Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other financial professional to determine what may be best for your individual needs.
When it comes to saving for retirement or making money with extra cash, it's tough to beat the stock market. Investing in stocks is something that many Americans participate in, at least for retirement, in the form of IRAs (individual retirement accounts) and 401(k)s.
But you don't have to only invest in stocks through brokerage firms or employer-sponsored account types like a 401(k). You can also invest individually in international or U.S. stocks, and often at a much lower cost than working with a broker-dealer.
That said, mastering the market takes quite a while to achieve. This article will break down how to invest in stocks for beginners.
What is stock investing?
Stock investing just refers to investing in the stock market.
Company stock is best understood as a piece of company ownership. For example, at its most high-level, if Company A has 1000 stocks, and you purchase one of those stocks on the stock market, you own 1/1000 of that company.
Why invest in stocks in the first place?
When a company is put on the stock market, each stock has a set price based on demand. However, as a company succeeds, it becomes more valuable, meaning the value of its associated stocks also increases.
For example, if Company A enters the stock market with a stock price of $10, then has an excellent fiscal quarter, the stock price might go up $12. If you purchased a stock for Company A at $10, you could then (theoretically) sell that same stock for $12 and make a $2 profit.
Of course, the reverse is also true: If you buy a stock, but the company performs poorly, or something else negative happens, the stock price could go down, forcing you to either hold onto the stock or sell it at a loss.
Successful long-term investment decisions are primarily a matter of choosing the right stocks at the correct prices, then selling them at the right time. This is much easier said than done, but that's the gist.
Furthermore, you can purchase other things besides stocks on the stock market. For example, you can invest in mutual funds (basically, groups of stocks) or exchange-traded funds/ETFs. But the broad principle for buying and selling any asset or security on the stock market is the same as described above.
Related: Why You Should Invest in Mutual Funds vs. Individual Stocks
How to invest in stocks as a beginner
Even if you don't have much experience, you can invest in stocks as a beginner and make money with the proper steps and preparation — and the correct brokerage account.
Step 1: Decide your goals
Your first step should be to decide your stock market investing goals. Most who invest in stocks have one of two goals:
- Make money in the short term.
- Make money in the long term.
In the former case, you want to do a lot of market research and invest in high-growth stocks. However, many of the best stocks for short-term profits are risky or volatile, so you can lose more money than you put in.
In addition, you should never purchase too many of the same individual stock — this leads to low diversification and the risk of suffering from market fluctuation.
In the latter case, you still need to do a lot of market research, but you'll primarily invest in low-growth, stable stocks that are unlikely to drop.
You'll most likely invest in established companies with strong, steady growth portfolios that don't increase massively year-to-year but will result in significant increases over decades. This is the kind of stock investing most people do for retirement savings.
When setting up an investment account, decide on an investment strategy by:
- Examining different investment products, such as index funds, stocks, bonds and fractional shares.
- Using an online brokerage account that offers good investment advice from robo-advisors or people. The best brokerage services will have online broker advice resources for beginners to the stock exchange like you.
- Setting clear investment objectives for your stock market adventures, including your financial goals and the types of investments you'll make.
Doing this will give you a much more robust plan for your investment portfolio.
Risk tolerance
The key to investing in stocks wisely is deciding your risk tolerance level. Stocks can be categorized in many ways, such as large capitalization stocks, aggressive growth stocks, small-cap stocks and value stocks. Each type of stock has a different risk association level.
If you have a high-risk tolerance, you'll go with riskier stocks, and the reverse is true if you have low-risk tolerance and mostly want to invest in stocks for retirement savings.
How much should you invest?
You'll also need to determine how much you should invest in the stock market. This answer is different for everyone, but in general:
- If you are young, investing a lot of money into the stock market is a good idea since you can likely afford some potential losses.
- If you are getting older, you should still invest a good amount of money, but more strategically and carefully, so you don't lose your limited investment funds before retirement.
Don't invest more in the stock market than you can afford to lose. Keep in mind that you have other investments, like your 401(k) or IRA, in addition to other things, like a savings account or holiday fund, you may need to pay for.
As your past performance experience grows, you can increase your stock funds over time.
Step 2: Choose an investment platform
Now you need to choose the right investment platform. You can invest in stocks on the stock market using a variety of investment platforms from companies like Fidelity, Vanguard, and Charles Schwab.
The investment platform you choose (or an investment app like Robinhood) allows you to pick stocks and purchase them through a broker. Stock brokers are market professionals who put in your orders to buy or sell stocks at your command without you having to be there in person.
What to look for in a good platform
You should find an investment platform that suits your needs and your budget. Try to find a platform that:
- Has a good reputation for success and customer service.
- Offers support services, like financial advisors or robo-advisors.
- Doesn't charge you any fees or high fees, such as annual fees.
Step 3: Fund your account
Once you choose the right investment platform, fund your account by linking a checking account or savings account to that platform. You'll need your bank account number and routing number information to do this.
Many stock investing platforms have a minimum amount you need to invest, like $100. But you can usually invest much more than this if you so choose.
Step 4: Do your research
At this point, you should do extensive stock market research to make the right purchases for your goals. Market research is an art in and of itself, so purchase some books or take some classes to understand how to identify potentially profitable stocks.
Investigate each stock or company you consider
When buying stocks, you should investigate every company or stock in mind. You'll have to look at a company's metrics to determine whether its stocks are good purchases.
Valuation, for instance, is essential when picking stocks. The valuation includes company profitability, earnings growth prospects, the quality of company management, and many other factors. Furthermore, remember that stock price can differ from the asset's intrinsic value.
Generally, a stock is a good purchase if:
- The company attached to it has had good growth over the last few quarters.
- Has good leadership.
- Has a good market position (i.e., its products are profitable and not offered by someone else to the same people).
Consider asset allocation
Then there's asset allocation, which describes how your portfolio is divided between different stocks and assets. Generally, as you get older, you'll want to have fewer stock assets because their value can dip or rise unpredictably. Instead, you want to invest more of your money (or allocate more of your support) into things like bonds and high-yield CDs.
If you are young, the reverse is true; you can invest in more stocks without too much risk to your long-term financial prosperity.
Step 5: Buy stocks
After carefully researching and considering your choices, you can buy stocks using your chosen platform or app. Purchasing stocks means looking at the price for a stock, putting in an order at your stock trading platform, and waiting for it to go through.
Note that most stock purchases don't happen instantaneously; they usually occur with a slight delay of a few minutes to a few hours or longer, depending on when you place the order.
Market order purchasing
When you buy a stock, you'll most often purchase it through market order buying. This means you tell your stockbroker to buy a stock as soon as possible at whatever price the stock is available. For instance, you can order a stock purchase when the market opens on a Monday — just remember that the price for that stock might be different Monday morning when the market opens compared to the price it closed on Friday evening.
Step 6: Monitor your portfolio and trade or sell as needed
Now, your job is to monitor your portfolio and trade or sell stocks as you want. Investing in stocks is an ongoing process, so be prepared to continue learning about investing and from your experiences, so you make wiser decisions and make more money in the coming years.
Related: How To Start Investing
Tips to invest in stocks successfully
If you want to get a head start on investing in stocks successfully, check out these essential tips.
Buy investments you're confident about
First, only buy investments that you are confident about. Do tons of research into a given stock or company before pulling the proverbial trigger.
It takes extra time, but your wallet will thank you when you invest in stocks with solid growth prospects that result in significant profits later down the road.
Related: How To Make Smarter Safer Investments in the Stock Market
Diversify your portfolio
It's also wise to diversify your portfolio, even at the beginning of your investment career. Diversifying your portfolio means not putting too much of your money into any single company or stock. Instead, you should try to buy stocks from many companies.
That way, if one company becomes unprofitable and the stocks for that company lose value, you won't suddenly lose all of your money on the stock market. You'll still have other stable and profitable stocks to continue drawing money from.
Market downturns happen — don't panic
From time to time, the stock market will see a significant downturn, such as a recession. It's important not to panic during these periods. If you have confidence in your stock choices, stick with them.
Panicking could result in you losing money when you don't need to. If you are patient, on the other hand, the stock market may rally, and your chosen stocks may return to their initial values or even surpass them.
Start investing early
Generally, the earlier you start investing, the better. Even if you only put a few hundred dollars into the market in your 20s, you'll still gain valuable experience and potentially make some money compared to dipping your toes into the stock market in your 30s or 40s.
Related: Is It Too Late to Start Investing?
Take profit
Last but not least, take profits when it makes sense. As you invest in stocks, it can be tempting to keep your money in the market, hoping for constant increases in stock prices. But that's never a good idea.
Instead, devise a plan for when you will sell your stocks and take a profit if they reach specific price targets. If those stocks reach the price targets, sell them and walk away with cash. You can continually reinvest some of that money later.
If your money stays in the stock market, it is always unrealized, and you don't get to spend it on anything.
Related: Everything You Need to Know About Stock Investing in a Bear Market
Summary
Above all else, remember that you'll become better at investing in stocks as you gain experience.
The most important thing to do is to keep investing with a plan and caution — as you earn money, don't hesitate to take profits to avoid losing that money later down the road.
Want to know more about investing, stocks, and related topics? Entrepreneur's other guides can help. Check them out today.
