Whether you're approaching retirement age, just starting out on your own, or somewhere in the middle, you've begun to think about your financial future. The next step is to do something about it, but where do you begin?
For the average person, investing can be a mystery. Terms like price to earnings ratio (p/e ratio), market cap, and return on equity, can be a bit confusing to say the least, but in reality, are about as simple to understand as basic arithmetic.
The first step to building your portfolio is to open a brokerage account. These accounts allow you to purchase stocks, bonds, mutual funds, and other investments by paying professionals to buy or sell the items you tell them to trade on your behalf. The fee you pay them is called a "commission", and can range from as low as $5 to $10 dollars, to upwards of several hundred dollars. The price difference arises when you choose between either a discount or full-service broker. Full-service brokerages provide a wider range of services, and have the price tag to match. They serve along the lines of professional money managers and can offer advice as to what investments might be right for you. Discount brokers are companies that tailor to the more self-directed investor. They don't offer advice as to where you should invest your money, leaving you to make your own financial decisions and charging you much less than their high-touch counterparts. Some firms, such as Charles Schwab and Merrill Lynch, offer both services to their customers, allowing them to choose between the full-service and discount formats.
When opening a new account, the minimum investment can vary, usually ranging from $500-$1,000 (and even lower for IRA's and other retirement and education accounts). Most offer the option of either having an application form sent to you, allow you to fill them out online, print them, and mail them in with a check, or can be completed digitally with an electronic signature. The process is easy and can be done fairly quickly at almost all financial institutions.
Among the most well-known discount brokers are E-Trade, T.D. Ameritrade, Interactive Brokers, Charles Schwab, and Scottrade. Each offers commissions ranging from $8-$30 and have easy-to-navigate web sites. All allow you to invest in mutual funds just as easily as in common stocks, which is a big plus for those who are just getting involved in managing their own finances. (Mutual funds are a collection of different stocks and bonds that are managed by professional money managers. For instance, if you wanted to invest in oil and gas, but weren't sure which stocks in that industry to purchase, you could look for a mutual fund that dealt exclusively with those types of corporations. You buy shares in the mutual fund, and the fund manager spends his time researching the different opportunities available).
Once you have opened your account, you can begin investing. All brokerages give you the option of setting up automatic monthly deposits, which will transfer an amount you specify each month from your savings or checking account to your brokerage account. This can be an easy way to start building up your equity by paying yourself first. If you don't see it, you won't spend it. Since you won't notice the money that is missing each month, saving can become relatively painless.
Finally, when you put money into your account, make a promise to yourself not to take it out. A relative of mine sold her stock in a major company to purchase a new couch and pay off her credit card debt. Twelve years later, the value of those shares she sold, including the spin-offs she would have received, stood at more than $1,500,000. This was a horrible way for her to learn the most important lesson about investing: Time is your biggest asset.