Are you wondering about how to start investing in stocks? Maybe you’re nervous because this is new to you and it seems like a risky venture.
Investing in stocks is risky–but that’s how people make money through the stock market. It’s also why beginners should start gradually, without investing much at first.
But investing in stocks is interesting and exciting, too. So definitely go ahead and give it a try!
In this article, we’ll share some experience and strategies about how to invest in stocks.
How to Invest in Stocks: The Stock Market for Beginners
There are some basic things to understand about the stock market before you start investing–though most of what you learn will come after you’ve invested and started watching the market.
How to Make Money from Stocks: Myth vs. Reality
“They say that if you really know what you’re doing, you can earn lots of money on the stock market.”
Well, not exactly. Day trading, also known as short selling, has made for some enticing stock market success stories over the years. The reason these stories go viral or become a legend, though, is that they are so rare and fluky.
According to stock market experts, “No matter your trade experience or past success, those markets will always be risky and cause the majority of people who trade there to incur losses.”
The far better way to approach the stock market is to buy stock with the intention of holding onto it for quite a while–at least five years.
Most people who make money on the stock market–and by “make money” we mean steady, incremental amounts of money–do so by holding onto their stock shares and earning interest and dividends on the investment over time.
An excellent source of information on the realities of the stock market is the Raging Bull website, which offers training, information, and advice.
How Much Money You Need to Invest at the Start
If you’re not working with an investment advisor or a financial planner, you should start small. But you can have some fun this way, and it’s definitely a way to learn about how the stock market works.
Do you have $500 to invest? Maybe even $1,000? If you can afford one of these amounts, that’s enough to get started.
You should set the money aside at first. Maybe deposit in a brokerage account (see below), where it will gain a little interest while you’re doing research on how to build your initial portfolio.
The “Learn By Doing” Approach to Investing in Stocks
We recommend this approach for younger people with stable employment. You should not invest more money than you can afford to lose–that is, to lose completely. You probably won’t lose much, if any, but there is that possibility.
We consider learning by doing a fun and interesting way to start investing in stocks. We caution you, though: you might make a few mistakes along the way. We believe what you learn from mistakes early on will prove invaluable in the long run.
Choosing a Broker
It’s funny how the term “stockbroker” conjures up visions of men in business suits waving their arms on the Wall Street trading floor. So it comes as a surprise that the “brokers” most individuals use nowadays are actually online brokerage firms.
“While it hasn’t always been the case, the actual execution of stock trades for individual investors is most often carried out electronically by a discount brokerage firm, such as Fidelity, TD Ameritrade, E-Trade, or Charles Schwab.”
The Ascent offers a list of the Best Online Stock Brokers for Beginners in 2019 that includes these and some others.
Building the Stock Portfolio
Ideally, your stock portfolio should be–or at least become–part of a larger comprehensive financial portfolio that includes regular and retirement savings accounts, a house, short-term “emergency” cash, and other financial assets.
How to Buy Stock
It is generally advised that a beginner’s stock portfolio include mutual funds and/or index funds. Each of these types of investments includes a mix of stocks, bonds, and other securities that have been created with a good balance in mind.
You also might want to invest in some blue chip stocks. These are well-established stocks that usually pay solid quarterly dividends. They include Citigroup, Merck, Johnson & Johnson, Coca-Cola, Visa, and AT&T–among others.
However, you also should make some very small investments (not more than 10% of your start-up budget) in stocks that are considered “riskier”–and watch them very carefully to see how they fare.
We consider this a good way to see how the market fluctuates.
When selecting riskier stocks, look for new businesses, especially online businesses, that show promise or have recently had IPOs (initial public offerings). Here is an article with some examples of riskier stocks.
Since you should always research stocks before purchasing them, this will give you some practice at that as well. There will be lots of information about individual stocks on your brokerage site.
By the way, if you want to understand the U.S. stock market news more generally, you can find that quite easily online as well.
Maintaining the Account
You should have a certain amount of money automatically transferred to your brokerage account each month–maybe $200. You can invest it right away or let it accumulate. Meanwhile, identify some possible stocks for investing these funds.
Note- you shouldn’t put small amounts of money in mutual funds since the fees tend to be higher for them. Wait until you’ve accumulated several hundred dollars or invest a lump sum like a tax refund or the pay from unexpected freelance work.
Being Advised on How to Buy Stocks
If you’re an older investor, someone who prefers a “hands-off” approach to investing, or just someone who feels a little nervous about investing, you should work with an advisor. There a few ways to do this.
Robo-Advisors
This is an investment platform that uses technology to help investors make money decisions. Investors share personal information, investment goals, and risk tolerance, and the robo-advisor creates a portfolio for them and manages it.
Investment Advisors or Financial Planners
If you prefer an actual human being, choose one of these professionals.
The two roles overlap in many ways, though there are different certifications for each: Registered Investment Advisor (RIA) for one and either Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC) for the other.
These are investment professionals who help clients meet long-term financial objectives by consulting with them and analyzing their goals, risk tolerance, and life stages. They then are ready to identify suitable investments.
Even if you don’t use their services when building your stock portfolio, you probably will want to do so later in your life, especially as you approach retirement.
Conclusion
Now you’ve learned a little about how to invest in stocks.
At some point in the future, after you’ve been watching the market and making small investments for several years, you might want to begin doing some more active trading–especially if you need to sell some of your stock.
When you do, be sure to set aside some of the profits to pay capital gains taxes.
If you don’t want to, though, just keep watching and learning. Your investments will be there when you need them.
For right now, why don’t you go check your bank account to see what you can afford to invest?