How To Invest In Stocks: Investing For Beginners

Investing in the stock market is one of many ways to plan for your financial future and help your money grow. That said, since there’s risk involved with any investment, you want to make the best choices along the way. Luckily, the process of buying stocks is easier than you might think.

What Is Stock Market Investing?

When you buy stock, you essentially purchase a small portion of the issuing company. You may also hear the terms “equities” or “shares” used interchangeably with stocks. You can buy and sell stocks through brokerage firms or directly from the issuing company.

The goal of buying stock is to benefit from any potential increase in value in the future. For example, if you buy a share of stock for $1 today and in 20 years it’s worth $50, your profits are $49, without any additional investment. This is also referred to as your “return on investment” (ROI).

While some stocks may have high potential for a good return on your investment, it’s important to think long-term and minimize your risk along the way. Stock investments can contribute substantially to your financial stability if you’re building toward your future over a long period of time.

Stock Market Risks

Though there is potential to make a large profit over time, the stock market is considered more volatile than other types of investing. Expect many ups and downs along the way, though the idea is that when properly diversified, the stock market generally goes up over the long term The future success of your stock portfolio depends on your ability to ride the waves of the market over time. If you think you’ll have the urge to sell off your investments when the stock market inevitably dips, you may want to consider investments with less volatility.

Stock Market Investment To Get You Started

When you first start investing, you’ll likely encounter some new terms. Let’s look at some that might be less familiar to you.

• Diversification: This means spreading your investments across different types of assets (like stocks, bonds, or real estate). It can also mean investing across various industries and sectors to reduce risk. Think of it as not putting all your eggs in one basket, this way when portions of your investments dip, you have others to balance them out.
• Dividend: A dividend is a payment made by a company to its shareholders, typically in the form of cash or additional shares of stock. It's your share of the company's profits.
• Risk tolerance: This is your personal comfort level with taking risks in your investments. Knowing how much risk you're willing to handle is essential, as it guides what you’ll decide to invest in.
• Portfolio: Your investment portfolio comprises all your investments, whether stocks, bonds, or other assets. They may be spread across several accounts and brokerage firms.
• Stock market index: A stock market index, like the S&P 500, Dow Jones and Nasdaq, measures the performance of a group of stocks. It helps investors gauge how the market or a specific sector is doing.
• Bull market: A bull market is when stock prices are rising, and investor confidence is high.
• Bear market: On the other hand, a bear market is marked by falling stock prices and projections of further price decline.

How To Start Investing In Stocks: 7 Steps

Investing in stocks can be a rewarding journey toward building wealth, but starting with a clear plan is essential. In the following sections, we'll outline six straightforward steps to get into stocks and start investing.

1. Determine Your Investment Goals

It’s critical to determine your goals for the money you invest. Are you hoping to build your retirement fund for the future? Are you planning to cover a large expense, such as your child’s college tuition, with this investment? Knowing why your investing can alter your investment strategy as different types of accounts have different benefits.

2. Set An Investment Budget

Before you start investing in stocks, you’ll need to determine both the amount of money you can afford to invest and your comfort level. First, take a deep look at your budget and what you might have left over to invest the difference.

In addition to your essential expenses, you’ll also need to consider your other savings goals. If you’re building an emergency fund or contributing to a savings account to fund a specific goal, you may decide to prioritize these goals over investing.

3. Determine Your Risk Tolerance

Your risk tolerance is a measure of how well you’re able to handle rise and dips in the stock market. Investments with higher growth potential often have higher risk, where investments with lower risk will likely grow less quickly, but steadily over time. You may want to save more and invest less if you have a low risk tolerance. Consider meeting with a financial advisor before homing in on an investment strategy.

4. Choose An Investment Strategy

Your investment strategy will depend on your investment budget, risk tolerance and financial goals. Some common strategies include long-term investing, value investing and growth investing. There are also socially responsible investment options that can have positive environmental or social impacts.

Your options range from hands-on approaches like purchasing individual stocks or bonds, working with a financial advisor for personalized guidance, using robo-advisors for automated portfolio management or taking advantage of employer-offered retirement plans.

5. Open An Investment Account

After establishing your stock investment budget and strategy, it's time to open a suitable investment account. Your investment account is what holds your investments, which you’ll select later in the process. Here are a few options to consider:

• Brokerage accounts: These are investment accounts where you buy and sell stocks, bonds, mutual funds, and other securities. You usually have two main account options: full-service (with a human broker) or self-directed (where you manage the account).
• Retirement accounts: These accounts are designed for long-term savings and offer tax advantages to help you build wealth faster. Examples include 401(k)s, IRAs (traditional and Roth) and pension plans. These accounts can help you save for retirement while potentially reducing your taxable income.
• Robo-advisor accounts: If you prefer a hands-off approach, robo-advisors offer automated portfolio management based on your risk tolerance and financial goals. They are a convenient choice for those seeking a more passive investment strategy.
• Education savings accounts: These accounts, like 529 plans, are tailored for saving and investing for educational expenses, such as college tuition.

Choose the type of account that aligns with your investment objectives. Remember to research fees, minimum investment requirements and available investment options when making your selection.

6. Choose And Buy Stocks

Once you set up your investment account, it's time to select and purchase the investments that match your financial objectives. Here are some options:

Individual stocks: These are shares of a single company, representing ownership in that specific business. Investors can buy and sell individual stocks based on their research and market expectations and typically gain shareholder voting rights.

Exchange-traded funds (ETF): ETFs are like a bundle of stocks, bonds, or other assets. They trade on stock exchanges, providing diversified exposure to an industry or sector. They are known for their low fees and are a popular choice for those seeking broad market exposure.

Mutual funds: These are generally professionally managed funds that pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other assets. Mutual funds are suitable for investors seeking professional management and diversification.

Index funds: Index funds are a subset of mutual funds designed to track specific market indices (like the S&P 500) and are a popular option for beginners. They offer a simple way to invest in a broad market with lower fees than actively managed funds.

Diversification is often vital in managing risk, so consider a mix of these investment types to build a well-rounded portfolio.

7. Create A Stock Portfolio Management Plan

Developing a portfolio management plan is essential for your long-term investing success. Regularly look for portfolio diversification opportunities, make adjustments based on your changing financial goals and ensure you're on track to meet your investment objectives.

For example, as you near retirement you might alter your retirement strategy. Since you’ll have a lower risk tolerance, you may want to convert parts of your portfolio to accommodate. This proactive approach will help you adapt to your changing financial needs.

How To Get Into Stocks: FAQs

Here are some common questions that many beginners have when investing in stocks.

How much should I invest in stocks?

A common guideline is to invest what you can comfortably afford to put at risk without affecting your basic living expenses and financial security. Start with an amount you won't miss in the short term. Then consider gradually increasing your investments when possible.

How long does it take to make money from stocks?

The time it takes to make money from stocks varies greatly and depends on several factors, including the stocks you choose, market conditions and your investment strategy. The average annual stock market return is approximately 7% when annualized over any 30-year period.

However, there are no guarantees for stock returns, and it's essential to invest with a long-term perspective. Short-term gains can be unpredictable, and the key to successful stock investing is often patience and a well-thought-out strategy.

What time does the stock market open and close?

The stock market in the United States typically opens at 9:30 a.m. and closes at 4:00 p.m. Eastern Time, Monday through Friday. That includes the Nasdaq Stock Market and the New York Stock Exchange.

The Bottom Line: Know Your Goals Before You Start Investing In Stocks

Although stocks offer the potential for high investment returns, they can be volatile. Before getting started, it’s critical to set clear investment goals and a budget based on your financial situation and risk tolerance. There are numerous ways to invest in stocks, including purchasing individual stocks, ETFs, index funds or mutual funds.

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