These are intriguing times for impressionable young investors.
The Dow’s cresting 20,000 for the first time in January before making a 24-day climb to 21,000 — the fastest 1,000-point climb since 1999 — coupled with this month’s $3.4 billion initial public offering for Snap Inc., parent company of social media darling Snapchat, has a lot of millennials wondering how to buy stock — or just jumping in and doing it.
“Snapchat, the social media platform owned by Snap Inc., is all the rage among millennials. The company’s newly public stock is, too,” The Wall Street Journal reported two days after trading began. Stock trading app Robinhood reported that 43% of users who made trades on the day of the IPO purchased Snap stock — and that the median age of those users was 26.
Wondering if you’re missing out? If you want to buy individual company shares for the first time, there are a few things to note. First, individual stock ownership is somewhat uncommon, with just 14% of U.S. families investing directly in stocks, according to a 2014 Federal Reserve report. More people invest in stocks indirectly through mutual funds and exchange-traded funds.
Second, individual stocks can be risky. NerdWallet recommends restricting individual stocks to no more than 10% of your investment holdings.
That said, if you are determined to learn how to invest in stocks, here are some tips to help you along the way:
1. Develop a taste for homework
To succeed with stocks, you must invest in a company whose stock is undervalued today or otherwise poised to sell higher in the future. For most investors, finding such companies means doing some homework, such as digging through public information — annual reports, Securities and Exchange Commission filings and company earnings — and the opinions and ratings of professional analysts.
If you need some handholding with this, consider choosing a broker that offers quality research and educational materials.
2. Buy to own
Remember, you’re not buying a lottery ticket — you’re buying a piece of a company. Some questions experienced investors ask that can’t be answered by financial statements: What is the track record of the management team? Has the company found a unique market niche? Will it still be around 20 years from now?
As Warren Buffett once said, “Buy into a company because you want to own it, not because you want the stock to go up.”
3. Build patience for profits
Investing is built on the simple “buy low, sell high” principle, but panicked selling and following the investor herd often results in the reverse — ditching stock where some patience would literally pay.
Most experts recommend holding a mix of companies across a variety of industries to spread the risk around, and to let strong long-term investments ride out bumpy market cycles.
To build discipline, start investing slowly with a limited number of stocks and a sum of money that you are OK with possibly losing. If your stocks gain value, you can reinvest that money back into the stocks — or other companies — but don’t invest more money until you’ve learned the ropes and become confident in your ability to research stocks.