Investing in stocks involves several key steps that beginners should follow to effectively enter the market. First, it is essential to set clear investment goals, determine your available capital, and assess your risk tolerance. Once these foundational aspects are established, you can open an online brokerage account, which is necessary for buying stocks or stock-based funds.
After funding your brokerage account, you can begin purchasing shares, typically starting with well-researched companies or stock funds. Understanding the purpose of stock offerings is also crucial; companies often sell shares during an initial public offering (IPO) to raise capital for growth.
Additionally, if you plan to invest in both primary and secondary markets, having a Demat account is recommended, as it holds electronic copies of your shares. Overall, a systematic approach and informed decision-making are vital for successful stock market investments.
How to invest in stocks in 7 steps
To invest in stocks, open an online brokerage account, add money to the account, and purchase stocks or stock-based funds from there. You can also invest in stocks through a robo-advisor or a financial advisor.
If you’re ready to invest in stocks yourself, this process may help you get started.
1. Decide if you want to invest on your own
There are several ways to approach stock investing. Choose the option below that best describes how hands-on you’d like to be.
Investing can be nerve-wracking! If you want to practice before you put your hard-earned cash on the line you can open a paper trading account and invest with fake money until you get the hang of it.
Keep reading. This article breaks down how to choose the right account for your needs and how to pick and manage particular investments.
You may be a good candidate for a robo-advisor, a service that invests your money for you for a small fee. Virtually all of the major brokerage firms and many independent advisors offer these services. We’ll cover investing through a robo-advisor in the next section.
This is one of the most common ways for beginners to start investing. This may be a great option for most people who have access to an employer-sponsored 401(k) because many plans offer a match. Employer matches are basically free money: If your employer offers a 4% match and you make $100,000 a year, if you contribute $4,000 to your 401(k) , so will your employer. That means you get $4,000 for free.
Choose a broker or robo-advisor
Once you know how you want to invest, you’re ready to choose your broker or robo-advisor.
If you’re investing on your own, you’ll need to figure out what broker you want to open that account with. Some brokers, like Fidelity, are famous for their many years in business and 24/7 customer support. Others, like Robinhood, are known for their easy-to-use platforms. You’ll want to evaluate brokers based on factors such as costs, investment selection, investor research, tools and customer service access. Maybe you’ll want to open a brokerage account where you already have a bank account, which can help you see all your finances in one place.
If you’re investing through a robo-advisor, you’ll have to figure out which one to work with. Similar to shopping for a broker, there are pros and cons to each. Some robo-advisors have very low fees, while others let you talk with a financial advisor for free. It’s a good idea to compare robo-advisors to see which ones offer the services you need. Most robo-advisors charge about 0.25% of your account balance.
Pick a type of investment account
Whether you’re investing on your own or through a robo-advisor, you’ll have to choose the type of investment account you want to open. There are several types of investment accounts, and it’s a good idea to figure out which account is right for you. For example, a Roth IRA comes with significant tax benefits while a standard brokerage account does not.
You’ll have to have some personal information available, including your social security number, and it will probably take around 20 minutes to open the account. With some brokerages and robo-advisors, it can take a few days to connect your bank account, so you may have to wait before you can start buying investments.
Learn the difference between investing in stocks and funds
Going the DIY route? Don’t worry. Stock investing doesn’t have to be complicated. For most people, stock market investing means choosing among these two investment types:
Stock mutual funds or exchange-traded funds
Mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs are a kind of mutual fund that tracks an index; for example, a S&P 500 fund replicates that index by buying the stock of the companies in it.
When you invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds.
Individual stocks
If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment and research.
If you go this route, remember that individual stocks will have ups and downs. If you research a company and choose to invest in it, think about why you picked that company in the first place if jitters start to set in on a down day.
Set a budget for your stock market investment
New investors often have two questions in this step of the process:
How much money do I need to start investing in stocks?
The amount of money you need to buy an individual stock depends on how expensive the shares are. (Share prices can range from just a few dollars to a few thousand dollars.) Some brokerages allow you to invest with fractional shares. Simply put, you can choose a dollar amount and invest that despite the fact that the share price might be greater than what you have (which means you can owe a fraction of a stock).
If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds often have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price — in some cases, less than $100).
How much money should I invest in stocks?
If you’re investing through funds — have we mentioned this is the preference of most financial advisors? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon.
A 30-year-old investing for retirement might have 80% of their portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. A general rule of thumb is to keep these to a small portion of your investment portfolio.
Focus on investing for the long-term
Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that’s just an average across the entire market — some years will be up, some down and individual stocks will vary in their returns.
For long-term investors, the stock market is a good investment no matter what’s happening day-to-day or year-to-year; it’s that long-term average they’re looking for.
The best thing to do after you start investing in stocks or mutual funds may be the hardest: Don’t look at them. Unless you’re trying to beat the odds and succeed at day trading, it’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day.
Best stocks for beginners
The process of picking stocks can be overwhelming, especially for beginners. After all, there are thousands of stocks listed on the major U.S. exchanges.
Stock investing is filled with intricate strategies and approaches, yet some of the most successful investors have done little more than stick with stock market basics.
That generally means using funds for the bulk of your portfolio — Warren Buffett has famously said a low-cost S&P 500 ETF is the best investment most Americans can make — and choosing individual stocks only if you believe in the company’s potential for long-term growth.
The S&P 500 is an index consisting of about 500 of the largest publicly traded companies in the U.S. Over the last 50 years, its average annual return has been more or less the same as that of the market as a whole — about 10%.
Learning how to invest in stocks can be daunting for beginners, but it’s really just a matter of figuring out which investment approach you want to use, what kind of account makes sense for you, and how much money you should put into stocks.
