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4 simple steps to take before you invest in the stock market

I recently set aside $1,000 dollars that I wanted to invest in the stock market. The problem is that I didn’t know where to start, and the money ended up sitting in my account for a month because I was too intimidated to dip my toe into the murky stock market waters. I’m glad to say that I eventually took charge, did some research, and got in the game. Here are some tips to help you do the same.

1. Is it the right time?

Once you have a little extra money to invest, it’s really tempting to get all Wolf of Wall Street and spontaneously pick a stock and throw your money in it — that’s not a good idea. Dani Pascarella is the CEO and Founder of Invibed, a site that makes personal finance accessible for millennials. She says that before you invest, it’s important to have a strong financial foundation. “You need an emergency fund that can cover three to six months of expenses before you start investing,” she told Yahoo Finance. “Being able to pay your bills is more important.”

If you have an emergency stash, Pascarella says it’s also important to look at your debt. If you have a credit card balance or loans, it might make more sense to pay off those debts before investing. “The average yearly rate of return for investments is 10%, but that average interest rate of credit cards is 15%, so you’re better off paying off your credit card first,” she said.

2. Why are you investing?

It’s crucial to know that the stock market can be flaky. Sometimes it’s up, sometimes it’s down. With that said, it’s important to know why you are investing. Are you looking for a short-term investment to raise money for a trip next summer? Do you want to buy a house in five years? Are you saving for retirement? The “why” is important because it’s will help you select the right investment and the risk you’re allowed to take.

3. Diversify

When starting out, it’s tempting to pick the stocks of your favorite company (Hello Amazon!), and throw your money in. This is a bad idea. “Don’t do individual stocks at the start, it is riskier than other options because all of your money is invested in one company,” says Pascarella. What she means is if you only have $1,000 and you decide to buy a $600 share in Google, you’ve bascially put all of your eggs in one basket.

Instead, Pascarella suggests beginners invest in an Exchange Traded Fund or an ETF. ETF’s come in a lot of different packages but essentially let you buy shares of a fund, which invests in a variety of different stocks at one time. One of the most popular is the SPDR S&P 500 ETF Trust (SPY), which invests in all 500 leading companies that comprise the S&P 500 Index.

Investor checking performance of financial portfolio online whilst reviewing investment statement

The SPDR Dow Jones Industrial Average ETF (DIA) is another popular Exchange Traded Fund that contains 30 important stocks including General Electric, Microsoft, and the Walt Disney Company.

Similarly, the PowerShares QQQ Trust Series 1 (QQQ), is composed of the 100 largest U.S. and international companies, excluding financial companies, listed on the NASDAQ stock exchange.

The value of these ETF’s fluctuate like any other stock, but in the long run they are generally a more stable and low-maintenance investment than stock picking.

4. Pick the right broker

From apps to sites and personal advisors, there are a lot of ways to go about investing. The key is to choose the right service for you.

If you’re busy and not really  interested in learning how the stock market works, consider a site like Betterment, which lets users log-in and fill out a detailed financial profile.  After you set up the account, the software does all of the hard work and suggests investments based on your goals. You can even set up automatic investments from your bank account so you don’t have to take time away from your busy schedule.

If you’d like to be more hands on in your investments, consider using a brokerage site like eTrade, Fidelity or Vanguard. These sites get you access to the market, but you’re on your own when it comes to choosing your investments. The one thing to look out for with these services are the fees. “Most of these sites will charge you a broker fee for making a trade, so research those costs ahead of time,” says Pascarella. Some of these sites will charge you up to $10 per trade, so it’s important to manage fees so you don’t breeze through your money simply by buying and selling stocks.

A couple of sites also have a minimum account balance that you need to hit before trading. Sometimes this could be as much as $2,500, which might affect the site you choose to trade on. Nerdwallet has this great tool to help you calculate the fees associated with popular online brokers.

There are also a lot of apps out there that make investing quick and easy. RobinHood allows for free trading, so you don’t have to shell out 10 bucks to a broker every time you want to make a trade. It also will send you notifications and real-time results so you can stay on top of your investments.

And finally, It’s also a good idea to research how the broker site deals with customer services. If you’re trading for the first time, you’ll want to have the option to talk with someone who is responsive and available.

What are your simple tips for investing? Email us at yfmoneymailbag@yahoo.com.