People who are new to investing often ask “how to invest in stocks for dummies”.
For starters, stocks are an investment into publicly traded companies to gain ownership of a business. The investing goal is to share in the business profits (i.e. dividends) or capital gains (appreciation of the share price).
If you want to know how to invest in stocks, let me tell you right from the start that there is no recipe that works for everyone the same way. And that’s actually a great thing.
No matter how much money you have to invest or how much knowledge about the stock market you have, you can start investing at any time. The sooner the better though.
In this article, I will explain the basics and how to get started investing.
Investing in Stocks: The Basics
We’re going to focus on how to invest in stocks rather than stock trading. Although many people interchange investing with trading, I want to make a clear distinction. With investing, the goal is long-term growth. In contrast, 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.
1. Investing Goals
Before diving into the stock market, you want to understand your investment goals. Are you looking to invest for independence or invest for retirement? What’s your time frame? Have you assessed your risk tolerance? 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.
2. What’s Your Risk Tolerance?
If you’re a beginner investor, the fear of market volatility probably gave you some anxiety. It’s understandable since uncertainty affects us all, and no one wants to risk losing their money. But statistics show that a decline of 5 to 10% on the stock market usually recovers in one month. That doesn’t mean investing in the stock market is without risk, but it sure isn’t something to avoid because of fear of uncertainty. And without risk, there is also no gain.
3. Know What Stocks Are
When you buy stocks you basically purchase a small share in a company that’s publicly listed on the stock market. If the company does well financially over time, the shares you bought reach a higher price. As a result, your stocks are worth more than when you purchased them. You can sell at a higher price and profit.
Take, for example, Tesla. Their shares were sold at $17 apiece when they went public, and now the price is $785.49. If you look over the graphic at NASDAQ, you’ll see the movement in the market volatility. The share value goes up, down, stagnates, and waltzes between these actions. Some investors sell their shares when they reach a certain value, and some decide to keep them and sell them at a future higher price.
But that higher price is never a guarantee, nor the declines. The share price is influenced by a lot of factors, from changes in the company, it’s marketing, the success of the company’s products and services, global changes (for example, the current pandemic), and many others.
4. Know Your Investing Options
Let’s break down how to invest in stocks so you can decide how to approach your investments.
You can invest on your own.
You can open a brokerage account (to buy and sell stocks, mutual funds, and bonds) from a variety of brokerage firms. The brokerage firm will act as an intermediary between the investments and you. You can transfer the money in and out of this account, just like you do with your other accounts. You can also take your money out at any time. Keep in mind a standard brokerage account is called a taxable brokerage account.
The great news is there are many online brokerages to choose from. The majority will allow you to invest in individual stocks, exchange-traded funds (ETFs), fractional shares. Of course, investing on your own requires doing your own stock analysis and a better understanding of market conditions.
You can invest with a Robo-advisor.
Don’t want to go at it alone? A Robo-advisor can provide investment advice based on your goals, risk tolerance, and time horizon. With a Robo-advisor, they manage your funds for you for a fee–a percentage of your account balance for the services, it’s usually around 0.25%. This option is good for beginners who cannot yet afford to pay an investment manager or financial advisor.
Investing through your 401(k).
The reality is that you might already be investing and you don’t know it yet. Your employer’s 401(k) offers you the possibility to invest in some stock mutual funds, that are more diversified and more steady, which means they are also less risky. With 401(k) plans, investment options are given based on your retirement goals. You’ll often find these plans offer target-date funds. Basically, if you have 30 years to retire, your contributions are allocated based on a target date of 2051.
However, with 401(k) plans, you cannot invest in individual stocks, just mutual funds. The goal or these plans is specifically for retirement savings.
Learn how to optimize your 401(k) with Blooom.
5. Opening a brokerage account
To start investing in stocks, you’ll need a brokerage account. Regardless if you plan to invest on your own or use a Robo-advisor. But, if you plan to buy/sell stocks, you’ll need a different type of online broker.
The great news is that both online brokers or Robo-advisors allow you to open accounts with very little money and even buy fractional shares of stock. And many provide powerful tools to perform technical analysis and view stock performance.
Through an online stock brokerage, you can open an account with as little as $1 and buy/sell stocks with zero commission fees. This is a good option for investors who want to actively invest.
In contrast, Robo-advisors have minimum balance requirements but often starting at $100. This option is best for passive investors who also want some financial advice.
Learn more about the difference between online brokerage and Robo-advisors.
6. Choose Your Stocks
If you’ve decided on an active approach and trade stocks, you’re probably wondering what stocks to invest in. Stock market investing requires your due diligence. When building your stock portfolio, some experts recommend looking at your favorite companies.
However, you can also DIY and invest in mutual funds which are a collection of stocks. Instead of trying to figure out which stock, you can invest in an industry or a fund that follows an index (like the S&P 500). For most retail investors, you can invest in a type of mutual fund referred to as index funds or exchange-traded funds.
It’s important to understand this: if anyone is promising you quick riches by investing in a specific stock, be wary as volatility can cause you to lose your entire investments.
Don’t Let Your Budget Stop You
When it comes to your budget, don’t get discouraged if you don’t have a big sum to invest at the moment. Sometimes you can start investing with as little as $100 through an online brokerage account in individual stocks.
Find good and steady companies that have a share price that you can afford and dip your toes in the wonders of your first investment.
Just to be on the safe side, if you are a beginner, it’s best to start out small and grow from there while gathering more experience and knowledge along the way.
Read our list of micro-investing apps that enable you to buy your favorite stocks for $1.
Consider Your Future Perspective
Investing in the stock market is a long-term commitment or at least that’s how it should be. When you look at your investment strategy from this perspective you no longer get affected by the market’s fluctuations. Why? Because in the long-term the historical charts state you’ll most probably have an average return of 10% per year. That is besides the occasional price increase that might bring you a nicer and juicer profit when you decide to sell some of your stocks while at their peak moment.
In the end, keep in mind that the best way to understand stocks and investments is to start with research and work your way up with your first small investments.
You’ll grow and you’ll learn together with your investments while making money for a more comfortable life. To help you on your journey, check out our article on tracking your investments to make sure you stay on top and in control of your investment situation.
Is investing in stocks good for beginners?
Investing in stocks is great for beginners because you don’t need any previous experience. However, if you want to invest in stocks, you should first learn how to read financial statements. If you do not understand what the numbers mean, then you may lose money when investing in stocks. For most newbie stock investors, it’s best to focus on mutual funds which include index funds and ETFs.
Should I 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.”
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. The main difference is that when you do it yourself, you need to be careful about how much risk you take. If you want to invest in stocks, bonds, mutual funds, ETFs, etc., you should consider hiring a financial advisor who has experience in these types of investments.
How much do I 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.