How to Invest in Stocks [A Beginner’s Guide to Start Investing]

Investing is a way to take today’s earnings and turn them into tomorrow’s wealth. When done consistently and with discipline, anyone can learn how to invest in stocks and build a financially secure life.

The best part? Anyone can do it. Beginner investors? Absolutely. Professionals? Certainly. The stock market provides several universally accessible investment vehicles to grow your assets over time.

The stock market relies on many participants gathering to buy and sell stocks, ETFs, mutual funds and other stock-based investment options.

To begin investing in the stock market, it can be as simple as opening an online brokerage account at one of the best stock trading platforms for beginners, using robo-advisors to automate your investing and letting your contributions compound.

Just the same, you can participate in stock picking and attempt to outperform the market. You don’t need any credentials or investing experience to build substantial wealth for yourself, no matter your investing style.

Beginner investors can use the same strategies that professionals employ to find stocks poised for solid growth or even use my favorite strategy: choosing to buy and hold low-cost index funds over a long time horizon.

Getting started in stock investing doesn’t need to be an arduous affair. You can set up automatic contributions to a retirement plan each time you get paid, like through an employer-sponsored plan, IRA, or even a taxable brokerage account.

Further, what you contribute doesn’t need to be sizable if you start early enough. Micro-investing apps and robo-advisor apps cater to showing you how to start investing with small amounts of money and build a diversified portfolio to weather stock market volatility.

How to invest in stocks as a beginner requires understanding what you invest in, what it takes to succeed at investing, and how your balance will grow over time.

So let’s get started with this guide on how to invest in stocks.

How to Invest in Stocks

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Investing in stocks doesn’t require expert-level knowledge only Wall Street veterans possess. When you start investing in stocks, you might consider your overall investment goals, time horizon, risk tolerance and which online brokers will help you get to where you want to be.

And the even more good news: investing isn’t just for the wealthy or high earners, either. If you don’t have much money but know you want to open an investment account to begin investing in stocks, target somewhere without an account minimum, making getting started a breeze.

The best brokers don’t charge commissions or have account minimums. They allow access to several ways to invest money in your account and make it easy to get started with automated investing and diversification.

How Do You Want to Invest in the Stock Market?

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When you start to think about the stock market and how you’d like to invest, first ask yourself about your investment goals and risk tolerance before you open an account.

Several brokers start first by asking you to complete a questionnaire to identify your reasons for why you would like to invest.

These answers can help the broker to identify the many ways to get you on the path to accomplishing what you want through a brokerage account. The best brokerages provide advice to those who need it and the tools to invest how they wish.

Best Brokerages for Investing in Stocks

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When considering your preferred manner of stock investing, you need to consider the different types of brokers available. In the past, brokers split into two main types:

1. Full-service brokers: Brokers which provide a full range of services from assisting with an investment account, planning for retirement, helping with personal finance decisions and even executing your wishes to buy or sell a stock order.
2. Discount brokers: For many years, investing in the stock market required going through full-service brokers or your bank. Discount brokers didn’t rule the roost as they do now. These brokers allow you to get started by placing your own trades. This meant you held responsibility for knowing your risk tolerance, whether individual stocks represented the best choice for how you want to invest, and whether you wanted to buy and hold for the long-term or instead choose to trade for short-term gains.

Today, smartphones have revolutionized how we interact with money, including ways to invest and make money in the stock market. Some investors want to take an active approach, while others prefer a passive way to invest in individual stocks, ETFs or mutual funds.

Find the best stock trading app and platform for your needs by looking at the following list of brokerage account options.

 

What are Robo-Advisors?

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In the last 20 years or so, a lot has changed in the stock investment space.

In that time, we’ve seen the rise of exchange-traded funds as a competitor to mutual funds, commission-free stock trading becoming the norm rather than the exception and a new breed of investment advisor: the robo-advisor.

Robo-advisors look to provide a diversified, low-cost portfolio as a substitute to traditional financial advisors.

Betterment first cut its teeth on this investment model, starting as a small business focused on using automated investing to build diversified portfolios of stock and bond index fund holdings. Since then, apps like Charles Schwab, Acorns and others have introduced this same service.

A robo-advisor allows you to start investing in stocks without knowing anything beyond your investment goals, risk tolerance and time horizon. This simplification creates a way to invest in stocks for beginners who have little money or knowledge of markets.

Further, the robo-advisor acts without emotion and can include fantastic features like tax-loss harvesting, automated rebalancing and age-appropriate changes to your asset allocation over time.

This new type of investment app creates portfolios based on scientific research to optimize portfolio performance, often with little money needed to start and reasonable fees.

With the success of index investing, when targeting long-term growth for building wealth, a robo-advisor might help you more than other stock trading platforms.

What is Micro-Investing?

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Micro-investing apps have empowered a new generation of investors by lowering the barriers to how much money you need to start investing and at what cost.

Popularized by Acorns, other apps like Public.com and Robinhood have also enabled fractional shares investing or the ability to purchase less than a whole share of a company that might have a high per-share stock price.

These apps can act as a fun, gentle way to start investing. Many of these financial apps also round up the cost of your purchases automatically to the nearest dollar, and the rounded-up amount then gets automatically invested.

For example, if you buy a drink for $4.25, the app would set aside 75 cents and invest it according to your selections.

Although each contribution amounts to less than a dollar, if you make regular purchases with your linked debit card or credit card, over the long-term, this amount can add up and become a passive way to invest without actively remembering to designate deposits.

You can think of these apps as advanced piggy banks or banking apps for kids, teens and young adults. However, where they outperform a piggy bank is investing the money in assets that appreciate in value instead of the funds sitting there (and losing value over time).

Some apps will allow you to set specific rules. For instance, you might place a rule that every time you get fast food from your favorite restaurant, your app contributes an extra dollar to your investments. Most apps will also let you set regular or one-time contributions.

One of the top benefits of micro-saving apps comes from using a “set it and forget it” strategy. The funds keep adding up, and you don’t need to adjust to the portfolio option you choose.

How to Invest in an IRA

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An individual retirement account is an account that helps you save for retirement. There are many types of IRAs, but they all allow individuals to accumulate funds in a tax-smart manner to spend later in life during retirement.

These accounts offer tax breaks on your income taxes and let you invest your money with a financial institution such as a bank or an investment firm.

Each year, you can contribute up to the lesser of the annual limit or your earned income.

IRAs come in two primary types: traditional and Roth IRAs.

A traditional IRA is what most people think of when they hear “IRA.” This type allows you to deduct your contributions from your taxable income in the year of contribution, but any growth or interest earned within will be taxed when you make withdrawals in retirement.

A Roth IRA allows you to pay taxes upfront and see your funds grow tax-free, and you will not pay taxes on your withdrawals in retirement.

You can open a brokerage account for your IRA through a service like Webull.

This stock trading app offers Traditional and Roth IRA brokerage services with commissionless trading, fractional shares investing, and valuable stock research and analysis tools to understand the investments available.

Just the same, you can simplify your investing through Webull by only purchasing index funds like the S&P 500 to provide instant diversification to your portfolio.

Signing up is free and even comes with free stocks for opening a brokerage account.

 

How to Invest through Your Employer

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Many people save for retirement through their employers’ 401(k), 403(b) or 457 plans. These allow you to set aside a percentage of each paycheck into a retirement plan offering investment options like mutual funds or even the company’s stock.

Often, employers offer to match up to a percentage of your contributions as an added incentive to get you invested in the plan. This free money carries a 100% return, making contributions to your employer’s retirement plan a no-brainer.

If you can, consider increasing your contribution percentage as time passes. Learning to live on your current pay and contributing each annual raise can make significant strides over the long term without harming your finances in the short term.

What is an Exchange-Traded Fund (ETF)?

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An ETF is a marketable instrument that tracks an index or collection of assets. ETFs function like stocks, which you can buy and sell at any time on the market.

ETF prices fluctuate based on supply and demand, just like any security. ETFs are a type of investment that can be passive or active.

Passive ETF investments automatically go to work for you by purchasing a basket of underlying assets in an index as you invest your dollars, while active ETFs give investors options with custom management and even exposure to indexes as well.

ETFs don’t need to track stock market indices—they may also invest in specific industries or sectors. Because of the various investment options available through passive and active ETFs, holders face varying charges for having their funds managed by ETF managers.

Management, administrative, and operational costs are ordinary expenses for the fund.

What is a Mutual Fund?

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Mutual funds are an excellent way for investors to diversify their portfolios and receive the benefits of professional management. When many people put their money together and pool it, they can buy a shared portfolio of assets to achieve the fund’s objective.

A mutual fund is a collection of investments, typically stocks and bonds. Many investors come together by pooling their money to invest in this group instead of purchasing them separately or through an investment advisor, stock brokerage or other means of buying investments.

A professional team can manage these funds actively by selecting individual securities or passively as an index fund. Active funds tend to have more input from the manager, while passive ones have less reliance on managers’ decisions because the investments track an index.

Unlike ETFs, investors can select different mutual funds with unique features and operational fees.

Types of Mutual Funds

Mutual funds also come in two structures: closed-ended or open-ended.

• Closed-ended mutual funds: Closed-ended mutual funds work similarly to ETFs by issuing a fixed number of shares through an initial public offering. From there, these closed-ended fund shares trade openly on the market like stocks or ETFs.
• Open-ended mutual funds: Open-ended mutual funds differ by offering new shares to the investors who place money with the fund or redeeming them from investors who sell their shares back to the mutual fund.

Are ETFs and Mutual Funds the Best Way to Invest Your Money?

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My preferred strategy involves buying low-cost index fund ETFs or mutual funds for the long-term through brokerages that don’t charge trading commissions like M1 Finance or Public.

Index funds are the best way to invest your money if you aren’t sure how best to invest in stocks. They allow you to invest your money in the stock market without it being tough.

So, if you have little experience or confidence in your judgment, index funds through ETFs and mutual funds are great options.

It’s also advisable to hold some of the best ETFs and mutual funds for diversification purposes.

Related: 13 Best Robinhood Alternatives [US & Non-US Trading Apps]

What Is Diversification?

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Diversification is a way to invest your money in the stocks of multiple companies at once, reducing your immediate risk or exposure to any one company’s actions or profit potential.

As an example of diversification and how it can reduce uncertainty and come in alignment with your risk tolerance, consider purchasing stocks of multiple companies versus just one.

You could invest your money among the top 100 best companies in the market or choose to invest in 5 companies grabbing headlines.

The former is what I recommend as it provides you exposure across many more industries and makes for a diversified portfolio.

Limiting your concentration to only a handful of stocks and opting for a broader portfolio has less drag on your returns when one company underperforms. As a counterpoint, if one stock outperforms, your broadly-assorted portfolio will lag.

On the whole, this should converge to average annual expected returns, minimizing the volatility and hopefully orienting toward a steadier return upward in the long term.

While no returns are guaranteed and past performance isn’t a predictor of the future, with time, choosing to invest your money in stocks should perform well in a diversified portfolio.

Related: 10 Best Non-Stock Investments [Alternatives to the Stock Market]

Why Diversification is Key for Reducing Risk and Stabilizing Returns

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Picking individual stocks entails numerous risks and uncertainty for your investment portfolio.

Just to begin, by choosing to invest in just one stock, you take on diversifiable risk, or the type of risk that comes from the uncertainty tied to purchasing a single stock or industry.

As the name suggests, investors can avoid this diversifiable risk by choosing assets in a wide range of stocks, sectors and industries. Doing so will avoid the dangers associated with one specific stock or industry.

The same is valid for alternative investment options, which allow for a broader diversification into many assets instead of holding one.

For the risk-loving investor, choosing to hold a limited number of stocks or sectors can produce more significant gains than a broadly-held basket of securities. However, this added risk can torpedo an investment portfolio for the less-experienced (and even the professionals).

The Risk of Stock Picking

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Some investors find wildly successful stocks and become investing all stars, but few and far between sustain this success across multiple stock picks. As you can reason, consistently picking the best stocks isn’t an easy task.

If it were, everyone would do it. Plus, no one would crown Warren Buffett as the “Oracle of Omaha.”

It’s easy to think that an investor’s primary focus rests in surfacing the best stocks by following stock news websites or analyzing and researching stocks, but this notion presents problems.

The better view involves seeing investing outcomes as a span of probabilities.

What do I mean by that? Well, instead of thinking each stock needs to serve as a home run for your portfolio, instead, evaluate investments as based on the likelihood they will provide returns in a serious of outcome categories.

For example, how do you see the likelihood of Amazon doubling its revenues in the next five years?

• Can it happen? Why or why not?
• What private insight leads you to think this outcome is more or less probable?
• Then, how does your insight compare to that of other investors in the market?

In truth, what you really want to ask yourself is whether you know more about Amazon’s business than the millions of other investors active in the market.

Gaining an Investment Edge

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Obtaining material information not readily known by the public can affect your expectations for a stock and give you an advantage over the market.

But, many investors go a long way to establish an edge and thinking you have one when you don’t might undermine your returns.

Sometimes having humility and avoiding mistakes can lead to a better outcome. You’d be better off going with an S&P 500 index fund than choosing individual stocks you think will outperform.

Following that notion, I think intelligent investing entails minimizing mistakes instead of pursuing maximum gains. I don’t particularly appreciate taking on uncompensated risks.

What a Portfolio Needs to Succeed

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A well-performing portfolio requires a healthy balance of risk and reward as well as exposure to many different securities. I keep the following items in mind for my portfolio:

• Side-step any and all avoidable risks. Don’t take on unnecessary risks with your portfolio when you don’t have a high probability of a better outcome.
• Be cautious and highly skeptical of your conclusions and whether you feel you possess some edge. It is much more likely you don’t have one when compared to the deep pockets spending endless time and money seeking the next edge.
• Keep minimal contact with your portfolio. By making trades in and out of stocks in the hope of better returns without clear cut reasons behind these transactions frequently leads to negative consequences for your returns. Letting a robo-advisor handle the account trades removes you from the decision-making on when to buy and sell your index funds, ETFs or stocks.
• Don’t make big mistakes. While certainly a guiding force most investors should aim to achieve and likely goes without saying, you often see larger gains when doing nothing than thinking you have some edge (when you don’t) and acting upon it.

How to Start Investing in Stocks

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Investing is a way to take today’s earnings and turn them into tomorrow’s wealth. When done consistently and with discipline, anyone can learn how to invest in stocks and build a financially secure life.

It’s hard to fight the math behind investing in small amounts consistently over time. If you can start investing as little as $100 per week (or 10% of your paycheck) by your early 30s and grow these contributions over time, you’re very likely to hit the millionaire mark by retirement.

Yet, not enough people do.

Over 100 million adults in the United States don’t have an investment account, leading them toward an uncertain financial future. Many choose to deposit money into a savings account instead, hoping it earns them passive income and is there when they need it.

The interest earned in these accounts will not make a significant dent in your retirement preparation like investing can. Investing is more potent than leaving cash in a savings account.

Fortunately, you don’t have to be in that number. With a simple approach involving stocks for beginners, you can quickly get started by following these investing principles:

• keep it simple
• keep investing
• keep portfolios diversified
• commit to your financial health

Reward your efforts taken now with money that multiplies over the long term.

Related:

• How to Invest as a Teenager or Minor [Start Under 18 Years Old]
• Best Custodial Accounts: How to Start Investing for Your Child
• Investment Accounts for Kids [Custodial Brokerage Accounts]