How To Invest in Stocks: A Beginners Guide

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Investing in the stock market is one of the best ways to create wealth over time. If you’ve never invested, all the names and numbers you hear in the news about stocks might seem like gibberish.

See: 5 Things You Must Do When Your Savings Reach $50,000

6 Steps To Begin Investing

With some research, you can unlock the meaning behind confusing stock terms and learn just how important — and easy — it is to begin investing, regardless of how much money you have. Here’s how to get started:

Steps To Get Started

  1. Decide what kind of investor you are.
  2. Decide where to open a brokerage account.
  3. Open a brokerage account.
  4. Decide whether to invest in stocks or stock funds.
  5. Manage and diversify your portfolio for long-term success.
  6. Consider your finances over the long term.

Your investments should be separate from your savings or emergency accounts. Reserve the latter for short-term goals and unexpected debt. Your investments should be for long-term goals, such as retirement.

To help you build up your investment funds fast, stick to the old investment axiom to “pay yourself first.” Before you spend money on discretionary expenses, divert some of your income toward your investments. This ensures that you still have the necessary funds to pay your bills.

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1. Decide What Kind of Investor You Are

Your investing goals and risk tolerance will help you decide which stocks to buy and at what price. Consider what you want to do with your money: purchase real estate, produce income, maximize capital appreciation, etc. Then, figure out how much time you have to meet your goals.

Risk tolerance refers to how much money you’re willing to lose on investment in exchange for the potential of greater gains. The stock market is unpredictable, so your risk tolerance decreases with time. Someone who plans to retire in 35 years has more time to recover from a dip in stock prices than someone who has five years until retirement.

Once you’ve considered your financial situation, risk tolerance and amount of money you’re willing to invest, decide how you want to invest.

There are two primary categories of investors: hands-on and passive.

Hands-On Investor

A hands-on investor builds a portfolio by choosing investments either alone or with a financial advisor’s help. This option offers more control over the portfolio’s structure and appeals to individuals looking to maximize gains. It is also more time-consuming for the person who has to research the available investment choices.

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Passive Investor

Passive investors don’t choose individual stocks. Instead, they match the performance of specific market indexes like the S&P 500 or Dow Jones Industrial Average. This approach tends to lessen volatility and provide a more stable return over time, but it comes with less growth potential.

2. Decide Where To Open a Brokerage Account

Investors can open a brokerage account in any of several places, including traditional and online brokerage firms such as Charles Schwab, Fidelity and Robinhood.

Full-Service Broker

Full-service brokers provide a wide range of services and professional guidance for nervous or inexperienced investors. For example, the full-service broker offers investment advice, makes stock recommendations and provides access to initial public offerings. They might also offer financial planning and wealth/asset management services, sell insurance and provide banking services. In exchange for this high level of service, you’ll have to pay commission and other fees.

Examples of full-service brokers include Merrill Lynch, Morgan Stanley and Goldman Sachs.

Discount Broker

Discount brokers provide fewer services than full-service brokers do. Although they don’t offer investment advice, for a fee they can execute trades on your behalf — or you can execute your own online trades from a self-directed investment account using the brokerage’s online trading platform. The benefit of a discount broker is that you’ll pay lower fees and might trade commission-free.

Fidelity and Schwab are two of the best-known discount brokers. Robinhood, which facilitates trades through its popular mobile app, is also a discount broker. There’s no charge to open an account, and trade minimums are just a few dollars.

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Robo-Advisor

A robo-advisor automates your investments. It’s a fully online process that begins with the platform asking you a series of questions about your budget, your investment priorities and goals and how often you want to invest. Once you’ve set up your account and added a payment method, the robo-advisor selects a portfolio of stocks on your behalf and continues to make investments according to the schedule you set.

Some discount brokers, such as Fidelity and Schwab, have a robo-advisor. Other robo-advisors include Betterment and Acorns.

3. Open a Brokerage Account

Opening a brokerage account is just as easy as opening a checking or savings account.

To open an account with a full-service broker, you can schedule an appointment to speak with an advisor in person. The advisor can help walk you through the different account options available to decide what’s best for you.

To open a brokerage account online, visit the brokerage’s website and complete the online application.

You’ll have to provide the following personal information:

  • Name
  • Social Security number
  • Driver’s license or passport information
  • Employment status
  • Contact person
  • Additional financial information, such as your bank name and account number

In addition to providing personal information, you will also need to answer questions about the type of account you want and how you plan to manage it.

4. Decide Whether To Invest In Stocks or Stock Funds

Purchasing individual stocks isn’t the only way to invest. Investors can also buy shares of mutual funds or exchange-traded funds. Funds are a great way for beginning investors to get their feet wet, because they take some of the guesswork out of building a portfolio.

Here’s a closer look at all three options:

Individual Stocks

Individual stocks give you the most control and flexibility over your portfolio. You can invest in any publicly traded company you want, and buy as few or as many shares as you want — or simply invest a few dollars in fractional shares if your budget is tight.

The benefit of investing in individual stocks is the opportunity for significant growth if the stocks you pick turn out to be winners. The downside is risk. Stock markets are volatile and unpredictable, and the information needed to make good choices can be hard to digest. That’s why you should never invest more than you can afford to lose.

Mutual Fund

A mutual fund pools money from many investors to create a portfolio of stocks and other equities. The funds are professionally managed, but you don’t need a full-service broker to buy shares in one — you can do your own trades on your broker’s trading platform or app.

There are several types of mutual fund to choose from:

  • Actively managed: The fund manager buys and sells securities with the goal of outperforming the market or a segment of the market.
  • Index fund: The fund tracks a certain benchmark index, such as the S&P 500, by investing in the securities included in the index or by investing in comparable securities to replicate the index’s returns.
  • Target-date fund: The fund invests in a selection of securities that changes as the target date approaches. The target date usually refers to a retirement date, so the mix of securities becomes more conservative as time goes on.

The primary benefit of a mutual fund is its diversity — chances are, at least some of the fund’s holdings will perform well, even during down times. However, mutual funds have management and other fees, and you can’t trade them instantly like you can stocks. Trades are executed at the end of the day, for whatever the price is at that time. The minimum investment is usually $1,000 for index funds and $3,000 for actively managed funds.

Exchange-Traded Fund

ETFs pool money from many investors just like mutual funds do, but ETFs trade like stocks. ETF prices, like stock prices, change throughout the day. You can purchase full shares, which start at just a few dollars for the lowest-priced ETFs, or fractional shares. As long as you place buy and sell orders when markets are open, your trades are executed immediately.

5. Manage and Diversify Your Portfolio for Long-Term Success

The key to success as an investor depends on your ability to lessen the risk by researching the investments that best meet your needs, diversifying your portfolio and keeping track of its performance.

Here’s how:

  • Choose a mixture of stocks, bonds and other short-term investments that match your investment goals and risk tolerance.
  • Meet with a financial advisor regularly, such as every six to 12 months, to review and evaluate your investments’ performance.
  • Rebalance your portfolio as needed by selling investments in over-weighted categories and buying investments in under-weighted categories.
  • Change your asset allocation as you get closer to retirement if you’re falling short of your financial goal.

Stock prices will rise and fall in reaction to factors you cannot control. But taking steps to manage your portfolio — either on your own or with assistance — can help you reach your financial goals.

6. Consider Your Finances Over the Long Term

Even if you seek a financial planner’s advice, you make the ultimate decisions about your investments. Avoid making rapid investment decisions without considering how they fit into your bigger plans. Here’s what you can do to get started:

  • Set a budget. Set limits for your investing budget and make it a line item on your regular budget. Remember that you should only invest money you’ve earmarked for investments, which is separate from your essential income.
  • Discuss plans with a financial advisor. A financial advisor can discuss investment options with you and help you determine what’s best for your situation.
  • Focus on long-term growth instead of short-term gains. Keeping an investment for an extended period can save you money in transaction fees and capital gains taxes. As long as you’re investing in a solid company, the investment will likely increase in value over time.

Investing In Stocks: Frequently Asked Questions

For the new investor, investing in the stock market can be an overwhelming experience. Here are some frequently asked questions tailored to new investors.
  • What should you consider before investing in stocks?
    • Before you decide to invest in stocks, it's helpful to have a basic financial education, including understanding the following broad topics:
    • • Banking and budgeting
    • • Credit and debt
    • • Income planning
    • • Risk management
    • You may want to wait until you have paid off your debt and have an emergency fund in place before investing in stocks. Using disposable income or income you've specifically dedicated for investing can help you avoid financial ruin if the stocks don't perform how you expected.
  • How much money do you need to start with stocks?
    • You can start investing with any amount of money, even if it's less than a dollar. If you can't afford a stock you want to buy, you can purchase a fractional share through many different brokerages.
  • Can you lose money if you invest in stocks?
    • Yes, you can lose money if you invest in stocks. This can happen if you sell the stock for a lower price than you paid for it. Stock prices fluctuate depending on factors like market conditions, political events and company performance. The company may also go bankrupt and liquidate assets to pay back debtors.
    • All investments including stocks carry a degree of risk. There's always a chance that you can lose the money you invested, so it's important to only invest funds you can afford to lose.
  • Can I invest in stocks myself?
    • While you can select stocks to invest in yourself, you will typically need an account with a broker to execute any trades.
  • When should you sell a stock?
    • Generally, stocks are a long-term investment, but there are times when you should consider selling them. Here are a few:
      • The stock doesn't fit your goals. When the stock no longer meets your financial needs, it may be time to let it go.
      • You find better alternatives. A change in the fundamentals of an investment can make other investment options more attractive.
      • It's time to rebalance your portfolio. Reviewing and rebalancing your portfolio ensures that your asset mix matches your risk tolerance.
      • You need a tax break. You can use an investment loss to offset capital gains in another.
  • What is the best way to invest for a beginner?
    • A great way to start investing is through your employer's 401(k) plan, if they have one. Also consider beginning with shares of a mutual fund – they're good for beginners because they're professionally managed and come with built-in diversity.
  • Can you make a living investing in stocks?
    • Yes. If your goal is to make a living investing in stocks, a good time to invest in stocks is as soon as possible. The younger you are, the more time you have to let stock prices increase before you cash in. Even so, no one expects you to know how to invest in stocks without knowledge. You'll need to learn how to invest in stocks and make money. To get started, take steps like setting an investing budget, understanding key terms and concepts like stock type orders and limits and seeking solid investment advice before diving in.

Daria Uhlig contributed to the reporting for this article.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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