At some point in your life, you should probably open a brokerage account. This is an account that allows you to get your money into the stock market. Investing in the stock market can open up the door to better returns than you would get if you kept all your cash in a high-yield savings account.
It can sometimes be hard to figure out whether you’ve reached that point in your life or not. To determine if you are ready to move forward with opening an investment account, be on the lookout for these key signs.
1. You have money you will not need for a few years
The point of opening a brokerage account is to invest in the stock market. Investing in the market always carries at least some risk of loss, unlike when you put your money into a high-yield savings account that is insured by the FDIC for up to $250,000.
If you make wise investments, you will be able to manage this risk and likely turn a profit over the long haul. But the market has ups and downs and evengreat investments can sometimes perform poorly for a few years. So, you should only put money into the stock market if you won’t need it for around three to five years or longer.
If you have a longer timeline like this, then you have the opportunity to wait out downturns. Even if you have terrible timing and the market crashes the day after you invest, you can wait for an inevitable recovery. But, if you can’t wait, you could be forced to sell for less than you paid. This is called locking in your losses — you sell before you have the opportunity to earn them back.
If you don’t have any money that isn’t going toward more immediate goals, such as paying off high-interest debt, then you’re not yet ready to open a brokerage account. But as soon as you have even a little bit of spare cash, you should get started investing. This could be as little as $5 or $10.
While it may seem silly to put so little into the market, it really isn’t. Many brokerage firms today have no minimum balance requirements and many allow you to buy fractional shares, or partial shares of stocks or ETFs. This means if you have only $5 to invest, you can still buy investments. You just may not own a whole share of it, but you’ll earn the same percentage returns as someone who owns thousands of shares.
As soon as you’ve started investing, you can begin taking advantage of the power of compound growth. That’s when your returns are reinvested, and the combination of time and compound growth can help you build wealth. In fact, investing just $10 a month over 40 years could leave you with over $53,000 if you earned 10% average annual returns.
2. You have a plan for how to invest
Finally, the second sign you’re ready to open a brokerage account is that you have a plan for how to invest.
See, once you put your money into the account, you have to buy assets with it. And you’ll want to know how you’ll approach this process to reduce your risk of loss.
You can buy stock shares to get an ownership stake in a wide range of companies. This is a riskier approach since your investment performance hinges on how one particular business does, but it can work if you do your research and understand how to pick good stocks.
For many people, the better option is to buy exchange-traded funds (ETFs) that track a financial index. These trade like stocks, but your money is pooled with others and used to buy shares in dozens or even hundreds of companies that make up a financial index. If you put your money into an S&P 500 ETF, you are essentially buying a small ownership stake in around 500 of the largest U.S. companies. You aren’t betting on one business to do well — you’re betting on around 500 of them. So you’re taking on more limited risk.
ETFs are the strategy Warren Buffett, one of the greatest investors of all time, recommends for most people. It’s also my approach, as almost my entire portfolio is in ETFs. Fortunately, buying them is simple as you can just use the ETF screener your brokerage account offers to find one tracking the S&P 500, the market as a whole, or a host of other financial indexes.
You can decide if your strategy will be to buy stocks, ETFs, or a mix of them. The important thing, though, is to make a plan you’re confident in so you can make informed investment choices.
Once you’ve done that, as long as you have even a few spare dollars, you’re ready to go. Check out the list of best brokerage accounts and open your account online today.
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