Simple Step-by-Step Guide for Making Your First Investment
On the Money Rehab podcast, Nicole Lapin provides a simple, step-by-step guide for beginners looking to make their first investment. She explains the process of setting up a brokerage account and using it to buy and sell securities, clarifying key concepts like trade orders and the role of dividends and stock price appreciation.
The episode offers practical tips for starting small and approaching investing with a long-term mindset focused on steady growth through disciplined strategies. Lapin emphasizes the importance of education, patience, and developing sound investment habits to build wealth over time.
This is a preview of the Shortform summary of the Jan 3, 2025 episode of the Money Rehab with Nicole Lapin
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1-Page Summary
Setting up a Brokerage Account
To invest in stocks, investors need a brokerage account, which provides access to buy and sell securities. Eligibility typically requires being a U.S. resident over 18. When choosing a brokerage, the host recommends Public for its fractional investing and user-friendly features.
Opening an account involves providing personal and financial information, then linking a bank account to fund it via electronic or wire transfers. Funds settle in a temporary money market fund earning interest.
Trading and Managing Investments
Investors place trades using market orders executing at current prices, or limit orders specifying price conditions. After placing an order, money is held in a settlement fund earning interest until the trade settles.
The host explains two main ways to profit: dividends from companies, and selling investments at a gain after appreciation over time. While dividends provide income, substantial wealth often stems from long-term appreciation.
Tips for New Investors
The host encourages starting small while learning investing basics. Investing should be viewed as investing in oneself for long-term wealth through disciplined, patient strategies focused on steady growth over time.
1-Page Summary
Additional Materials
Clarifications
- Fractional investing allows investors to buy a fraction of a share or security, enabling them to invest in high-priced assets with smaller amounts of money. This approach provides access to a diversified portfolio without needing to purchase whole shares. Fractional investing is particularly beneficial for new investors looking to start small and build their investment portfolio gradually over time. It offers flexibility and the opportunity to invest in companies that may have high share prices.
- Market orders are instructions to buy or sell a security at the current market price. When an investor places a market order, the trade is executed immediately at the best available price. This type of order provides certainty of execution but does not guarantee a specific price. Market orders are commonly used when speed of execution is more important than the price at which the trade is executed.
- A limit order is an instruction to buy or sell a security at a specific price or better. It allows investors to control the price at which their trade is executed. If the market price reaches the specified level, the order will be triggered and executed at that price or more favorably. This type of order provides investors with more control over the price they pay or receive for a security.
- A settlement fund is a temporary account where funds are held after a trade is executed until the transaction is finalized. It earns interest during this period and serves as a holding place for the money involved in the trade. The settlement fund ensures that the trade is completed accurately and securely before the funds are transferred to or from the brokerage account. It helps manage the process of buying and selling securities by providing a buffer between the trade execution and the movement of funds.
- A money market fund is a type of mutual fund that invests in short-term, low-risk securities like Treasury bills and commercial paper. These funds aim to maintain a stable asset value and provide income to investors through dividends. They are regulated to limit risks and typically invest in high-quality, short-term instruments with strict guidelines on maturity and diversification. Money market funds play a crucial role in providing liquidity to financial markets.
Counterarguments
- While Public is recommended for fractional investing and user-friendly features, other brokerages may offer better rates, more diverse investment options, or superior research tools that could be more beneficial depending on the investor's needs.
- Being a U.S. resident over 18 is a common requirement for U.S.-based brokerages, but international investors have access to global markets through brokerages in their own countries or international platforms.
- Providing personal and financial information is standard for opening a brokerage account, but concerns about data privacy and security are valid and should be addressed by the brokerage's policies.
- While funds typically settle in a money market fund earning interest, the interest rates on these funds are often very low and may not keep pace with inflation.
- Market orders and limit orders are common trade types, but there are other order types and strategies that can be more suitable for certain market conditions or investment goals.
- Dividends and selling investments at a gain are two ways to profit, but there are also other investment strategies such as options trading, short selling, or fixed-income investments that can also be profitable.
- Long-term appreciation is a common way to build wealth, but it also comes with risks and is not guaranteed; market volatility can lead to significant losses.
- Starting small is good advice for new investors, but even small investments can lead to substantial losses if not managed wisely; education and risk management are crucial.
- The concept of investing as a form of self-investment is motivational, but it's important to recognize that not all investments lead to steady growth and some may result in losses.
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Setting up a brokerage account
Understanding how to set up a brokerage account is essential for anyone looking to invest in the stock market. Let's break down the steps and considerations to take before diving into investing.
Brokerages serve as the intermediary between investors and the stock market, providing access to buy and sell securities.
If you're over 18 and living in the United States, you're typically eligible to open a standard brokerage account. For those under 18, a custodial account would be necessary, with an adult acting as the custodian until you reach maturity. Non-US citizens may face certain limitations when it comes to opening a US-based brokerage account.
When choosing a brokerage, which can be an established firm or an online platform, it's essential to compare features such as fractional investing, robo-advisor options, and required account minimums to ensure they meet your investment needs and preferences. Fractional investing allows you to buy portions of a share, making it easier to invest in high-priced stocks with less money. Robo-advisors are automated programs that assist in making investment decisions based on your financial goals and risk tolerance. Brokerages may charge different rates for robo-advisor services, some as low as 0.5% of managed assets, and up to 1% for human advisor services.
Opening a brokerage account involves providing personal and financial information, then linking a bank account to fund the account.
To open an account, you will need to supply personal details like full name, address, date of birth, and social security number, along with verification documents such as a driver’s license or passport number. Financia ...
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Setting up a brokerage account
Additional Materials
Clarifications
- A custodial account is a type of account that allows minors to own securities with an adult acting as the custodian until the minor reaches the age of majority. This account structure enables young individuals to start investing in the stock market under the guidance of a responsible adult. The custodian manages the account and makes investment decisions on behalf of the minor until they are legally able to take control of the account. It is a common way for minors to begin building a financial portfolio and learn about investing at an early age.
- Non-US citizens may encounter restrictions when trying to open brokerage accounts in the United States due to regulatory and compliance requirements related to international clients. These limitations can vary based on factors like the individual's country of residence, tax implications, and the brokerage firm's policies. Non-US citizens might need to provide additional documentation, face higher fees, or have limited access to certain investment products compared to US residents. It's essential for non-US citizens to research and understand the specific rules and restrictions that apply to them before attempting to open a US-based brokerage account.
- Fractional investing allows investors to purchase a portion of a share, enabling them to invest in high-priced stocks with less capital. This method makes it easier for individuals to diversify their portfolios and participate in the stock market with smaller amounts of money. Fractional investing is particularly beneficial for those who want to invest in companies with high share prices but do not have enough funds to buy a full share. It provides an opportunity for broader market participation and portfolio customization.
- Robo-advisors are automated investment platforms that use algorithms to provide investment advice and manage portfolios based on an individual's financial goals and risk tolerance. They offer a hands-off approach to investing, making it easier for beginners or those who prefer a more passive investment strategy. Robo-advisors typically charge fees based on a percentage of managed assets, which can vary depending on the provider. These services can help streamline investment decisions and provide diversified portfolios without the need for constant monitoring by the investor.
- When opening ...
Counterarguments
- While brokerages do serve as intermediaries, it's important to note that not all brokerages offer the same level of access or the same types of investments, which can affect an investor's ability to participate in certain areas of the stock market.
- The eligibility criteria for opening a brokerage account may vary not only by age and residency but also by the brokerage's policies and the regulatory environment of the investor's home country.
- Non-US citizens can open US-based brokerage accounts, but the process may involve additional documentation and compliance with both US regulations and those of their home country, which can be a significant barrier.
- When choosing a brokerage, other features such as commission fees, account fees, customer service, platform usability, and educational resources are also important to consider, not just fractional investing and robo-advisor options.
- The cost of robo-advisors can be a consideration, but it's also important to evaluate the performance and the quality of the service provided, as a lower fee does not necessarily mean better value.
- The process of opening a brokerage account may require more than just the basic personal and financial information listed, such as employment information or investment experience, depending on the brokerage's requirements and regulatory obligations.
- Fund ...
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Mechanics of placing stock trades and managing investments
Investors navigating the stock market have several options and strategies when buying stocks and managing their portfolios.
Investors can choose between market orders, which execute at the current market price, or limit orders, which specify a maximum or minimum price.
A market order means you're buying or selling a stock at whatever the current price is. This type of order is fast and straightforward but doesn't necessarily guarantee the price at which the trade will be executed. For example, if you place a market order to invest $100 in VOO, it will be executed whether VOO is trading at $500, or if it suddenly shoots up to $1,000 or goes down to $200.
In contrast, a limit order allows you to set a maximum buy price or minimum sell price for a stock. This tells your brokerage to execute the trade only if the conditions are met, offering more control over the purchase price. However, if the stock is volatile or your set price is not reached, it can take longer for the trade to execute, if it does at all. For example, you might specify that you wish to invest in VOO only if the price is $500 or better; thus, if VOO is trading at $600, the order won't be executed.
During the settlement period after a trade, the investor's money is temporarily held in a money market fund, earning a small amount of interest.
After you have placed a market order, your transaction doesn't complete instantly. It can take a few days for the trade to settle. During this time, the money is held in what's called a settlement fund, which is essentially a temporary holding area for the money until the trade settles. Many brokerages use a money market fund for the settlement fund, which contains short-term, high-quality debt securities like treasuries and CDs. While money in the settlement fund isn't invested in stocks, it does earn some interest, likely more than a regular bank account.
The two main ways to make money from investments are through dividend payments and selling the investment for a gain.
When managing investments, there are two primary ways to profit. One is through dividends, which are payments a public company makes to its shareholders, typically in the form of cash or additional shares. Dividends serve as a thank you to investors and are distributed regularly by some companies.
The more common and potent ...
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Mechanics of placing stock trades and managing investments
Additional Materials
Clarifications
- During the settlement period after a trade, the completion of the transaction is finalized, and ownership of the securities is transferred. This period typically lasts a few days, during which the funds and securities involved in the trade are exchanged between the buyer and the seller. It is a standard process in financial markets to ensure that all aspects of the trade are accurately processed before it is considered complete. The settlement period helps mitigate risks and ensures the smooth functioning of the trading process.
- A money market fund is a type of mutual fund that invests in high-quality, short-term securities like Treasury bills and commercial paper. It serves as a temporary holding place for funds during the settlement period after a trade, earning a small amount of interest. Money market funds are considered low-risk investments and are commonly used by brokerages for this purpose. They provide liquidity and stability to investors while their trades are being processed.
- Investments appreciate when their value increases over time due to factors like market demand, company performance, or economic conditions. This appreciation can lead to potential profits when the investment is sold at a higher price than what was initially paid. Holding onto investments for longer periods generally increases the likeli ...
Counterarguments
- Market orders may not be suitable for stocks with low liquidity or high volatility, as the final execution price can be significantly different from the last traded price due to slippage.
- Limit orders, while providing price control, may lead to missed opportunities if the market price never reaches the limit set, especially in fast-moving markets.
- The interest earned on money in a settlement fund is typically very low and might not keep pace with inflation, which could be considered an opportunity cost of not being fully invested.
- Dividend payments are not guaranteed and can be cut or suspended by the company, especially during economic downturns or financial difficulties.
- Focusing solely on dividends might lead to overlooking the total return potential of an investment, which includes both capital gains and dividends.
- Selling investments for a gain involves timing the market, which can be difficult and risky; it also incurs taxes on capital gains, which can reduce the net profit.
- The historical average stock market return of about 8% per year may not app ...
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Tips and recommendations for new investors
For individuals looking to delve into the world of investing, the host shares valuable tips and platform recommendations to help them start on the right foot.
For guidance on where to open a brokerage account, the host recommends the Public platform for its user-friendly features like fractional investing.
The host advocates for the Public platform, noting its intuitive interface and its array of offerings tailored for new investors. Public caters to a variety of investments, including stocks, bonds, and treasuries, while making it exceptionally straightforward to use. A standout feature is its fractional investing capability, allowing investors to buy into high-value stocks with as little as $20. This makes it possible for those with limited funds to participate in the market.
The host emphasizes that investing in the stock market is an investment in oneself and can pay dividends over the long term.
The host conveys that investing in the stock market should be seen as an investment in oneself, stressing the potential long-term benefits. With the right approach, patience, and strategy, investing can yield significant returns that can serve one's financial goals for ...
Here’s what you’ll find in our full summary
Tips and recommendations for new investors
Additional Materials
Counterarguments
- While the Public platform may offer user-friendly features, it's important to compare fees, services, and regulatory track records with other platforms before making a decision.
- Fractional investing, though beneficial for those with limited funds, may also limit the understanding of stock ownership and market movements compared to purchasing full shares.
- The Public platform might not offer the same depth of research tools or advanced trading options that other platforms provide, which could be important as an investor's experience grows.
- Investing in the stock market does carry risks, and it is not guaranteed to always result in dividends or long-term wealth, especially in volatile or bear markets.
- Starting small and learning the ...
Actionables
- You can create a mock investment portfolio to simulate stock market investing without financial risk. Use a spreadsheet or a free online portfolio simulator to track imaginary investments in stocks and bonds. This exercise will help you understand market fluctuations and the impact of diversification on investment performance.
- Set up automatic transfers from your checking account to a dedicated savings account to build an investment fund. Determine a small percentage of your income that you can comfortably save each month, and as the balance grows, you'll have a reserve ready to invest when you feel confident to start.
- Engage in a monthly investment book club with friends or onl ...
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