How To Invest In Stocks
To beginner investors, the stock market can be incredibly intimidating. There are hundreds of terms and buzzwords that can confuse new investors along with complicated-looking charts and trading tools. However, after taking a deep breath, newcomers can begin to get their bearings and make their first stock investments. When boiled down to its core principles, the stock market is relatively straightforward. You buy a small piece of ownership in a company, and you are rewarded when that company performs and grows. Of course, over time, traders have implemented complicated new ways of doing business like trading derivatives, options, and shorting stocks.
With this guide, you will learn the simplest way to get started with investing in stocks with relative safety for the long term. Once you know these basics, you’ll be ready for anything!
Step 1: How Do You Want To Invest In Stocks?
Choosing to invest in the stock market leaves you with a variety of options you can consider. The following options will give you a choice between how involved you would like to be in the process of choosing your own securities (tradeable financial assets).
- I want to choose all stocks individually – This is a great way to get started but presents a little more risk as new investors won’t know all the best ways to evaluate a stock and choose a winner with low risk.
- I want an experienced trader to choose the stocks – Don’t be fooled; investing in the stock market doesn’t mean you have to choose your own stocks! With mutual funds and exchange-traded funds (ETFs), you will pool your money with other investors into a fund made up of several different stocks. We will go over this a little later.
- I want to invest in stocks for retirement or use an employment 401(k) – Many don’t start investing in the stock market until their first job offers them an opportunity to contribute to a 401(k). This is a wise step to retiring quickly.
Once you know what you are aiming for, you are ready to move on to step two!
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Step 2: Choose a Brokerage
Opening an investing account with a brokerage has never been easier. You don’t even have to leave your house to open your first account to buy stocks. Choosing a brokerage will come down to personal preference but keep your thoughts from step one in mind.
Investors seeking to buy their own individual stocks to test their wit or bet on their favorite companies can open accounts with brokerages like Robinhood, which offers a simple interface and easy mobile app. Investors who want to buy into mutual funds or ETFs may be better off with a company like Vanguard. And those looking to open their 401(k) will need to follow company instructions for setting up their accounts.
There are a huge number of options available to investors when it comes to choosing a brokerage, so choose a reputable company that is best for your unique needs. For the fastest option, open an account online and deposit funds to make your first purchase of shares.
Step 3: Choose Your Investment
After your brokerage account is all set up and you have transferred funds to buy stocks, you can now check out all of the options available to you.
Many investors purchase stock in companies that they believe in or know a lot about. For instance, a computer programmer that knows everything about computer components may buy stock in a company they know just released a processor that will beat the competition. It also can be a good option to choose safe stocks that pay quarterly dividends like Apple or AT&T.
For beginners choosing stocks to invest in, buying for the long term is often the best option. Short-term speculation has bankrupted many would-be investors that treated the stock market like a casino. However, once you get a feel for the market, you may want to adjust your risk tolerance a little higher to seek better returns.
It is always a good idea to buy various stocks in different industries to diversify your portfolio. If you only buy shares of one company, you will be devastated if something catastrophic happens to that company. With ownership of many companies, even if one holding goes belly up, you still have holdings in other companies and industries to offset it.
ETFs and Mutual Funds
Mutual funds and exchange-traded funds are made up of pools of people who entrust an expert fund manager to purchase shares in many different companies. This can be a fantastic way to avoid risk when it comes to choosing the right stocks. You will be able to see the fund’s lifetime performance before you invest in it so you can know roughly how much you will earn if everything goes to plan.
However, ETFs and mutual funds are subject to the same volatility as the stock market as a whole. Things like a recession or pandemic can cause a major blow to stocks and even put companies out of business. Many ETFs are built to track indexes like the S&P 500 that provide stable returns over time, so these provide extra safety by investing in the bomb-proof companies that are the highest earners in the U.S.
Step 4: Create a Budget for Your Portfolio
After choosing your preferred investment type, you will want to decide how much you are willing to invest. You always want to have enough savings and spending money, but you don’t want to miss out on an opportunity to grow your wealth. So how much do you invest?
- What is your goal? – The best thing to do when deciding the dollar amount you want to invest is to choose a realistic goal that you want to achieve with your money. This can be retirement (or maybe an early retirement if you play your cards right!). Perhaps you are planning to grow a set amount to afford a down payment on a house. In any case, it can be very helpful to have a number in mind that you would like to see and a time you would like to see it. Then, you can adjust your average percent return you would like to see each year.
- How much will you need to start? – Today, investors don’t need much at all to open an account and start investing. Even those with very little to spend can open an account with a brokerage like Robinhood to buy fractions of company shares for amounts like $20 or even less! If you are looking to invest in mutual funds, you will need some more cash. They will often have minimums that you need to meet.
Step 5: Keep The Big Picture in Mind
Many investors will become impatient when watching their investments grow, but this shouldn’t distract you. Successful investors stick to the plan and earn steady gains over the years. A slow and steady strategy will almost always pay off in the long run due to overall market growth. However, once you learn more about the stock market and trading, you can absolutely allocate small amounts of your portfolio for riskier investments like cryptocurrency, known for sharp increases in value.
Warren Buffet, the king of long-term investing, suggests investing in index funds that track the S&P 500 is the best thing that people can do to safely earn over time and have a great nest egg for retirement or other purchases. Keep the number goal you want in your mind from step four, and stick to your guns if you start getting FOMO from other volatile investments!
Step 6: Monitor Your Portfolio Sparingly
New investors will be very tempted to view their portfolios daily, but this won’t be helpful for long-term investors. Momentary dips and gains are just that — if you have chosen a safe mix of funds, stocks, and other investments, your wealth will grow over time.
However, when you start out, you should check in with your portfolio from time to time to observe the charts and see how the market reacts to various stimuli. This can be very helpful in understanding the stock market and learning more about investing. While you shouldn’t over-manage your portfolio of stocks, you can still sell underperforming stocks, and purchase shares of companies you think will do a better job. Just remember never to make decisions based on greed, fear, or any other emotion.
When it comes to money, the best thing you can do is make conservative and information-based decisions that grow your wealth steadily and safely. Keep your portfolio diversified using your brokerage’s tools like pie charts for seeing where your money is allocated. By following these steps, learning more about investing, and seeking expert investment advice, you can build your wealth to meet ambitious goals.
Other Questions When It Comes to Investing in Stocks
Here are some frequently asked questions when it comes to the stock market and investing that we can cover.
Are stocks the best investment for a beginner?
Although we can’t say they are the best investment, stocks are a great choice for beginners. If investors are willing to buy shares of companies for long-term growth (around five years), then stocks are a perfect investment opportunity. The stock market as a whole will usually grow substantially in this amount of time, meaning that a diversified portfolio of stocks will experience a healthy increase in value.
How do you choose individual stocks?
It is important to choose stocks based on objective data like price-to-earnings ratios and other important factors. Some stocks like Microsoft are a safe long-term bet because they are giants in their industry and have been safe for decades. Learn a few of the methods for valuing stocks so you can do your due diligence properly and learn some of the underlying principles of stock dollar value.
What If I Don’t Have Much To Invest?
It is just fine if you don’t have a lot of cash on hand to invest. You are still ahead of the curve by wanting to grow your wealth in the stock market! Although there are many stocks that will require a higher minimum investment, you can invest with almost any amount through platforms that allow fractional ownership of shares. Companies like Webull, Robinhood, and even Charles Shwab enable investors to buy slices of a stock. This is great for stocks that are worth thousands of dollars just for a share. Many wouldn’t have the money to invest or diversify elsewhere if they had to sink 3 or 4,000 dollars into a single stock (as is the case with companies like Amazon and NVR.
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Alt-text: Wall Street signs on a pole
What Is An Index Fund?
An index fund is an incredibly valuable investment for beginners as it follows an index or a guide for market behavior. For example, the S&P 500 index tracks the largest 500 stocks traded on the New York Stock Exchange. Stocks like Apple, Microsoft, Intel, Amazon, and Alphabet (Google) are on this list.
An index fund can either be an exchange-traded fund or a mutual fund that buys shares to follow this index as closely as possible. So Vanguard’s S&P 500 index fund will purchase shares of all these companies using a large pool of investor money. It would be very hard for a single investor to diversify their portfolio this much as a share in each of these companies would be prohibitively expensive. Owning shares of an index fund will provide healthy diversification and a steady, safe reward.