Learn how to invest in stocks, including how to choose a brokerage account and research investments.
Investing in stocks means buying shares held in a public company. Those small stocks are known as company stocks, and by investing in those stocks, you expect the company to grow and perform well over time.
When that happens, your shares may become more valuable, and other investors may be willing to buy them more than you paid for them. That means you can make a profit if you decide to sell it.
A good rule of thumb is to have a diversified investment portfolio and keep investing, even when the market has its ups and downs.
One of the best ways for beginners to learn how to invest in stocks is to put money into an online investment account, which can then be used to invest in stocks or stock mutual funds.
With multiple brokerage accounts, you can start investing at the price of one share. Some brokers also offer paper trading, which allows you to learn how to buy and sell with a stock market simulator before investing real money.
How to Invest in Stocks in Six Steps
There is no one-size-fits-all method for investing in stocks, but this six-step process can help you get started. First, find out how practical you want to be, open an account, choose between stocks and funds, set a budget, focus on the long term, and finally manage your portfolio.
1. Decide how you want to invest in the stock market
There are several ways to approach stock investing. Choose the option below that best represents how you want to invest and how practical you want to be when choosing the stocks you invest in.
A. “I want to choose my own stocks and stock mutual funds. Read on; This article outlines what practical investors need to know, including how to choose the right account for their needs and how to compare stock investments.
B. “I want an expert to manage the process for me. “You may be a good candidate for robo-advisors, services that offer low-cost investment management. Almost all large brokerage firms and many independent advisors offer this service, which invests your money for you based on your specific goals.
C. “I want to start investing in my employer’s 401(k). “This is one of the most common ways for beginners to start investing.
In many ways, it teaches new investors some of the most proven investment methods: making small contributions on a regular basis, focusing on the long term, and taking a hands-off approach. Most 401(k) offer a limited selection of stock mutual funds, but no access to individual stocks.
2. Choose an investment account
Once you have your preferences in mind, you are ready to buy an investment account. For practical types, this usually means a brokerage account. For those who want a little help, opening an account through robo-advisors is a reasonable option. We break down both processes below.
An important point: both brokers and robo-advisors allow you to open an account with little money.
DIY options: opening a brokerage account
An online brokerage account likely offers the fastest and least expensive way to buy stocks, funds, and various other investments. With a broker, you can open an individual retirement account, also known as an IRA, or you can open a taxable brokerage account if you’ve saved enough for retirement in a 401(k) plan or other employer plan.
We have a guide to opening a brokerage account if you need an in-depth dive. You’ll want to evaluate your broker based on factors such as cost, investment selection, and investor research and tools.
Passive option: open a robo-advisor account
Robo-advisors offer the benefits of investing in stocks, but do not require their owners to do the hard work necessary to select individual investments. Robo-advisor services provide complete investment management: these companies will ask you about your investment goals during the onboarding process and then build a portfolio designed to achieve those goals.
This may sound expensive, but the management fee here is usually a fraction of the fee that a human investment manager would charge: most robo-advisors charge around 0.25% of your account balance. And yes, you can also get an IRA at robo-advisors if you want.
One thing to keep in mind is that while robo-advisors are relatively inexpensive, read the fine print and choose your provider carefully.
Some providers require a certain percentage of the account to be kept in cash. Suppliers typically pay very low interest on cash positions, which can be a huge drag on performance and can create allocations that are not ideal for investors. This required cash allocation position is sometimes more than 10%.
If you choose to open an account with a robo-advisor, you probably don’t need to read more in this article – the rest is just for that type of DIY.
3. Learn the difference between investing in stocks and funds
Are you going to go the DIY route? Don’t worry. Investing in stocks doesn’t have to be complicated. For most people, investing in the stock market means choosing between these two types of investments:
Stock mutual funds or exchange-traded mutual funds. Mutual funds allow you to buy small pieces of many different stocks in a single transaction. Index funds and ETFs are types of mutual funds that track indices; for example, the Standard & Poor’s 500 fund tracks that index by buying shares of its member companies.
When you invest in a fund, you also have small pieces of each of those companies. You can raise a lot of funds to build a diversified portfolio. Keep in mind that stock mutual funds are also sometimes called stock funds.
Individual actions. If you are looking for a specific company, you can buy one stock or several stocks as a way to dip your feet into the stock trading water. Building a diversified portfolio of many individual stocks is possible, but requires significant investment and research.
If you follow this route, remember that individual actions will have their ups and downs. If you’re researching a company and choose to invest in it, think about why you chose that company in the first place if nervousness started showing up on a bad day.
The advantage of stock mutual funds is that they are inherently diversified, which reduces their risk. For most investors, especially those who invest their retirement savings, a portfolio consisting primarily of mutual funds is the obvious choice.
But mutual funds are unlikely to rise meteorically like some individual stocks. The advantage of individual actions is that smart choices can pay a heavy price, but the chances that each individual action will make you rich are slim.
4. Set a budget for your stock market investments
New investors often have two questions at this step of the process:
How much money do I need to start investing in stocks? The amount of money you need to buy individual shares depends on how expensive the shares are. (Stock prices can range from a few dollars to a few dollars. one thousand dollars.)
If you want a mutual fund and have a small budget, an exchange-traded fund (ETF) might be your best option. Mutual funds often have lows of $1,000 or more, but ETFs trade like stocks, meaning you buy them at the stock price — in some cases, less than $100.)
How much money should I invest in stocks? If you invest through funds, have we mentioned that this is the preference of most financial advisors, you can allocate most of your portfolio to stock funds, especially if you have a long-term horizon.
A 30-year-old who invests in retirement can own 80% of his portfolio in a stock fund; The rest will be in the bond fund. Individual actions are another story. The rule of thumb is to keep it in a small portion of your investment portfolio.
5. Focus on investing for the long term
Investing in the stock market has proven to be one of the best ways to increase wealth in the long run. For decades, the average stock market return was about 10% per annum. However, remember that it is only an average across the market: some years will go up, some go down, and individual stocks will vary in return.
For long-term investors, the stock market is a good investment no matter what happens day after day or year after year; This is the long-term average they are looking for.
The best thing you can do once you start investing in stocks or mutual funds can be the hardest thing – don’t look at it. Unless you’re trying to beat the odds and succeed in day trading , it’s a good idea to avoid the habit of compulsively checking how your stock is performing several times a day, every day.
6. Manage your stock portfolio
While worrying about daily fluctuations won’t do much to the health of your portfolio, or your own portfolio, of course, there will be times when you need to check stocks or other investments.
If you follow the steps above to buy mutual funds and individual stocks over time, you’ll want to revisit your portfolio several times a year to make sure it’s still in line with your investment goals.
A few things to consider: If you’re nearing retirement, you may want to move some of your stock investments to more conservative fixed income investments. If your portfolio is too weighted in one sector or industry, consider buying stocks or funds in another sector to build greater diversification.
Finally, also pay attention to geographical diversification. Vanguard recommends that international stocks account for up to 40% of the stocks in your portfolio. You can buy international stock mutual funds to get this exposure.
Best course of action for beginners
The stock selection process can be quite laborious, especially for beginners. After all, there are thousands of stocks listed on major US exchanges.
Stock investing is full of complicated strategies and approaches, yet some of the most successful investors have done little more than just sticking to the basics of the stock market.
That usually means using funds for the bulk of your portfolio (Warren Buffett says that low-cost S&P 500 ETFs are the best investments most Americans can make) and choosing individual stocks only if you believe in the company’s long-term growth potential.
The S&P 500 is an index of about 500 of the largest publicly traded companies in the United States. Over the past 50 years, the average annual return has been about the same as the market as a whole: about 10%.
The end result of stock investment
Learning how to invest in stocks can be daunting for beginners, but it’s really just a matter of figuring out what investment approach you want to use, what type of account makes sense to you, and how much money you should put in stocks.