How To Invest In Stocks: A Step-by-Step Guide for Beginners

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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. But 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.

Check Out: 4 Genius Things All Wealthy People Do With Their Money

How To Invest In Stocks

Here’s how to get started with investing in stocks:

1. Decide what kind of investor you are.
2. Decide where to open a brokerage account.
3. Open a brokerage account.
4. Start early.
5. Decide whether to invest in stocks or stock funds.
6. Manage and diversify your portfolio for long-term success.
7. 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.

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 an 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, your risk tolerance and the 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, a 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, 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.

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 information
• Additional financial information, such as your bank’s name and your bank 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. Start Early

The best way to succeed as a beginning investor is simply to start early. The earlier you begin investing, the more time you have for your returns to compound — and this can be the single biggest contributor to your long-term success. 

Take, for example, the case of an investor who begins investing $300 per month at age 20 and earns a 7% annual return until age 65. At that point, the investor’s account value will be approximately $1.14 million. But if someone waited until age 30 to begin investing that $300 per month, even if they earned a 9% annual return — a significant boost — they’d still only have about $882,000. The point is that even with a portfolio that earns less money, starting early can result in a larger ultimate account value.

5. 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 funds to choose from:

• Actively managed fund: 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 that 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 or fractional shares. As long as you place buy and sell orders when markets are open, your trades are executed immediately.

Which Is the Best Option for Beginning Investors?

The truth is that most beginning investors shouldn’t consider investing significant amounts into individual stocks. As mutual funds and ETFs can provide instant diversification, particularly to a small portfolio, they are usually the best options to consider for beginning investors. As portfolios grow and investors build more knowledge, they can consider investing in individual stocks if they’re willing to put in the time and effort to research stocks that match their investment objectives and risk tolerances.

6. 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.

7. 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 and Stick To It

You have to treat your investment money the same way as you do your bills, like your mortgage, rent or utilities. Force yourself to pay this “bill” every single month. Most advisors suggest that you “pay yourself first” by putting money into your investments before you even pay your other bills. This way, you won’t get caught trying to invest whatever money is left over after you pay your bills and spend your discretionary income, which is a trap many people fall into.

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. A licensed professional can help you drill down and discover what your real investment objectives and risk tolerance are. Advisors can also provide emotionless counsel during times of market sell-offs.

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. As famed billionaire investor Warren Buffett has often said, “Our favorite holding period is forever,” meaning that once you pick the right stocks, you should sit back and let them do the work for you, rather than trying to trade in and out and time the market. 

Automate Your Investments

Investing is not a one-and-done process. Rather, it’s something you should do on a regular basis. Getting in the habit of saving 20%, 15%, 10% or even 5% of your income on a monthly basis is one of the cornerstones of long-term investment success, and the best way to do this is to automate your investments.

Not only will you be continually pumping up the value of your account, but you’ll be taking emotion out of the equation. It’s human nature to avoid investing in stocks or other investments when they are down sharply in price, but that’s the best time to pick up additional shares, when they are cheap. Automated investing helps keep you in the market and continually builds up your account value.

Daria Uhlig contributed to the reporting for this article.

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