Dear daughter,
The process for you to start investing in the stock market is easy. However, you need to have clarity on what your goal is and what type of investment you want to have.
Do you want to be an active or a passive investor? The answer to this question will be the key to knowing what type of account you need to open and the kind of broker you need to approach.
1- Investing in mutual funds or exchange-traded funds
If you want to invest in mutual funds or ETFs I think the best option is to open an account with the fund manager.
The fund management company will create an account where you can transfer your money. Usually, that account is a money market account. This means that this account will attract interest (bigger than a savings account) while the money is in the account.
Then, you instruct the company on what fund you want to buy with that money. They invest your money into that specific fund. Usually, the transaction does not have a fee. The fee you have to pay is an annual fee and every time is due, they will sell some units from the mutual fund or ETF as a payment.
Some brokers might have an automated system to place such orders.
ETFs can also be bought as common stocks on the stock exchange. This means you can buy or sell them like you buy a stock when you do stock picking.
2- Buying and selling stocks on the stock exchange
Active investing is mostly about stock picking.
If this is your favorite choice, then you should open an account with a broker that allows you to buy straight from a stock exchange.
A broker is a company that connects you with the stock market. You cannot buy by yourself from the stock market, so you need to choose which one will be your broker.
Here you can find a great definition of what a broker is, and here there is an explanation of how to choose a broker.
Once you find a broker, you will get your account details.
First, you need to transfer money to that account. That money is the fund you can use to buy stocks.
The broker will give access to an online system where you can track stocks you like.
How to know what stock you want to track?
Remember when I write to you about what is investing in the stock market?
You first must decide what to buy, then when to buy, and lastly when to sell. If you don’t remember, read that letter again, it is very important to have clarity on those three things before you make a decision.
When you have access to the broker’s online system, you will see that you can also buy ETFs using their platform. So, if your favorite ETF is the one that tracks the S&P 500 index, you will be able to buy it there.
3- Other things to consider
When investing in the stock market you should have a long-term investing horizon.
Usually, novice investors are looking all the time at the stock price to know if it went up or down. That is one of the worst things you can do. It can give you a good load of stress and it won’t make any difference in your investing results.
What will give you the best results in investing is doing your due diligence and being patient.
As the investor Mohnish Pabrai says “All investment managers’ miseries stem from the inability to sit alone in a room and do nothing.”
If you start looking at your investments every minute, probably your emotions will control you. And you will make buying or selling decisions emotionally, that is the worst thing that can happen to an investor.
That’s it.
In summary, you create an account with a broker, transfer funds, and give instructions on what to buy.
When are you choosing your broker and opening an account?
Love you, Dad.