be a firm or an online platform. For the most part, if you're over 18 and live in the United States, you can open a U.S.-based brokerage account. If you're under 18, you'll need a custodial account, which is a brokerage account opened by a parent or a guardian.

4:34But there are some eligibility restrictions. For example, there are limitations for non-U.S. citizens. So if you're an international money rehabber, you're probably going to need to do a little more digging to find the right brokerage account for you. Also, if you have a history of violating brokerage policies, obviously you are going to be given a hard time when trying to create a new account. Just saying. But just like Like a bank or a credit card, there are a ton of different options when it comes to choosing a brokerage. I like public because I like the interface. It's good for investing in stocks and bonds and treasuries.

5:04It's easy. My producer Morgan uses Vanguard. I started at Schwab. There are a bunch of them, and honestly, their capabilities are all pretty similar. When you're looking around, I would specifically recommend that you ask for these three functions. Number one, does the brokerage offer fractional investing? Some brokerages offer fractional shares, which means you can buy a portion of a share rather than having to buy the full share at a time. This is great if you want to invest in expensive stocks like Berkshire Hathaway Class A, which is currently trading at over$600 ,000 a share. So with fractional investing, you could invest in Berkshire if you had 20 bucks that you wanted to invest.

5:41But if your brokerage does not offer fractional investing, you won't be able to invest in Berkshire unless you pony up$600 ,000 pay for one share. So I personally like using brokerages that offer fractional investing just to keep more options open. Number two, does the brokerage offer robo-advisors? When you think of robo-advisors, don't picture a Wally-type robot taking over your financial chores. Robo-advisors are AI-backed programs that brokerages used before AI was mainstream. Opting into a robo-advisor means that you're telling the brokerage that you want their algorithms to make informed investing decisions for you.

6:17This means you won't have to buy or sell stocks yourself. All you have to do is note your financial goals and your risk tolerance, and the robo-advisor program will make investments for you based on that profile. So if you're super into investing and you want to do all of your transactions yourself, then you won't really care about robo-advisors. But if you want to have someone at your brokerage help you buy and trade stocks and funds, using a robo-advisor is cheaper than talking to a real human broker. Opting into a brokerage's robo-advisor program will mean that you're charged on average 0.5 % of assets under management.

6:48If you opted into a brokerage's program with a human advisor, you'll likely be charged on average 1 % of assets under management. I know it's only half a little baby percentage difference, which doesn't sound like a lot, but the big picture is investing with a human investor will cost you double than what it costs you to work with a robo-advisor. And that really adds up. And the last one, number three, do you have to deposit a minimum chunk of cash in order to open an account? You don't have to be a millionaire in order to invest, and you definitely don't need to be a millionaire in order to open a brokerage account.

7:23But different brokerages have different requirements when it comes to how to fund your brokerage for the first time. So you'll want to make sure before you start going through the process of setting up the account that the brokerage doesn't have a higher minimum to set up the account than you're comfortable with. And if you need more help getting oriented, I'll touch on some more broker recs at the end of the episode. When you make your pick, you're going to find that opening a brokerage account is pretty straightforward, and it's probably going to remind you of when you opened up a bank account.

7:51You're going to need to enter in all of your personal information, your full name, your address, your date of birth, your social security number, all that jazz. You'll also need to take an extra verification step by giving your driver's license number or your passport number. Next, you'll need to give some background financial information. You'll probably need to share some information on your income, your net worth, and your investing goals. Once your account is set up, the next step is to fund it with money from your bank account. Most brokerages offer several methods for funding your account.

8:18The easiest way, in my opinion, is to just do a bank transfer, which is where you link your bank account to your brokerage account and transfer funds electronically. You can also do a wire transfer, which is faster, but you'll have to pay the wire fee, which I don't think necessarily is worth it. I'll take the free option eight days a week. You could also mail a check to fund your brokerage account, but who writes checks anymore? You should know that depending on which method you choose to fund the account, it could take a day or two for that money to hit the account. So as excited as I know you'll be on day one, you might not be able to start investing the day you fund your account.

8:50Once your account is officially funded, you can buy your first stock or your first fund. And let me double click on this point. I have talked to people who put money into their brokerage account and think that that means they're invested in the stock market. That is not true. And that would be like if you decided to bake a delicious cake and so you bought all of these delicious ingredients, but you called it a day. Funding a brokerage just allows you the option to buy stocks, but you still need to buy them. You still need to bake the cake. I talk a lot about S &P 500 index funds on the show, so I'll use that as an example for an investment.

9:22But what you choose to invest in will totally depend on your goals and your financial picture. Okay, so now for the nitty gritty blocking and tackling. You can't just go into your brokerage account and search S &P 500 index funds and be done. You're going to need to know the ticker symbol, which is essentially the nickname or the address that funds or public companies get so that you can find them easily. For example, Apple's ticker symbol is AAPL. There are some clever ones like Harley Davidson's ticker is HOG, and Cheesecake Factory's ticker is C-A-K-E, Cake. When it comes to S &P 500 index funds, there are a few options, but they're all pretty similar.

9:59SPY is a popular one, but I'll go with VOO for this made-up example. I like VOO because it has a lower expense ratio than SPY, which essentially means more of your investing returns stay in your pocket. And so let's say you're investing in VOO. You'll go to your brokerage online or in an app, and you'll search for that ticker symbol VOO. There you'll get to a landing page for the stock, and then it's time to choose how much you want to invest and how. And when I say how, I mean that the brokerage will ask you to choose your order type. This is an area that trips some people up. Sometimes it causes people to stop in their tracks altogether, but that's not going to be you.

10:36We got this. Here's the breakdown. You'll be given the choice between a market order or a limit order. A market order means you're buying a stock at whatever the current price is. It is fast. It is straightforward, but it doesn't necessarily guarantee the price you'll pay. And here's what I mean by that. Say your brokerage allows for fractional investing and you want to invest$100 in VOO. At the time I'm recording this, VOO is trading at more than$500, but let's just call it an even$500. If you do a market order, your$100 would be invested in VOO, whether it's trading at the$500 mark still, or if it shoots up to$1 ,000, or if it goes down to$200.

11:14Whatever the price is, you'll own$100 of VOO. A limit order, however, lets you base your transaction around a ceiling for the stock price. Let me decode that. So if you decide that you want to take that$100 and do a limit order, you'll need to set a maximum price that basically tells your brokerage, okay, I want to invest in VOO, but only if the price is $500 or better. So if VOO jumps and starts trading at$600, the order wouldn't go through. The ceiling that you set doesn't have to be$500. It could be anything. You make the rules. A limit order gives you more control over the price of the stock when you buy it, but it also might take longer for the order to go through if the stock price is moving up and down.

11:56In my opinion, limit orders matter way more when you're selling a stock versus when you're buying a stock. And when I invest, I typically just do a market order. If your brokerage doesn't allow fractional investing, this could get a little annoying with the choreography of limit orders specifically, which is another reason I like brokerages that allow for fractional investing. So let's say we place a market order for$100 of VOO. When you buy or sell a stock, the transaction doesn't always complete instantly. It could take a few days to settle. During this time, your money sits in what's called a settlement fund.

12:28Think of this as stock limbo until the transaction settles. This is also probably where your money is going to sit after you fund the account, but before you make an investment. The super rad thing about settlement funds is that many brokerages will have their settlement fund be a money market fund. Money market funds are a type of fund that contains short-term high-quality debt securities okay so without the jargon that means low-risk investments that can turn into cash easily so money market funds typically have treasuries and cds those are the debt securities investments that basically offer a low-risk way to park cash temporarily so money market funds aren't going to change your financial life let me be clear but they are an investment so when your money is sitting in your settlement fund not invested yet, it's still earning some interest, meaning it is probably working harder for you than it would have been in your regular bank account.

13:21And that's before you even start investing. So I love that. But back to settlement funds. While your purchase is going through, your money will just be hanging out in the settlement fund. And then when your purchase goes through, boom, you have made your first investment. Now, this is technically everything you need to know in order to invest. But I want to take it one step further, just so you know everything you need to know about making money from investments, because that's the whole point of this, right? At the most basic level, there are two ways to make money from a stock. First, are from dividends.

13:52Dividends are payments from a public company to its shareholders, usually in the form of cash or additional shares. So it's essentially a thank you to investors, not all companies pay them, but those who do typically distribute them on a regular basis, quarterly, semi-annually, or annually. Dividends can be a nice source of passive income. For example, if you own shares in a company that pays a dividend of$2 per share annually and you own 50 shares, then you'll receive$100 in dividends every single year. And I give that example intentionally because while dividends are amazing and I love passive income, dividends aren't going to make you rich.

14:28The more common way to get rich from investments is to sell your investments. And this is one of the most essential rules of investing. Your brokerage account is not your bank account. For your bank account, what you see is what you get. If you have$100 in there, you have$100. Simple as that. That money is not going anywhere until you spend it. For your brokerage account, what you see is not what you get, because what you see will probably change every week, every day, every hour, every minute that the stock market is open. If your portfolio is worth$100 ,000, you aren't guaranteed those six figures forever.

15:05The market could go down. Or if you're picking individual stocks, which you probably know I'm not into by now, and one of the companies that you've invested in files for bankruptcy, that money is gone. The only way to actually make money in your brokerage account, yours, period, the end, is to sell the investment. But here's the trick. Historically, the stock market goes up 8 % year over year. So the longer you're invested, the better. I know I just said the most significant way to get rich from your investments is to sell your investments, and that is true. But if you've made smart and sound investments, the longer you hold on to them, the more you'll be able to sell them for.

15:42I know it is a mind, you know what, but it doesn't have to be. The name of the game is to pick the investments that are favored to grow over time, the later, the longer, the better. And when you pick that investment that's right for you, now you know how to buy it. For today's tip, you can take straight to the bank. I told you at the end of the episode, I'd circle back to a recommendation for investing. If you're looking for guidance on where to open a brokerage account, I'd check out Public, which I've linked in the show notes. I've been wanting to work with Public for a while now because they're my favorite brokerage app.

16:13So I've been stocking them and recently I wore them down. So now we're teaming up. Public offers a lot of things that I think are helpful for new investors. Fractional investing, stocks and funds, and their interface for bond investing is truly the best I have ever seen. And one last thing, quickly, I am super proud of you. Investing in the stock market is investing in yourself. And that's the money move that will pay the most dividends over time.

16:42Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.

17:24Thank you.