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How to Invest in Stocks: A Guide to Getting Started

No matter how much money you have to invest or how much knowledge you have about the stock market, you can start investing at any time.

If you want to know how to invest in stocks, let me tell you it’s not as complicated as it seems. Investing is quite simple. Sure, there are things you need to know, but I’ll cover those in this article.

No matter how much money you have to invest or how much knowledge you have about the stock market, you can start investing at any time. The sooner, the better, though.

What are Stocks?

Stocks are offered by publicly traded companies and are available for purchase by investors. These companies range across various industries and sizes, from multinational conglomerates to smaller niche firms. Think of Apple, Walmart, Dollar Store, and Chipotle.

Companies issue stock to raise capital for expansion, operations, or other needs. When you buy a stock, you purchase a small piece of that company, known as a share. If the company grows and becomes more valuable, so does your share; conversely, if the company loses value, so does your investment.

How the Stock Markets Works

The stock market operates through a network of exchanges, like the New York Stock Exchange (NYSE) or Nasdaq. Companies will list their stock on an exchange through an initial public offering (IPO). Once listed, stocks are bought and sold by investors on the exchange.

Most stocks you’ll buy and sell have been listed on the exchange for years. However, you might hear of media-pumped IPOs making their stock market debut.

Benefits of Investing in Stocks

Owning stock means having a stake in a company’s future, which can be a rewarding experience beyond financial gain. However, there are financial benefits to investing in stocks, including:

  • Capital Appreciation: Over the long term, stocks have the potential for significant capital appreciation, outpacing inflation and other investments.
  • Income: Some stocks provide income through dividends, which are payments made to shareholders from the company’s profits.
  • Diversification: Investing in various stocks can help diversify your investment portfolio, reducing risk.
  • Liquidity: Stocks are generally liquid, meaning they can be quickly sold for cash.

How Stock Investors Make Money

There are two ways investors generate income:

  • Capital Gains: Investors earn money when they sell a stock for more than they paid for it. For example, if an investor buys shares in Company X at $10 per share and sells them when the stock price reaches $15, they realize a capital gain of $5 per share.
  • Dividends: Some companies distribute earnings to shareholders as dividends, providing an income stream to investors. If Company Y pays an annual dividend of $1 per share, an investor holding 100 shares would receive $100 per year in dividends.

How much do you need to start investing in stocks?

The answer depends on how much money you want to invest in stocks, and what kind of investment you want to make. With many different types of online brokerages available, you have options to invest as little as $1.


How to Start Investing in Stocks

We’re going to focus on how to invest in stocks rather than stock trading.

Although many people interchange investing with day trading, I want to make a clear distinction. With investing, the goal is long-term growth. In contrast, day trading has a shorter time horizon with traders focusing on share price changes for quick profits but that often comes with a greater risk of loss.

Step 1: Educate Yourself

Learn about different types of stocks, market sectors, and investment strategies to understand your options. I recommend the article on investing terms. This will help you become familiar with the terms.

If you’re a beginner investor, the fear of market volatility probably gives you some anxiety. It’s understandable since uncertainty affects us all, and no one wants to risk losing their money.

However, statistics show that a stock market decline of 5 to 10% usually recovers in one month. That doesn’t mean investing in the stock market is risk-free, but it sure isn’t something to avoid because of fear of uncertainty. And without risk, there is also no gain. 

It can seem overwhelming, but the truth is this: investing in stocks is easier than most think. And you have way more options to achieve your investment objectives.

Step 2: Define Your Goals

Understand your investment goals and determine why you are investing and what you hope to achieve.

AspectExplanation
Determine Your Investment GoalsClarify why you are investing and define your financial objectives. Your goals may include saving for retirement, buying a home, funding education, building wealth, or achieving financial independence.
Time HorizonConsider your investment time horizon, which is the length of time you expect to hold your investments before needing to access the funds. Short-term goals may have a horizon of a few months to a few years, while long-term goals may span decades.
Risk ToleranceAssess your risk tolerance, which is your willingness and ability to endure fluctuations in the value of your investments. Determine how much volatility you can tolerate without feeling anxious or making impulsive decisions.
Financial SituationEvaluate your current financial situation, including your income, expenses, assets, liabilities, and overall financial stability. Complete a financial checkup. Understanding your financial position can help you set realistic investment goals and develop an appropriate strategy.
Investment PreferencesIdentify your investment preferences, such as the types of assets you prefer to invest in (e.g., stocks, bonds, real estate), your preferred investment style (e.g., active trading, passive investing), and any ethical or social considerations.

The more awareness you have about your life goals and better-investing knowledge, the better you’ll be at investing in stocks. You’ll understand the difference between day trading and stock investing, and you’ll be less inclined to listen to investing gurus promoting wildly risky trades.

Step 3: Open an Investment Account

The next step is choosing an online brokerage.

What’s the difference between self-directed investing and managed investing? Self-directed investing means that you invest your money yourself. Managed Investing means that someone else invests your money for you.

You have options, from online discount brokerages to robo-advisors and investment advisors.

Option 1: Online Brokerages: Invest on your own

You can open a brokerage account (to buy and sell stocks, mutual funds, and bonds) from various brokerage firms. This isn’t as complicated as it seems. Platforms like Fidelity, E*TRADE, Robinhood, and Schwab allow you to buy and sell stocks easily.

The brokerage firm will act as an intermediary between the investments and you. Keep in mind a standard brokerage account is called a taxable brokerage account. 

You can open an account within minutes and buy shares after your deposit clears. A self-directed or DIY online brokerage lets you buy your favorite companies and set up automatic investments.

Read this to learn how to open an online brokerage account .

Option 2: Full-Service Brokers: Work with an advisor

For personalized investment advice, you can work with a full-service broker. If your finances are more complicated or you have hundreds of thousands to invest, working with a human advisor can be helpful.

Here’s the difference between online vs full service.

AspectOnline BrokerageFull-Service Broker
DefinitionOnline brokerage platforms provide a digital platform for investors to execute trades and manage their investment portfolios independently.Full-service brokers offer personalized investment advice, research, and portfolio management services, typically with higher fees and commissions.
Features– Self-directed trading
– User-friendly trading platforms
– Access to research tools
– Lower fees and commissions
– Personalized investment advice
– Tailored investment recommendations
– Comprehensive research and analysis
– Full-service support and assistance
Examples– Charles Schwab
– TD Ameritrade
– Robinhood
– Morgan Stanley Wealth Management
– Merrill Lynch
– UBS Wealth Management

Option 3: Robo-Advisors: A merged option

Don’t want to go at it alone or need a full-service broker? You can opt for robo-advisors that merge the two options.

A robo-advisor can provide investment advice based on your goals, risk tolerance, and time horizon. These automated platforms can manage a stock investment portfolio. Popular platforms include M1 Finance or Betterment.

Robo-advisor platforms manage your funds for a fee–a percentage of your account balance for the services—usually around 0.25%. They’ll do the heavy lifting for you, but that also means you don’t have that much of a say on the stocks to invest in. This option is good for investors who cannot afford to pay an investment manager or financial advisor. 

Find the best robo-advisor for you in the financial marketplace.

Step 4: Research and Select Stocks

Analyze potential investments based on your strategy, looking at financial health, industry position, and growth potential. You can buy shares of individual companies or index funds, which are a basket of stocks.

AspectSummary
Financial Health– Analyze financial statements, such as income statements, balance sheets, and cash flow statements.
– Look for indicators of profitability and positive cash flow.
– Evaluate debt levels and liquidity.
Industry Position– Assess market share, brand strength, and technological innovation.
– Consider barriers to entry and competitive advantages.
Growth Potential– Analyze historical growth rates and future growth opportunities.
– Evaluate innovation, market expansion, and product development.
– Assess management’s ability to execute growth strategies.

Should you invest in stocks or index funds?

Warren Buffett said it best that individual stock picking is not for everyone. His advice for the average person is to think like a long-term investor and choose a simpler strategy. Buffet says, “Invest in low-cost index funds.”

Some do choose to invest in stocks and others choose the simplicity of investing in index funds.

Let’s say you have $10,000 to invest and consider whether to invest in individual stocks or invest in index funds. Here’s how it will play out.

  • Individual Stocks: Decided to invest $10,000 in five different tech stocks that you believe have high growth potential. You purchased $2,000 worth of shares in each company.
  • Index Funds: Alternatively, you could invest $10,000 in a technology sector index fund, which provides exposure to a wide range of tech companies.

After a year, the stock market experiences significant volatility.

  • Individual Stocks: Two of your chosen stocks perform exceptionally well, increasing by 30% each, while two others perform moderately, increasing by 10%. However, one stock performs poorly, decreasing by 20%.
  • Index Funds: The technology sector index fund experiences an overall increase of 15% due to the combined performance of the tech companies in the index.

At the end of the year.

  • Individual Stocks: Your portfolio is now worth $11,200. You made gains on four stocks but incurred losses on one.
  • Index Funds: Your investment in the index fund is now worth $11,500, reflecting the overall performance of the technology sector.

In this example, while your individual stock picks had both high-performing and low-performing stocks, your investment in the index fund provided more consistent returns across the sector.

Step 5: Diversify Your Portfolio

Don’t put all your money in one stock or sector; spread your investments to manage risk.

Diversifying your portfolio involves spreading your investments across different companies and industries. This strategy helps manage risk because if one investment performs poorly, it may be offset by better performance in another investment.

Let’s say you have $10,000 to invest. Instead of putting all of it into one stock or sector, you diversify your portfolio. Here’s how you might allocate your investment:

  • Stock 1: $3,000 in technology stocks
  • Stock 2: $3,000 in retail stocks
  • Index Funds: $4,000 in index tracking the S&P 500

If one sector, such as technology, experiences a downturn, the impact on your overall portfolio is mitigated by the performance of other assets. For example, while your technology stocks may decline, your investments in retail or index funds might remain stable or even increase in value, helping to offset losses.

Step 6: Invest Regularly

Set up an automatic investing schedule. When you get paid, allocate a portion to your brokerage account that will be automatically used to purchase shares of companies you’ve chosen.

Consider using dollar-cost averaging, which involves investing a fixed amount regularly, regardless of market conditions. Here’s how it works.

Let’s say an investor, John, invests $100 in a particular stock monthly using dollar cost averaging (DCA). The stock’s price fluctuates each month. Here’s how his investment progressed over seven months:

MonthInvestment Amount ($)Stock Price ($)Shares Purchased
Jan$100$1010
Feb$100$128.33
Mar$100$156.67
Apr$100$119.09
May$100$137.69
Jun$100$147.14
Jul$100$166.25

At the end of seven months, John has invested a total of $700. Let’s calculate the total number of shares he has purchased and their total value:

  • Total Shares Purchased: 55.17 (rounded)
  • Average Cost per Share: Total Investment / Total Shares Purchased = $700 / 55.17 ≈ $12.67
  • Current Value of Shares: Total Shares Purchased × Current Stock Price = 55.17 × $16 ≈ $885.12

Through dollar cost averaging, John has accumulated over 55 shares of the stock with an average cost per share of approximately $12.67, and the current value of his investment is approximately $885.12, despite the fluctuations in the stock price over the seven-month period.

By following these steps, you can begin your journey to invest in stocks with a long-term approach.

Tips for Those Who Want to Buy and Sell Stocks (aka Make Trades)

  1. Start Small: Begin with a small, manageable investment to familiarize yourself with the process.
  2. Learn to Analyze Stocks: Understand basic financial metrics and what makes a stock a good investment. Familiarize yourself with the market sectors and industries.
  3. Monitor Your Investments: Keep track of your stocks’ performance and the overall market conditions.
  4. Know When to Sell: Have clear criteria for when to sell a stock, whether for taking profits or cutting losses.
  5. Diversify Your Portfolio: Don’t put all your money into a single stock or sector; spread your investments to mitigate risk.
  6. Stay Informed: Follow market news, company announcements, and economic indicators that can affect your investments.

Investing in stocks involves risks, including the loss of principal, but with careful planning and execution, buying and selling stocks can be an effective way to build wealth over time.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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