How to invest in stocks in your 20s
Thinking of buying shares in your 20s? Here are eight tips to help you get started.
Ask any seasoned investor and they'll tell you there's no better time to start buying shares than when you're in your 20s.
Not only are you starting to earn real money in your 20s, but you also have decades ahead of you before retirement. This means you can afford to take a few risks – it's the ultimate mix.
But where do you even start and how do you do it? Luckily, it's easier than you might think! If you're in your 20s and thinking about investing in the stock market, here are 8 tips to help you get started.
1. Open a share trading account
First, to buy shares, you need a stockbroker. In generations gone by, this meant phoning your broker and paying them a big fee to place the trade for you.
These days, we have the cheaper alternative of buying shares ourselves online. Share trading platforms (online brokers) allow you to trade shares on your phone or desktop with the click of a button.
Trading apps come in all shapes and sizes, from apps for total beginners to platforms designed for advanced traders.
There can also be a big difference in terms of costs. For example, some brokers charge up to $50 in commission fees per trade while others, such as eToro, charge $0 brokerage. To find the best one for you, check out our online broker comparison table.
SPONSORED: Warren Buffet is a supporter, but is it too late to get on board?Read more…
2. Take a few risks
When it comes to investing, you'll often hear the term "risk profile" thrown around. This is how much investment risk you're able to take on in your current stage of life.
As a rule of thumb, the longer you can afford to invest in the stock market, the more risk you can afford to take on to (hopefully) get a better return in the long run.
When you're in your 20s, you can usually afford to go with a more "aggressive" approach since you have decades left on the timeline. Everybody is different, but generally speaking, it means you can put a larger portion of your money into stocks – which is a higher risk investment than, say, a savings account. The closer you get to retirement, the more the ratio of cash to stocks switches.
Plus, you can afford to invest in more "growth" stocks rather than "blue chip" companies, which can be riskier but are more likely to earn a bigger profit in the long run.
There's a lot more to risk profiling then this, which you can read more about in our guide.
3. Build a stock portfolio
Your 20s is the perfect time to start building up a portfolio of stocks.
A stock portfolio is a collection of different company stocks that you own. It's important to have a diversified portfolio because owning shares in one or two companies is risky. When you own stocks in multiple companies, the best performers help to balance out the worst and your losses are watered down.
To build a portfolio, start small by buying stocks in one or two companies. Depending on how much you can afford to invest, you could buy stocks in a few companies a year and build up to a portfolio of 20 or more over time.
4. Buy global shares
If you only buy shares in Australian companies, you're limiting yourself to our rather small market. While Australia's stock exchange is growing every day, it's still heavily weighted towards mining and banking stocks compared to other markets.
Building a truly diversified portfolio of stocks means holding shares from different countries as well as from different sectors. The biggest and arguably most important stock exchange in the world is in the United States.
This is where you'll find some of the world's most well-known and influential companies, including the FAANGs – Facebook, Apple, Amazon, Netflix and Google.
Not all brokers allow you to trade global shares. To buy shares listed on Wall Street or other countries, you'll need to find an International stock broker.
5. Buy what you know
Picking the right stocks is all about doing your research, but if you already understand what the company does, your job is halfway done.
Try to invest in companies that offer products that you like or own. For example, enjoy watching Netflix and think the company has more growing to do – why not buy shares in it too?
If you use its products regularly, you'll be in a better spot to take advantage of trends or even sell if the company stops delivering.
6. Think about dividends
When people talk about making money from shares, they're usually referring to the capital gain, i.e. you buy stocks for a low price and sell for a high price. However, you can also earn a nice income from dividend payments.
Not all stocks pay dividends, but those that do typically pay twice a year as a small portion of each share. So say you own 100 shares in Microsoft (MSFT) and it pays a dividend of $2 a share annually – if you don't sell your shares, you'd rake in $200 (pre-tax) a year without ever having to sell.
If you build up enough dividend stocks over the years to hold onto for the long term, you could retire with a nice regular income.
7. Invest in ETFs
Instead of buying shares directly, your other option is to invest in a ready-made portfolio such as an exchange traded fund (ETF).
An ETF is a fund of stocks that has been listed on a stock exchange. This means you can use an online broker to buy and sell ETFs the same way you would buy shares.
The benefit of ETFs is that you are investing in hundreds or thousands of companies in one trade, which means it can be a cheaper and less risky alternative to share trading.
8. Consider a robo-advisor
If stock picking isn't for you, consider investing in the stock market through a robo-advisor.
Robo-advice apps invest your money into a portfolio of stocks or ETFs based on your risk profile. Because the portfolios have been designed for you by experts, it's typically a safer choice than buying shares directly.