Looking to build wealth and take advantage of the potential long-term gains that come with investing in stocks? You’re not alone! Although the prospect of diving into the stock market may seem intimidating, investing in stocks is actually quite simple and accessible to beginners.
To get started, one of the easiest ways is to open an online brokerage account and purchase stocks or stock funds. Don’t feel comfortable doing it alone? No problem! You can work with a professional to manage your portfolio for a reasonable fee. The best part? You can invest in stocks online and get started with just a little bit of money.
If you’re new to investing, you may be wondering: how exactly do you invest in stocks? In this article, we’ll cover the basics of how to get started in the stock market, even if you don’t know much about investing right now. So let’s dive in!
Table of Contents
1. Decide your investing approach
Investing in stocks can seem intimidating, but it doesn’t have to be. The first step is to consider what approach best suits your personality and lifestyle.
Are you someone who enjoys doing research and crunching numbers, or do you prefer a more hands-off approach? Regardless of your preference, there’s an option that can work for you.
Individual Stocks
If you have the time and desire to research and evaluate stocks regularly, buying individual stocks might be the right choice for you.
It’s possible for a patient and smart investor to beat the market over time, but this approach requires active involvement and a willingness to stay on top of things like quarterly earnings reports and mathematical calculations. If that doesn’t sound like your cup of tea, don’t worry. There are other options.
Index Funds
Investing in index funds can be an excellent option for those who prefer a more passive approach. Index funds track a stock index, like the S&P 500, and offer lower costs compared to actively managed funds.
With index funds, you’re virtually guaranteed to match the long-term performance of the underlying index. Historically, the S&P 500 has produced annualized total returns of about 10%, which can lead to substantial wealth over time.
Robo-Advisors
Robo-advisors have become increasingly popular in recent years as an easy and efficient way to invest in the stock market. A robo-advisor is a brokerage that invests your money in a portfolio of index funds based on your age, risk tolerance, and investing goals.
Many robo-advisors will also optimize your tax efficiency and make changes to your portfolio over time automatically. If you’re a busy professional without the time to learn how to analyze stocks or want a more hands-off approach, a robo-advisor could be an excellent option for you.
2. Determine how much you can invest
Investing in the stock market can be a great way to build long-term wealth, but it’s important to know where to put your money.
Money you shouldn’t invest in stocks includes your emergency fund, money for short-term expenses like tuition or vacations, and money earmarked for a down payment on a house. Stocks are too volatile for these purposes, and you don’t want to risk losing money you need in the near future.
For money that you won’t need for at least five years, you can consider investing in stocks. A good starting point for asset allocation is to subtract your age from 110 and put that percentage of your investable money into stocks, with the remainder in fixed-income investments like bonds or CDs. You can adjust this ratio based on your personal risk tolerance and investment objectives.
For example, if you’re 40 years old, you might consider putting 70% of your investable money into stocks and the other 30% into fixed-income investments. If you’re comfortable with more risk, you could shift that ratio further in favor of stocks, while if you’re more risk-averse, you might shift it more towards fixed-income investments.
Remember, investing in the stock market involves risk, but with the right strategy and a long-term perspective, it can be a powerful way to grow your wealth.
3. Open a brokerage account
If you’re new to investing in the stock market, you may be wondering how to get started. One essential step is to open a brokerage account, which will allow you to buy and sell stocks and other securities. You can check out our guide on how to open a brokerage account.
Now, let’s take a look at what you need to know.
Choosing the Right Type of Account
Before you start looking for a broker, you’ll need to decide what type of account you want. The two main options are a standard brokerage account and an individual retirement account (IRA).
If you’re just looking to invest some extra cash or want easy access to your money, a standard brokerage account is probably the way to go. However, if you’re focused on building a retirement nest egg, an IRA may be a better fit.
There are two types of IRAs: traditional and Roth. Traditional IRAs offer a tax deduction for contributions, but you’ll pay taxes on withdrawals in retirement. Roth IRAs don’t offer a tax break upfront, but withdrawals are tax-free in retirement. There are also specialized types of IRAs for self-employed individuals and small business owners.
Comparing Costs and Features
Once you know what type of account you want, it’s time to start comparing brokers. Here are some factors to consider:
- Costs: Most online brokers no longer charge trading commissions, but there may be other fees to watch out for, such as account maintenance fees or fees for transferring funds.
- Educational resources: Some brokers offer a variety of educational tools and resources that can be helpful for beginners.
- Investment research: If you’re interested in doing your own research, look for a broker that offers access to investment research reports and tools.
- Trading platform: The broker’s trading platform should be user-friendly and functional. Look for a demo version to try out before committing any money.
- Other features: Some brokers offer additional features, such as the ability to trade on foreign stock exchanges or physical branch locations for in-person support.
Opening Your Account
Once you’ve chosen a broker, opening an account is usually a quick and painless process that can be completed online. You’ll need to provide some personal information, such as your name, address, and Social Security number, as well as funding information for your account.
You can typically fund your account via EFT transfer, mailing a check, or wiring money. Once your account is funded, you can start buying and selling stocks and other securities.
Investing in the stock market can be an excellent way to build wealth over time. By opening a brokerage account, you’ll have the tools you need to get started.
4. Choose your stocks
Before you start buying stocks, it’s important to understand a few key concepts to help you make informed decisions.
Diversification is Key
One of the most important things to keep in mind is diversification. It’s a good idea to have a variety of different types of companies in your portfolio. However, don’t go overboard with diversification. Stick with businesses you understand and are comfortable with. If you’re good at evaluating a particular type of stock, it’s okay to have one industry make up a relatively large segment of your portfolio.
Avoid High-Volatility and Penny Stocks
High-volatility and penny stocks are often tempting to new investors because of their potential for high returns. However, they come with significant risks, and it’s best to avoid them until you have more experience.
Learn the Basic Metrics and Concepts
Before you dive into investing in individual stocks, take some time to get acquainted with the fundamental measures and ideas used to assess them.
Consider checking out books on stock investment, such as “How to Make Money in Stocks” by William J. O’Neil, to enhance your understanding.
Invest in Rock-Solid, Established Businesses
While flashy high-growth stocks can be tempting, it’s wise to create a solid base for your portfolio with established businesses. These stocks may not offer the same potential for rapid growth, but they typically come with less risk.
Now that we’ve covered the essentials let’s dive into some beginner-friendly stocks that you can consider for your portfolio.
Top 5 Beginner-Friendly Stocks
Microsoft (MSFT)
- Microsoft is a tech giant with a long history of success. The company has a diverse range of products and services, including Windows, Xbox, and LinkedIn. With a market capitalization of over $2 trillion, Microsoft is a stable, blue-chip stock that is perfect for beginners. For more information, check out our guide on buying Microsoft stock.
Visa (V)
- Visa is a financial services company that processes electronic payments around the world. It has a dominant market position and a strong brand name. As the world becomes more digital, Visa is poised to benefit from this trend.
Johnson & Johnson (JNJ)
- Johnson & Johnson is a healthcare company that produces medical devices, pharmaceuticals, and consumer healthcare products. The company has a strong track record of growth and pays a reliable dividend. Healthcare is a stable industry that is not as susceptible to economic downturns as other sectors. For more information, check out our guide on buying Johnson & Johnson stock.
Procter & Gamble (PG)
- Procter & Gamble is a consumer goods company that produces a wide range of products, including Tide, Pampers, and Crest. The company has a long history of success and a strong brand name. Consumer goods are a stable industry that is not as susceptible to economic downturns as other sectors.
Apple (AAPL)
- Apple is a technology company that produces a wide range of products, including iPhones, iPads, Macs, and AirPods. The company has a strong brand name and a loyal customer base. Apple has a market capitalization of over $2 trillion, making it one of the most valuable companies in the world. As technology continues to advance, Apple is well positioned to continue its success. For more information, check out our guide on buying Apple stock.
These stocks are excellent choices for beginners because they are established, financially sound, and have a track record of consistent growth. While no investment is completely risk-free, these stocks offer a good balance of potential returns and stability.
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5. Keep it Simple and Steady
If you’re looking to make money in the stock market, you might think that you need to do something extraordinary or take big risks. But as Warren Buffett, the most successful long-term investor of all time, has said, that’s not the case. The secret to his success is a simple strategy that anyone can follow.
Buy Great Businesses at Reasonable Prices
Buffett’s strategy is to buy shares of great businesses at reasonable prices. By great businesses, he means companies that have a strong competitive advantage, a history of good management, and a proven track record of profitability. By reasonable prices, he means buying when the stock is undervalued relative to the company’s intrinsic value.
Hold for the Long Term
Once you’ve bought shares in a great business at a reasonable price, the key is to hold on to those shares for as long as the business remains great (or until you need the money). This means resisting the temptation to sell when the market dips or the stock price falls.
Experience Some Volatility
Of course, there will be some volatility along the way. Stock prices can go up and down, sometimes sharply. But if you’ve bought shares in a great business at a reasonable price, those fluctuations shouldn’t matter too much in the long run.
Produce Excellent Returns
By following this simple strategy, you can produce excellent investment returns over time. You don’t need to do anything extraordinary or take big risks. Just find great businesses at reasonable prices and hold on to those shares for the long term.
