Wondering how to invest in stocks, but don’t know where to start? You’re not alone. Investing in the stock market can be an intimidating prospect, especially if you’re just starting out. Beginner investors often think you need thousands of dollars and an economics degree to invest in stocks. But in fact, getting started doesn’t have to be expensive or complicated.
While there are plenty of nuances to learn about the stock market and dozens of strategies investors could use, you have many options for becoming an investor, no matter what your budget. With online brokerage accounts and investing options like exchange-traded funds (ETFs) and fractional shares, you can start simple and small, with $100, $10, or even $1. Then you can build out your portfolio over time to meet your unique investing goals and increase your investments as you grow your income.
In this article, we’ll cover:
- Why you should invest in stocks
- What to consider before investing
- How to invest in stocks in 6 steps
Why you should invest in stocks
Why do people invest in the stock market? Most investors have two primary reasons to grow their money and to keep ahead of inflation. While there is always risk when you invest in stocks, it comes with some appealing advantages as well:
- Return on investments: There are two main ways investors earn a return on their stock purchases: increases in stock prices and dividends. You realize a return when you sell shares for more than you purchased them, and some stocks offer dividend payments every year, regardless of changes in the stock price.
- Compounding: Compounding happens when the money you’ve earned on an investment itself earns additional interest or returns. When you use your investment gains, dividends, and interest to buy more shares, your money will compound and grow for you even if you’re not adding new money to your account. This will amplify your wealth potential by keeping that income invested instead of spending it. Try Stash’s compounding interest calculator to see how it works.
- Retirement planning: Investing is often the primary way people save for retirement. With a long timeline, tax advantaged retirement accounts, and compounding, investing can help you achieve your retirement savings goal by growing your money more than you could by keeping it in a regular savings account or hiding it under the mattress.
- Long-term financial security: With a historical average return of around 10% per year, the stock market can potentially provide earnings that outpace what you could earn in interest in a savings account over the long term. And when your stock returns keep pace with or outstrip the inflation rate, your spending power is not diminished when you cash out your investments in the future.
Things to consider before investing
Investing in stocks can be as basic or complicated as you want it to be. There are numerous investing guides and strategies to choose from, but how you invest is ultimately personal. You’ll want to match your investment strategy to your own timeline, goals, risk tolerance, and comfort. Remember, an investing strategy is only effective if it helps you reach your goals and you can stick to it.
- What are your financial goals? People invest for various short- and long-term goals, such as milestones like purchasing a house, education expenses, retirement, and achieving overall security. Your financial goals will influence your timeline, risk tolerance, and investment strategy.
- What’s your risk tolerance? Investing in stocks comes with risks. The stock market is volatile; different stocks and sectors are prone to different levels of fluctuation in stock price. So, it’s important to understand your risk profile, i.e., how comfortable you are with different levels of risk based on your age, income, and investing timeline.
- How long do you plan to invest? Your investing timeline will largely depend on your goals. How far are you from retirement? When do you want to buy that house? The earlier you start investing, the longer your time horizon. Longer time horizons allow for more aggressive investment strategies because you have time to recoup any losses from stock market fluctuations.
- Do you feel secure in your emergency fund? Building an emergency fund is an important part of your overall financial plan. When your car breaks down, your water heater leaks, or you run into other unexpected large expenses, your emergency fund allows you to cover them without having to take money out of your stock investments. That way, you don’t have to worry about needing to sell stock when the market is down or paying short-term capital gains taxes.
- Do you have any high-interest debt? If you’re investing regularly but still have high-interest debt, like credit card debt, you may be spending more on interest payments than you’re earning on investment gains. So prioritize paying down high-interest debt before focusing on your investment strategy.
- What does your budget look like? Making a budget you can stick to goes hand-in-hand with developing your investment strategy. You’ll want to ensure your monthly income covers all your expenses and set aside a portion for savings and investments. This allows you to invest regularly over time.
How to invest in stocks in 6 steps
Now that you know the why, it’s time to get into the how. These six steps will walk you through the fundamentals of how to invest in stocks, so you can get started right away:
- Choose your investing style
- Pick an investment account
- Decide how much money you’ll invest
- Choose what stocks and funds to invest in
- Create a schedule and invest regularly
- Monitor and track your portfolio
1. Decide what kind of investor you want to be
Before you start choosing specific kinds of stocks and funds for your investment portfolio, you’ll want to identify what kind of investor you are. This will help you form your strategy and identify how involved you want to be in your day-to-day investment decisions.
Consider questions like:
- Do you want to be an active or passive investor?
- How much control do you want to have over your investments?
- How comfortable are you with risk?
- How stressful will it be for you to see losses?
- How much time can you dedicate to managing your investments?
- How much guidance do you need for investing decisions?
While there are a lot of investing strategies, there are two broad investor types: the DIY investor and the set-it-and-forget-it investor.
Investment style #1: “I want to control my investments and choose what I buy.”
A DIY investor takes a hands-on role in building and managing their investment portfolio. These investors might go for investments that call for passive management, investing primarily in index funds, or go for securities that call for more active involvement by selecting individual stocks. Either way, they are most interested in having direct control of their investments.
DIY investing is perfect for investors looking to reduce fees, have direct control over their investment decisions, access more stock choices, or grow their financial confidence. If this is the right style for you, you may want to consider the following:
- Open a brokerage account: A brokerage account is a taxable investment account you use to buy and sell securities through a licensed brokerage firm. You’ll need a brokerage account to buy and sell individual stocks, bonds, mutual funds, index funds, ETFs, and more. If you’re a DIY-style investor, you can just open an account and start selecting stocks and funds to buy. If you take this approach, be sure to review any transaction fees that will be assessed for the securities you wish to buy, and understand the tax impacts of buying and selling securities as these will directly impact your investment returns over time.
- Learn more about the stock market: Even seasoned financial experts agree that understanding all the ins and outs of the stock market can be difficult. With a DIY investing approach, it may behoove you to start by brushing up on key stock market statistics to give you a baseline as you research different stocks and economic trends to guide your investing decisions.
Investment style #2: “Set it and forget it. I want a hands-off approach to investing.”
Hands-off investing can be a useful strategy for investors who are less confident in their investing knowledge and those who don’t want to devote the time to do their own research. These investors are more interested in leaning on experts to handle their investment strategy. While this style might come with higher fees and less direct control, it also provides access to more resources and less stress.
In addition to opening a brokerage account, you may want to consider a couple methods to get investing support if this is your style:
- Hire a financial advisor: A financial advisor is an expert who helps you manage your money and understand your investment options. Advisors help you select investments that align with your goals, minimize taxes, and manage your portfolio. People with a complex financial situation or those who have a large amount to invest often go this route.
- Choose a robo-advisor: Investors with more straightforward needs or who don’t want to pay a financial advisor’s fees may use a robo-advisor instead. A robo-advisor is one way investors go about automating their investing, essentially utilizing a computer program to algorithmically assemble an investment portfolio based on their needs and goals. Robo-advisors usually have lower fees, but you don’t get direct access to an actual person for investing advice.
2. Open an investment account
For the most part, you can’t purchase stocks directly on the stock market; a licensed brokerage makes trades on your behalf. Brokerages run the gamut from brick-and-mortar firms with human financial advisors to app-based online brokerages with algorithm-driven robo-advisors, to stripped-down DIY online brokerages. The type of brokerage you choose depends on your investing style.
You have a few different investment account types to choose from, with different functionality, limitations, and tax consequences.
Taxable brokerage accounts
A taxable brokerage account allows you to directly purchase various investments, including individual stocks, bonds, mutual funds and ETFs. Your brokerage might also offer options for investing in things like real estate, commodities, and cryptocurrency. You can invest as much money as you want, manage your investments yourself or rely on a financial advisor or robo-advisor, and often get started with a small amount of money. Brokerage accounts don’t offer any particular tax advantages, and you’ll generally have to pay taxes on the income you earn when it is realized.
Individual retirement accounts
If you’re investing for retirement, you may consider a tax-advantaged account like a traditional IRA or Roth IRA. IRS rules limit how much money you can contribute to an IRA each year, and you can’t withdraw from them until you’re 59½ years old without incurring a penalty. However, these accounts come with significant tax advantages. Both of these accounts are typically available as self-managed DIY accounts or as robo-advisor accounts for automated investing.
- With a traditional IRA, your tax-deductible contributions can lower your taxable income for the year, and you pay no taxes on funds while they’re invested. You’ll pay regular income tax on your money when you withdraw it.
- With a Roth IRA, your money is taxed before you contribute, and it grows tax-free while it’s invested. As long as you follow the IRS rules for qualified withdrawals, you’ll pay no taxes on your earnings upon withdrawal.
Custodial accounts (investment accounts for kids)
A custodial account is typically opened by a relative or guardian to invest money on behalf of a child. Custodial accounts generally work just like any other type of brokerage account, where you can use a DIY approach or robo-advisor, but the beneficiary cannot withdraw the money until they reach the age of majority, which varies by state. There are two types of custodial accounts: UGMA and UTMA. They are very similar: both allow you to invest in stocks, bonds, mutual funds and ETFs. They also allow for some of the investment income to be taxed at the minors tax rates (which are usually lower than the adults tax rates), however any unearned income over $2,600 (in 2024) will be taxed at the parents tax rates. Investment income is considered unearned income. The main difference is that UTMA accounts can contain more types of investments, such as real estate and artwork.
3. Choose how much you’ll invest in stocks
Everyone has different circumstances, income, and budgets to work with. Consequently, how much you should invest will vary heavily between different investors.
Generally, experts recommend you invest around 10-20% of your income if you’re saving for retirement. But the more realistic answer is to invest what you can afford. You can start buying stocks with little money thanks to fractional shares, which let you purchase a just portion of a share. Even small investments made over a long timeframe will add up, whether you have $10 or $1000 to invest right now. Take the following factors into consideration as you decide how much you should invest in stocks at first:
- Understand your financial situation. Do you have a budget? An emergency fund? Debt? What’s your monthly income, and how does it compare to your expenses? Once you understand where you are financially, you can identify how much money you can dedicate to your investments.
- Set attainable investment goals. Whether you’re building up a retirement nest egg or are aiming for a medium-term goal like buying a house, determine how much money you’ll need for each goal and how much time you have to reach it.
- Create a realistic investing plan. Then, pull it all together to decide how much money you’ll invest to start with, and the amount you’ll add each month. Remember that the longer your money is invested in the stock market, the more opportunities you have for it to grow, recover from any dips in share prices, and take advantage of compounding.
4. Choose what stocks and funds to invest in
Now that you know where you’re investing and your budget, it’s time to invest in stocks. You can invest in several ways, including individual stocks, bonds, ETFs, and mutual funds. Each comes with different pros and cons: risk versus reward, impact on diversification, costs, and level of investor involvement.
Individual stocks
Stocks, or shares, are pieces of ownership of a company. When choosing individual stocks to buy, you’ll want to do some research to identify companies you expect to do well and have increasing share value. In addition to the company’s financial health and stock price, consider the sector and industry it’s in, as some are more sensitive to economic conditions, which can lead to higher volatility. Companies list their stocks on a stock exchange, and investors purchase them via their brokerage.
| Pros of individual stocks | Cons of individual stocks |
|---|---|
| By handpicking specific companies to invest in, you’re in the driver’s seat of every investment. | Investing in one stock puts all your eggs in one basket, which can be risky. If you pick the wrong company, you might find your investment has actually lost money. |
| If you happen to pick the right company, you might find yourself cashing in your gains, and if you invest in stocks that pay dividends, you could earn passive income. | You’re required to monitor your investments and decide when is the right time to sell. This can be time consuming and difficult. |
| The stock prices of the most highly valued companies are often expensive, although buying fractional shares can make them more accessible. | |
| Volatility of individual stocks, sectors, and industries can introduce higher risk. | |
| It may be difficult and time consuming to diversify your investment across many companies if you choose to purchase individual stocks. |
Mutual funds
Instead of picking individual stocks, some investors prefer to invest in stocks through a fund. Mutual funds pool investors’ money and purchase a basket of securities, like stocks, bonds, and money market funds. Buying shares in a fund offers some built-in portfolio diversification because you’re investing in multiple securities at once. While you can buy mutual funds through many brokerage firms, you can also purchase them directly from the fund provider.
| Pros of mutual funds | Cons of mutual funds |
|---|---|
| Funds tend to create a more diversified portfolio, which can help minimize risk | Mutual funds often have a minimum required initial investment amount |
| They’re often actively managed by professionals | You’ll usually have to pay fees for fund management |
| Shares are typically fairly affordable, allowing sequential investments as small as $1 per trade. | Diversification varies; for example, a mutual fund that focuses on a single sector could leave your portfolio overly dependent on that sector’s performance |
| If stocks in the fund pay dividends, you’ll receive your payment for your dividends in a regular cadence via mutual fund distributions. | Mutual funds only allow trades once per day |
Exchange traded funds (ETFs)
Like mutual funds, ETFs pool investors’ money and purchase stocks and other securities. However, ETFs function differently than mutual funds because investors buy shares from one another rather than from a mutual fund company. And while both types of funds may be actively or passively managed, ETFs are more likely to be the latter. Many ETFs are passively-managed index funds, which buy a mix of stocks intended to match the performance of a stock index like the S&P 500. Unlike mutual funds, you’ll have to purchase shares of ETFs through your brokerage.
The pros and cons of mutual funds and ETFs are often similar, but there are a few key differences.
| Pros of ETFs | Cons of ETFs |
|---|---|
| ETFs tend to create a diversified portfolio, which can help minimize risk.
ETFs often have lower fees because they’re usually passively managed. |
Like mutual funds, the actual level of investment diversification varies.
You may be required to purchase full shares, which may increase the minimum dollar amount required to make an investment. |
| You can make trades any time during trading hours | If the fund is passively managed, there’s little involvement from a fund manager; some people see this as a downside |
| Because many ETFs disclose their holdings daily, you might have more up-to-date information compared to mutual funds, which only have to disclose holdings quarterly | Investment strategies differ among funds, and some, like leveraged ETFs, use approaches that may be riskier than others |
5. Set an investing schedule and continue to invest
Once you’ve gotten started with a brokerage account or retirement account, you can create an investing plan and schedule. Many people like to invest monthly, bi-weekly, or weekly, depending on how often they get paid. This helps you get in the habit of investing and build your portfolio over time, even if you don’t have much money to invest upfront. Automating your investments using an app or payroll deduction can help you stay on target without transferring money manually.
Investing a set amount of money at regular intervals also allows you to leverage the benefits of dollar-cost averaging, in which you automatically buy fewer shares of a stock when the prices are high and more when the prices are low. You might also participate in a dividend reinvestment program, or DRIP, so any dividends you earn are automatically invested in more securities. Both of these approaches support a passive investing strategy in which your investments can grow without a lot of hands-on management.
6. Monitor and track your portfolio
As an investor, you’ll want to keep an eye on how your portfolio is performing over time. Checking in daily may simply increase your anxiety, as stock prices fluctuate frequently, but periodic reviews can help you ensure your investing strategy stays in line with your goals. Consider setting a money date with yourself to review your progress a few times a year. Don’t panic if the value of your investments decreases sometimes; the whole idea of investing in stocks for the long term is to allow for inevitable ups and downs.
Periodically, you may want to rebalance your portfolio. Many experts suggest doing so once or twice a year or if an asset class exceeds the ceiling you’ve set. Your brokerage may do it automatically, or you might have to take a more active role. There can be tax consequences to rebalancing, so you may want to check in with a tax professional to understand your options.
Finally, it’s a good idea to rethink your investment strategy occasionally, especially when you have a major change in your life. You’ll likely find that your risk profile and investment goals change over the course of your life, and your portfolio can evolve with you.
Ready to invest in stocks?
Learning how to invest in stocks might seem a bit overwhelming at first, but getting started doesn’t have to be. With a bit of reflection, you can identify your goals, risk tolerance, and investing style. Then it’s pretty straightforward to open a brokerage account and start your journey as an investor.
Investing with Stash gives you lots of options, including fractional shares that allow you to start buying stock no matter how much money you have to invest, ETF options that help you build diversity into your portfolio automatically, and Smart Portfolios that help you find the right portfolio for your unique needs. The sooner you start investing, the more your money could grow.
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