How To Invest In Stocks

Investing in stocks can be a powerful way to grow your wealth over time. Whether you’re a complete novice or looking to refine your strategy, understanding the basics of stock investing is crucial. After all, there can be risks involved, and developing a sound investment strategy is no easy feat. 

In this guide, we’ll walk you through how to invest in stocks, as well as the basics of stock investing, from choosing the right brokerage to analyzing potential investments.

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How does investing in stocks work?

The stock market refers to the exchange of shares of publicly traded companies. Companies issue new stocks and securities to raise capital, and investors trade these securities on stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ. Stock market indices like the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite track the performance of a basket of stocks, representing the overall market or specific sectors.

3 ways to invest in stocks

Investors can take advantage of three main ways to invest in stocks: buying individual stocks, owning stock mutual funds, and purchasing exchange-traded funds (ETFs),

1. Buying individual stocks

Individual stock investing is all about buying shares of ownership in companies that you believe will grow and be successful over time. Stocks have historically outperformed other investments like bonds or savings accounts, although stock investing comes with the risk that you could lose some or all of the money you invested. 

And while investing has historically been reserved for only the wealthy few, it’s arguably more democratized nowadays than ever before. The beauty of stock investing is that you can get started with even a small amount of money.

The key benefits of the stock market are the potential for higher returns, the ability to diversify your investments across different companies and industries, and the convenience of being able to buy and sell shares easily. 

Unlike depositing your money in a bank or a Certificate of Deposit (CD), when you invest in the stock market, you face risk of loss. Market volatility, economic downturns, and the potential for individual companies to underperform contribute to the fact that you can lose money. When you buy stocks, the money you invest is called the prinicipal. If you buy stock for which the price goes down and you sell at a loss, you lose some or all of your principal. The key is understanding how to balance the risks and protect yourself where possible. 

2. Owning stock mutual funds

Mutual funds pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Mutual funds can work well for those who want a relatively hands-off approach to investing or who lack the time or expertise to research individual stocks. However, mutual funds are made up of stocks, and all stocks carry a risk of price drops that can cause losses for investors.

Key benefits of mutual funds include built-in diversification, professional management, and potentially lower risk compared to investing in just a few individual securities. You can easily buy into a mutual fund through your 401(k) or individual retirement account (IRA). It can be an ideal option for long-term investors willing to accept the risk of loss who are looking for a simple, diversified way to help grow their money over time.

3. Investing in stock ETFs

Exchange-traded funds (ETFs) hold a basket of investments like stocks or bonds and trade on an exchange like individual stocks. ETFs can be great for investors who want an easy, diversified way to invest in a particular market sector or index. They tend to have lower fees than actively managed mutual funds. Young investors or those with smaller accounts often like ETFs because you can buy as little as one share at a time. ETFs come with the risk that you could lose your principal if you sell when some or all of the stocks in the ETF experience price drops.

8 steps to invest in stocks

Once you’ve committed to becoming a stock investor, you can follow these steps. Use free or other educational resources to learn as you go. 

1. Outline your investment goals

Before you think about picking stocks or funds, determine your investment goals. Are you saving money for retirement or a home? Knowing what you’re investing for helps determine how much risk you’re willing to take, what type of assets you should focus on, and your ideal time horizon. 

2. Choose between short-term or long-term investing 

When it comes to investing, you’ve got two main paths to choose from — short-term trading or long-term investing. Short-term traders take advantage of the volatility of the market to attempt to earn quick profits. 

Long-term investors focus on trying to steadily grow their wealth over the years through smart investments in stocks. The gains come slower and with a risk of loss, but this strategy may potentially entail lower risk and there is also research to suggest it has been associated historically with better returns. 

3. Set a budget for your investment

Before you start investing, take a look at your budget. You don’t want to invest money you might need for bills and expenses. Review your income; fixed costs like mortgage and utilities; and minimum debt payments. Then factor in your variable spending like groceries, gas, and entertainment. What you have left over after expenses and savings contributions could be your investable cash flow. Even if it’s just $50 or $100 a month, those small amounts have the potential to add up over the years. 

4. Decide on your investing approach

You can choose from a number of approaches on your investing journey, including managing your stock trading yourself, paying a financial advisor, using a robo-advisor, or investing through your 401(k).

• Self-managed: You set up an individual brokerage account, fund it, and trade stocks yourself.
• Investment manager: You pay a human investment advisor to invest for you. 
• Robo-advisor: Algorithms trade stocks for you with allocation models. 
• Invest in your workplace 401(k): If you defer part of your paycheck into your company 401(k), you can choose from several funds with stock market holdings to invest your retirement savings.

5. Open an investment account

Several investment account types are available, including standard brokerage accounts, robo-advisor accounts, IRAs, and 401(k)s. Companies like Fidelity, E*TRADE, Charles Schwab, Robinhood, and many others offer brokerage accounts. These accounts take just a few minutes to open online, and once you have one, you can buy and sell stocks, ETFs, and mutual funds. 

You can also opt for more professional money management with a human investment or financial advisor or investment advisory firm, you’ll have an investment account with their custodian. If you’re investing for retirement, look into opening up an IRA or contributing to your company 401(k).

6. Fund your investment account

You can fund your investment account by mailing a check, sending a wire, or linking a bank for ACH transfers. These platforms may charge fees to hold or manage your money or to allow you to make stock market trades, including commissions, maintenance fees, service fees, mutual fund purchase minimums and fees, expense ratios, or subscription-based model fees.

7. Pick your stocks or funds

If you’re aiming to build your own portfolio of individual stocks, it’s important to research company financials, competitive advantages, management team, and growth potential. Avoid buying stocks based on stock tips — you need to understand what you’re investing in and why. Diversification — spreading risk over numerous sectors and companies — helps reduce but not eliminate risk. When you buy an individual stock at a certain price, you lose money if the price drops and you sell the stock.

Aim to diversify across different companies, industries, and investment types like stocks and bonds. If you come across a company that seems complicated or you can’t grasp its business model, it’s best to steer clear. Stay disciplined, diversify, and invest in what makes sense to you, remembering that there’s no guarantee you can outperform the overall market.

8. Monitor your investments regularly

After you invest, be sure to keep an eye on how those holdings are performing over time. Markets fluctuate based on news, economic conditions, and company performance. Set a calendar reminder to review your positions every month or quarter. Read up on financial news and analysis surrounding your investments. Immerse yourself in learning about stocks, sectors, and strategies to improve your trading abilities.

Best stock options for beginners

Public companies are categorized into four main types of stocks: blue chip, dividend, growth, and defensive. Here’s a brief explanation of each.

Blue chips

Blue chips tend to be large, financially secure companies with long track records of profitability and stable management. The main draw is that they typically provide more reliable returns and dividends over time, even if those gains are slower compared to higher-growth stocks. While they are not likely to give you explosive, overnight returns that growth stocks might yield, blue chips can offer a way to build long-term wealth. Even though blue chips have done well historically, past performance is not a guarantee of future returns. 

Examples of blue chip stocks include Apple (NASDAQ: AAPL), Berkshire Hathaway (NYSE: BRK.A), Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ), and American Express (NYSE: AXP).

Dividend stocks

Dividend stocks are like getting a paycheck from the companies you invest in. These companies regularly pay out a portion of their profits directly to shareholders, usually quarterly. For example, for each share you own in Coca-Cola, you receive a cash dividend payment each quarter when the board decides to pay dividends. 

Growth stocks

Growth stocks are the young guns of the investment world; these are innovative businesses aiming to disrupt their industries and capture massive market share. Investing in growth stocks is all about getting in early on the next big thing before it goes stratospheric. 

With opportunity comes risk. Rapidly growing businesses can be volatile and face competition from new upstarts nipping at their heels. There’s no guarantee their products and services will remain must-haves. For investors with a high-risk tolerance, betting on the next game-changing innovator has the potential to pay off. 

Defensive stocks

Defensive stocks are like the sensible snow boots of the investment world — they may not be the most exciting, but they could keep you warm when storms hit. These companies include the companies providing the utilities powering homes, consumer staples companies making food and household goods, and healthcare firms providing medicine and treatments. The products from these defensive businesses tend to remain in demand regardless of how well or poorly the overall economy is faring, but the stock prices for defensive stocks can still drop, causing you to lose the money you invested.

Tips for beginner stock investors

When you’re just starting out, it’s smart to take it slow. Investing in the stock market is no exception. Just because you have money doesn’t mean you should invest it all in the stock market. Being aware that you could lose the money you use to buy stocks can help guide your purchasing decisions. Here are some tips for beginner traders.

Educate yourself on the basics of stock market investing

You can find lots of free resources to help you learn how to trade stocks, and the more time you spend learning, the more confident you will feel.

Build an emergency fund before investing in stocks

Money invested in the stock market faces risks. A stock’s price could drop to zero, and you could lose all the money you invest. Be sure to have money set aside to pay your bills and cover emergencies before you invest.

Start small and gradually increase your investment

Instead of investing all your money in one stock in a one-time purchase, consider investing slowly in stocks and ETFs over time.

Understand the concept of risk and be prepared for potential losses

If you deposit $1,000 in a bank, you can be sure you’ll get your $1,000 back. If you buy $1,000 worth of stock, there’s no guarantee that you’ll get that money back. The share price could rise, and you could sell the stock for a profit. Or the price could drop and if you sell at that lower price, you will lose some or all of that $1,000. If the company goes bankrupt, you may lose it all.

Wolf of Wall Street — time to join the pack?

Investing in the stock market can be a great way to increase your financial net worth. Buying stock in one company via individual stock purchases or many companies through an ETF offers the potential to grow your investments, as long as you are aware of the fact the stock market investing is risky and comes with the potential of losing some or all of the principal funds you used to invest It’s an exciting prospect that is worth investigating to help you reach your own financial goals.

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