If you are ready to start investing in the stock market but aren’t sure of the first steps to take when investing in stocks, you’ve come to the right place.
Investing in stocks can be an efficient way to build wealth over time. Learning how to invest wisely and patiently over a lifetime can yield returns that far outpace the most modest income. Nearly every Forbes 400 wealthiest Americans made a list in 2019 because they owned a large block of shares in a public or private corporation.1
It all starts with understanding how the stock market works, your investment goals, and whether you can handle a lot or just a little bit of risk.
What is stock investing?
Investing in stocks may sound like a complicated financial transaction, but really, it just means buying tiny shares of ownership in a public company. Those small shares are known as the company’s stock, and by investing in them, you’re hoping the company grows and performs well over time. And as a partial owner of the company, its success is also your success. If the company grows and performs well, your shares may become more valuable, and other investors may be willing to buy them from you for more than you paid for them. If that’s the case, you’ll earn a profit when you sell your stocks down the road.
Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that’s just an average across the entire market — some years will be up, some down, and individual stocks themselves will vary in their returns. But for long-term investors, the stock market is a good investment no matter what’s happening day-to-day or year-to-year; it’s that long-term average they’re looking for. And the most likely way to earn that is to invest early and stay invested for the long haul.
Determine your investing approach
There are several ways to approach stock investing. Choose the option below that best represents how you want to invest and how hands-on you’d like to be in picking and choosing the stocks you invest in.
Before you decide, try this. Which of the following statements best describes you?
- I’m an analytical person and enjoy crunching numbers and doing research.
- I hate math and don’t want to do a ton of “homework.”
- I have several hours each week to dedicate to stock market investing.
- I like to read about the different companies I can invest in but don’t desire to dive into anything math-related.
- I’m a busy professional and don’t have the time to learn how to analyze stocks.
The good news is that regardless of which of these statements you agree with, you’re still a great candidate to become a stock market investor. The only thing that will change is the “how.”
The different ways to invest in the stock market
- Choose stocks and stock funds on your own.
- Meets an expert to manage the process for me. You may be a good candidate for a Robo-advisor, a service that offers low-cost investment management. Virtually all major brokerage firms and many independent advisors offer these services, which invest your money for you based on your specific goals.
- Invest in your employer’s. 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 investing methods: making small contributions regularly, focusing on the long-term, and taking a hands-off approach. Most 401(k)s offer a limited selection of stock mutual funds but not access to individual stocks.
Decide how much you will invest in stocks.
First, let’s talk about the money you shouldn’t invest in stocks. The stock market is no place for money that you might need within the next five years, at a minimum.
While the stock market will almost certainly rise over the long run, there’s too much uncertainty in stock prices in the short term — in fact, a drop of 20% in any given year isn’t unusual. In 2020, during the COVID-19 pandemic, the market plunged by more than 40% and rebounded to an all-time high within a few months. So funds you shouldn’t invest in stocks.
- Your emergency fund
- The money you’ll need to make your child’s next tuition payment
- Next year’s vacation fund
- The money you’re socking away for a down payment, even if you will not be prepared to buy a home for several years.
Choose an investing account.
All of the advice about investing in stocks for beginners doesn’t do you much good if you don’t have any way actually to buy stocks. To do this, you’ll need a specialized type of account called a brokerage account.
Opening a brokerage account is generally easy, but you should consider a few things before choosing a particular broker:
Type of account
First, determine the type of brokerage account you need. Most people who are just trying to learn stock market investing choose between a standard brokerage account and an individual retirement account(IRA). Both account types will allow you to buy stocks, mutual funds, and ETFs. The main considerations here are why you’re investing in stocks and how easily you want to access your money.
If you want easy access to your money, are just investing for a rainy day, or want to invest more than the annual IRA limit, you’ll probably want a standard brokerage account.
On the other hand, if your goal is to build up a retirement nest egg, an IRA is a great way to go. IRAs are very tax-advantaged places to buy stocks, but the downside is that it can be difficult to withdraw your money until you get older.
Compare costs and features.
Most online stock brokers have eliminated trading commissions, so most (but not all) are on a level playing field as far as costs are concerned.
However, there are several other big differences. For example, some brokers offer customers various educational tools, access to investment research, and other features that are especially useful for newer investors. Others offer the ability to trade on foreign stock exchanges. And some have physical branch networks, which can be nice if you want face-to-face investment guidance.
There’s also the user-friendliness and functionality of the broker’s trading platform. I’ve used quite a few of them and can tell you firsthand that some are far more “clunky” than others. However, many will let you try a demo version before committing any money, and if that’s the case, I highly recommend it.
Opening a brokerage account
An online brokerage account likely offers your quickest and least expensive path to buying stocks, funds, and a variety of 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’re already saving adequately for retirement in an employer 401(k) or another plan.
The passive option: Opening a Robo-advisor account
A Robo-advisor offers the benefits of stock investing but doesn’t require its owner to do the legwork required to pick individual investments. Robo-advisor services provide complete investment management.: These companies will ask you about your investing goals during the onboarding process and then build you a portfolio designed to achieve those aims.
This may sound expensive, but the management fees here are generally a fraction of the cost of what 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 a Robo-advisor if you wish.
Choose your stocks
Now that we’ve answered the question of how you buy a stock if you’re looking for some great beginner-friendly investment ideas, here are five great stocks to help get you started.
Of course, in just a few paragraphs, we can’t go over everything you should consider when selecting and analyzing stocks, but here are the important concepts to master before you get started:
- Diversify your portfolio.
- Invest only in businesses you understand.
- Avoid high-volatility stocks until you get the hang of investing.
- Always avoid penny stocks.
- Learn the basic metrics and concepts for evaluating stocks.
It’s a good idea to learn the concept of diversification, meaning that you should have a variety of different types of companies in your portfolio. However, I’d caution against too much diversification. Instead, stick with businesses you understand — and if it turns out that you’re good at (or comfortable with) evaluating a particular type of stock, there’s nothing wrong with one industry making up a relatively large segment of your portfolio.
Buying flashy high-growth stocks may seem like a great way to build wealth (and it certainly can be), but I’d caution you to hold off on these until you’re a little more experienced. Instead, it’s wiser to create a “base” to your portfolio with rock-solid, established businesses.
If you want to invest in individual stocks, you should familiarize yourself with some of the basic ways to evaluate them. Our guide on stock market trading https://wowplus.net/stock-market-trading-what-it-is/ is a great place to start.
Stock market investing for beginners
All of the above guidance about investing in stocks is directed toward new investors. But if I had to pick one thing to tell every beginner investor, it would be this: Investing isn’t as hard — or complex — as it seems.
That’s because there are plenty of tools available to help you. One of the best is stock mutual funds, which are an easy and low-cost way for you to invest in the stock market.
The other option is a Robo- advisor, which will build and manage a portfolio for you for a small fee.
Bottom line: There are plenty of beginner-friendly ways to invest, no advanced expertise required.
Can you invest if you don’t have much money?
There are two challenges to investing small amounts of money. The good news is that they’re both easily conquered.
The first challenge is that many investments require a minimum. The second is that it’s hard to diversify small amounts of money. Diversification, by nature, involves spreading your money around. The less money you have, the harder it is to spread.
The solution to both is investing in stock index funds and ETFs. While mutual funds might require a $1,000 minimum or more, index fund minimums tend to be lower (and ETFs are purchased for a share price that could be lower still).
Are stocks a good investment for beginners?
Yes, as long as you’re comfortable leaving your money invested for at least five years. Why five years? That’s because it is relatively rare for the stock market to experience a downturn that lasts longer than that.
But rather than trading individual stocks, focus on stock mutual funds. With mutual funds, you can purchase a large selection of stocks within one fund.