How to invest in stocks? Explained for beginners

Investing in stocks is a method to increase your wealth gradually. Regularly setting aside funds for investment can lead to significant growth over time. It's crucial to start early as the longer the investment period, the better. This guide outlines the basics of stock investment, including the amount needed, stock selection, and other essentials, in 10 simple steps. Whether you have a substantial sum or a modest $25 weekly, you can commence your investment journey.

Investing in stocks in few steps

1. Establish clear investment objectives

Start by defining your financial aspirations. These could range from short-term goals like saving for a vacation to long-term aims such as securing retirement or funding education. Your objectives will vary based on your life stage and aspirations. Younger investors often prioritize growth and long-term wealth accumulation, while those nearing retirement focus more on income generation and capital preservation.

The more specific you are about your goals, the easier it becomes to determine the most effective strategies to achieve them. Here are some guidelines:

• Specify your objectives: Instead of vague goals like "save for retirement," set concrete targets like "accumulate $500,000 in my retirement fund by age 60."
• Determine your investment horizon: Assess the time you have to accomplish each goal. Different purposes will have varying timelines. Generally, longer timeframes allow for less risk and more feasible objectives.
• Assess your financial situation: Realistically evaluate how much you can allocate toward your investment goals, considering savings, income, and other financial resources.
• Prioritize your goals: Rank your goals based on importance and urgency, balancing multiple objectives like saving for a down payment, funding a wedding, or preparing for retirement.
• Adapt to life changes: Financial planning is an ongoing process. Life circumstances evolve, and so do your financial goals. Regularly review and adjust your objectives to align with changes in your life.

The initial step in any endeavor is often the most significant. It's during this phase that you establish your aspirations and envision yourself in a future where your investments in stocks, coupled with a bit of luck and the prudent investment strategies you'll learn here, pave the way for success.

2. Assess your investment capacity

Determining the amount you can invest in stocks requires a thorough and honest evaluation of your financial standing. If your funds are less than ideal, don't be discouraged. Remember, investing is a journey, and you're just getting started. It's crucial to view it as a marathon, not a sprint, with plenty of opportunities ahead. Here are some guidelines for conducting a realistic assessment of your investment capacity:

• Evaluate your income sources: Begin by examining your sources of income. Check if your employer offers investment options with tax benefits or matching contributions that can boost your investments.
• Build an emergency fund: Before diving into investments, ensure you have a stable financial base. Determine the amount you need for emergencies, typically covering several months of major expenses like mortgage or rent payments, along with other bills.
• Address high-interest debts: Prioritize paying off high-interest debts, such as credit cards and loans, before investing in stocks. Returns from stock trading are unlikely to outweigh the costs of accumulating high interest rates on outstanding debts.
• Establish a budget: Based on your financial assessment, establish a budget for investing in stocks. This amount should not jeopardize your current or future financial obligations. Decide whether you'll start with a lump sum or invest smaller amounts regularly.

Remember, investing involves risks, so only invest money you can afford to lose. Avoid putting yourself in a financially precarious situation for the sake of investing. Responsible investing is about making informed decisions and avoiding unnecessary risks.

3. Assess your risk tolerance

Understanding your tolerance for risk is fundamental in investing. Evaluate your comfort level with the uncertainties inherent in the stock market, considering factors such as your life stage, financial objectives, and ability to absorb potential losses.

Determining your risk tolerance is essential for developing an investment strategy aligned with your financial goals while ensuring peace of mind. It guides your selection of stocks for your portfolio and informs your actions during market fluctuations. Avoid being swayed into taking unnecessary risks or being overly cautious. Consider whether you prioritize stability or are open to higher risks and potential returns amid market volatility. This self-assessment lays the groundwork for your investment journey.

Stocks can be categorized based on their risk levels. Large-capitalization (large-cap) stocks, representing established, prominent companies, tend to offer stability. In contrast, small-cap stocks present greater growth potential but carry higher risks. Similarly, growth stocks promise rapid gains but entail elevated risks, whereas value stocks focus on steady, long-term growth with lower risks.

4. Determine your investment approach

Each individual has a unique financial disposition that shapes their investing style, alongside their risk tolerance. Some investors prefer an active approach, regularly monitoring their portfolios and analyzing market trends, while others opt for a passive, hands-off strategy, allowing their investments to grow steadily over time with minimal intervention. Time constraints may also influence one's investing style, as some individuals may lack the availability to actively trade stocks or keep up with market news.

Understanding your investing style is crucial for establishing a personalized investment strategy. While your approach may evolve over time, it's essential to commence with a strategy that aligns with your current preferences, even if it may evolve in the future.

Here are some general guidelines for identifying your investing style:

• DIY Investing: If you possess a strong understanding of stock markets and feel confident in managing your investments independently, DIY investing may be suitable for you. Opening an account with reputable online brokers grants you access to a wide array of investment options, enabling you to execute trades based on your research and insights.
• Working with a Financial Advisor or Broker: Individuals seeking personalized guidance and tailored investment recommendations may benefit from partnering with a financial advisor or broker. These professionals offer expertise tailored to your financial goals and life circumstances, providing insights on suitable investment options and assisting in portfolio management.

5. Choose an investment account

Once you've determined your investment goals, risk tolerance, and preferred investing style, selecting the appropriate investment account is essential. Various types of accounts offer distinct features, benefits, and limitations, catering to diverse investor needs.

Here are some common investment account options:

Retirement accounts:

• Employer Retirement Plan: Many employers offer retirement plans, such as 401(k), 403(b), or 457 plans, allowing employees to invest in stocks and other assets. Contributions are deducted from your paycheck, often with employer matching contributions, and enjoy tax advantages.
• Individual Retirement Account (IRA): IRAs provide tax benefits and investment flexibility, with options including traditional IRAs (tax-deductible contributions) and Roth IRAs (tax-free withdrawals in retirement). IRAs serve as supplemental retirement savings alongside employer-sponsored plans.

Taxable brokerage accounts

If you seek greater flexibility or have exhausted your IRA contributions, a standard taxable brokerage account offers a wide range of investment opportunities, including individual stocks, stock mutual funds, ETFs, and stock options. While lacking the tax advantages of retirement accounts, these accounts provide flexibility and have no contribution limits. You can select from various taxable brokerage accounts to align with your investment style.

• Individual Brokerage Accounts: These are single-owner accounts where the account holder retains full control over investments and assumes sole responsibility for tax implications. The basic type is a cash account, allowing securities purchases with available account funds. Margin accounts, suitable for experienced investors, permit borrowing against the account value to acquire additional stocks.
• Joint Brokerage Accounts: Shared by two or more individuals, typically spouses or partners, these accounts can be structured as cash or margin accounts. Joint tenants with rights of survivorship designate ownership transfer to surviving account holders upon the death of one party.
• Managed Accounts: Professionally managed accounts where portfolio managers make investment decisions tailored to the account holder's needs, objectives, and investment preferences.

Accounts for specialized goals

For specific investment objectives with potential tax advantages, consider specialized account types:

• Dividend Reinvestment Plan (DRIP) accounts: Some brokers offer DRIP accounts, automatically reinvesting stock dividends to purchase additional shares without commission fees.
• Education Savings Accounts (ESA): Providing tax benefits for qualified educational expenses, ESAs are advantageous for education-related investments.
• Health Savings Account (HSA): Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free, making HSAs beneficial for healthcare-related investments.
• Trust and Custody Accounts: Trust accounts are managed by trustees for the benefit of a third party according to trust agreements. Custody accounts allow minors to own stocks and assets, with a custodian overseeing the account until the minor reaches adulthood.

6. Understand the expenses associated with investing

Commissions and charges

When selecting a brokerage firm, broker fees are a crucial factor to consider, alongside reputation and alignment with your investment strategy and objectives, which we'll delve into in the next step. Traditionally, brokerage firms levied fees in the form of trade commissions, account maintenance charges, and fees for additional services such as research or financial advice. However, the landscape of brokerage fees has undergone significant changes in recent years. Here's what to keep in mind as you conduct your research:

• Trading commissions: Brokerages may impose a commission for each stock trade you execute, whether buying or selling. These fees typically range from $2 to $10 per trade. While some brokers offer commission-free trades, they may compensate for this by introducing other fees. Depending on your trading frequency, these charges can accumulate, impacting your portfolio's returns and reducing your investable funds.
• Illustration: Suppose you purchase one share of stock from five companies with a total of $1,000. Assuming a $10 transaction fee per trade, you'll incur $50 in trading expenses, equivalent to 5% of your $1,000 investment. If you decide to sell these stocks, the total round-trip cost (buying and then selling) would amount to $100, or 10% of your initial investment.
• Maintenance fees: Some brokerages impose monthly or annual charges to maintain your account. However, these fees may be waived if your account balance exceeds a specified threshold.
• Service charges: Additional fees may apply for inactive accounts or for services such as broker-assisted trades, premium research access, or margin trading (via borrowing). Most of these fees and associated services are optional.
• Subscription-based models: With Generation Z and Millennials playing a larger role in investing, financial advisors, planners, and brokers are adapting to clients accustomed to subscription-based models for various services. Instead of paying per transaction or for specific services, you may opt for a flat monthly or annual fee. Your subscription might include perks like commission-free trades, research tools access, and premium customer support.

Some platforms offer tiered subscription options, offering enhanced features or reduced margin rates at higher subscription levels. Similar to managing subscriptions for streaming services or online magazines, it's essential to assess whether you're fully utilizing the features you're paying for. If not, you may consider downgrading to a lower tier or exploring alternative brokerage options.

Account minimums

In recent years, intense competition among brokerage firms has led to a significant shift. Many online brokers have done away with account minimums, making it simpler for a broader spectrum of investors to initiate their investment journey.

This means that even if you only have a small amount of capital to invest, you can still open a brokerage account and start trading stocks. While some brokerages may still mandate substantial initial deposits to qualify as a client, the departure from very low or zero minimum requirements has democratized investing, rendering it more accessible to novice and nontraditional investors. Nonetheless, it's prudent to evaluate any minimum deposit requirements imposed by a brokerage firm. After all, it's your money, and factoring in transaction fees and maintenance expenses may lead you to conclude that maintaining a minimum balance in your account is more cost-effective in the long term.

7. Choose your broker

Brokers fall into two main categories: full-service and discount. Full-service brokers offer a wide range of financial services, including tailored advice for various financial goals like retirement planning, education planning, and estate planning. They typically cater to high-net-worth individuals and require substantial investments. On the other hand, discount brokers have lower barriers to entry and provide a more simplified set of services, allowing you to place individual trades and offering educational resources.

Full-service brokers

These brokers provide comprehensive traditional brokerage services, offering personalized advice for different life events such as college planning and retirement planning. The personalized guidance they offer justifies their higher fees, which are often based on the value of your transactions, assets under management, and sometimes an annual membership fee. Minimum account sizes can start at $25,000.

Discount brokers

These brokers provide tools for selecting investments and placing orders. Some offer robo-advisory services for a set-it-and-forget-it approach. Most provide educational materials on their websites and mobile apps, and many have no or very low minimum deposit requirements. However, they may have other fees and requirements, so it's essential to consider both as you choose the brokerage that best fits your financial situation.

Robo-advisors

For an automated investment solution, robo-advisors or automated investment platforms offer a cost-effective and straightforward approach. According to Charles Schwab, a significant portion of Americans plan to use robo-advisors by 2025. These platforms use specialized algorithms to create and manage your investment portfolio based on the information you provide about your financial goals, risk tolerance, income, and savings. Robo-advisors are low-cost, usually have minimal or no minimum balance requirements, and are designed for new and intermediate investors. However, they offer fewer trading options and lack the personalized approach of traditional financial planning. If you're interested in this option, explore our list of the Best Robo-Advisors of 2024.

8. Funding your stock account

Now that you've selected the type of account to open, it's time to fund it. Here's how to proceed:

• Choose a brokerage: Begin by selecting a brokerage firm that aligns with your investment goals, preferences, or convenience. Consider factors such as fees, available investment options, and user-friendliness of the platform.
• Pick your account type: Decide whether you want to open a cash account, where you pay for investments in full, or a margin account, which allows for borrowing to purchase securities.
• Open your account: Provide your personal information, including your Social Security number, address, employment details, and financial situation, to open your account. This typically takes around 15 minutes.
• Link your bank accounts: The most common method to fund your stock account is by linking it to your bank account. This is usually done online through the brokerage's platform, where you enter your bank account number and routing number. Many brokerages allow you to verify the link through small test transactions.
• Transfer or deposit your initial funds: Once your bank account is linked, you can transfer funds to your brokerage account. This is usually done via electronic funds transfer, which may take a few days to process. Alternatively, you can opt for wire transfers for faster funding, though these often come with additional fees. Some brokerages also accept physical checks.
• Set up periodic transfers: If you plan to invest regularly, consider setting up automatic transfers from your bank to your brokerage account.
• Start investing: Once the funds are verified in your account, you're ready to start investing. Begin by selecting stocks that align with your investment goals and strategy.

9. Selecting your stocks

Choosing the right stocks can seem daunting, especially for beginners. It's essential to focus on stocks that offer stability, a solid track record, and the potential for steady growth. Avoid the temptation to dive into risky stocks in hopes of quick gains. Long-term investing is about consistency and patience, not rapid results. Here are some types of stocks that are often considered safe bets for beginners:

• Blue-chip stocks: These are shares of large, well-established companies with a history of stable performance. Examples include companies listed in the Dow Jones Industrial Average or the S&P 500. Blue-chip stocks are typically industry leaders and provide stability during market fluctuations.
• Dividend stocks: Companies that regularly pay dividends can be attractive to beginners. Dividends provide a steady income stream, which can be reinvested to purchase more stock, increasing your investment over time.
• Growth stocks: While riskier, growth stocks offer the potential for significant returns. Beginners interested in growth stocks should focus on industries with long-term growth potential, such as technology or healthcare.
• Defensive stocks: These are stocks in industries that tend to perform well even during economic downturns, such as utilities, healthcare, and consumer goods. Investing in defensive stocks can provide stability during market volatility.
• ETFs (Exchange-Traded Funds): ETFs are traded like stocks and track various indexes or sectors. They offer a low-cost way to diversify your investment portfolio and gain exposure to a broad range of assets. ETFs often track market indexes like the S&P 500, providing instant diversification and reducing the risk associated with individual stocks.

Starting with a conservative approach, focusing on stocks or funds that offer stability and a strong track record, can build confidence and provide returns as you gain experience in investing.

10. Continue educating yourself about stock investing

Investing in stocks is an ongoing learning journey, even for seasoned investors who continuously discover new insights and strategies. As the stock market evolves, it's crucial to stay informed and periodically revisit your investment approach, starting from Step 1 to reassess your goals, available funds, and investment style. Here are some final tips:

• Read widely and regularly: Stay updated on financial news, global economic trends, industry developments, and the performance of companies in your portfolio. Be discerning about the sources you rely on, avoiding quick-fix promises and instead focusing on reputable financial publications and books that offer valuable insights into investment strategies and market fundamentals.
• Utilize stock simulators: Practice trading stocks without financial risk by using virtual money on stock simulation platforms. These tools allow you to experiment with different investment theories and strategies before implementing them with real money. Investopedia offers a free simulator that can help sharpen your skills.
• Understand diversification: As you progress in your investment journey, explore diversifying your portfolio across various asset classes to mitigate risk and enhance potential returns. Diversification beyond stocks can involve investing in bonds, real estate, and other financial instruments.

Remember, just as financial planning is an ongoing process, learning about stock investing is continuous. The more knowledge you acquire, the better equipped you'll be to make informed investment decisions and adapt to changing market conditions.

Best stocks for novice investors

For beginners navigating the complexities of the stock market, selecting the right stocks can feel like an overwhelming task. Here are some recommendations that not only cater to beginners but are also favored by many seasoned experts managing their portfolios:

Index funds: Investing in index funds has surged in popularity in recent years. These funds passively track the performance of specific market indices, such as the S&P 500. Index funds offer broad market exposure without the need for extensive research or stock-picking expertise. They are known for their simplicity and lower fees, making them an attractive option for novice investors.

Blue-chip stocks: Investing in well-established, stable companies with a history of consistent growth and dividend payments is a classic strategy. Blue-chip stocks, named after the highest-value poker chips, provide stability and potential steady returns over the long term. Examples include Apple, JP Morgan & Chase Co, Johnson & Johnson, and Coca-Cola.

Dividend aristocrats: These are companies that have consistently increased their dividends for at least 25 consecutive years. Investing in dividend aristocrats offers the potential for rising income and compound growth. Examples include ExxonMobil, Procter & Gamble Co., and Walmart.

Low-volatility Stocks: These stocks historically experience fewer price fluctuations, providing stability to portfolios. They often belong to defensive sectors like utilities, consumer staples, and healthcare. Examples include Berkshire Hathaway, Brystol-Myers Squibb Company, Duke Energy, and the Hershey Company.

Quality factor ETFs: These exchange-traded funds (ETFs) invest in companies with strong financial health indicators, such as low debt levels and consistent earnings growth. They offer exposure to stocks with solid quality characteristics, providing stability and potential for long-term growth.

While these strategies may not yield outsized growth like riskier stocks, they offer stability and the potential for steady returns over time. It's essential to remember that investing is not gambling; it requires prudence, patience, and discipline. Starting with stable stocks allows novice investors to gain experience and gradually explore riskier investments as they build their portfolios.

What is the minimum amount required to begin investing in stocks?

The required amount varies depending on the brokerage firm and the investment choices you prefer. Certain online brokerages don't impose minimum deposit requirements, enabling you to initiate investing with a modest sum. Nonetheless, the cost of individual stocks and the minimum investment for specific mutual funds or ETFs might necessitate a larger initial investment. Nevertheless, there are numerous brokerages and investment opportunities available now for individuals starting with limited funds compared to a decade or two ago.

Are stock funds suitable for novice investors

Investing in stock funds, such as mutual funds and ETFs that encompass a diversified array of stocks, serves as a wise choice for novice investors. These funds provide diversification, effectively mitigating risk by distributing investments across various stocks, and are professionally managed by fund managers. Additionally, stock funds offer beginners the opportunity to invest in a broad spectrum of stocks through a single investment, eliminating the need to select individual stocks initially. As you monitor the performance of your mutual fund or ETF investment over time, you'll also gain valuable insights into the dynamics of the stocks held within these funds, thereby enhancing your investing knowledge for future endeavors.

What are the investment risks?

Investing involves allocating resources presently to achieve future financial objectives. There are varying degrees of risk associated with different asset classes and investment instruments. There's always the chance that your investment may not appreciate over time. Hence, effectively managing risk is crucial for investors aiming to meet their financial goals, whether immediate or distant.

Do i need U.S. residency to open a brokerage account?

 Living in the U.S. isn't a requirement for opening a brokerage account. Many U.S. brokerage firms cater to international clients, although the application process and requirements may vary. Additional documentation, like proof of identity and residence, might be necessary. While there are some investment and service regulations specific to non-U.S. citizens, the overall experience is quite similar. Most major online brokers in the U.S. accommodate international clients.

How do commissions and fees operate? 

Brokers typically charge customers a commission for each trade. To minimize expenses, investors often limit their trading activity to avoid excessive fees. Certain investment types, such as exchange-traded funds (ETFs), may entail additional fees to cover management costs.

In summary, beginners can initiate their stock investments with a modest sum of money. However, it's essential to conduct thorough research to define your investment objectives, assess your risk tolerance, and understand the associated costs of investing in stocks and mutual funds. Additionally, researching various brokers and their fee structures is crucial to finding the most suitable option aligning with your investment style and goals. Once you've completed these steps, you'll be in a favorable position to leverage the potential financial rewards that stocks offer over the years to come.