Investing is something just about everyone knows they should do, and they should do early. Unfortunately, unless you went to college for a field related to finance, chances are you haven’t been taught much about the stock market and how to use it to your advantage.
With a lack of education on the subject, beginners often wait far too long to throw their hat in the ring of Wall Street.
While the market is a complex machine, actually using it is likely far simpler than you thought. With a little guidance, virtually anyone can begin investing in stocks right away. Follow the steps below to learn how to go about stock investing.
How to Start Investing in Stocks
A balanced investment portfolio usually has a large allocation to stocks. But how do you make sure the stocks you pick are winners and will help you to achieve your goals? Follow these steps to begin investing in stocks:
1. Identify Your Investing Goals
Your investment decisions should be based on your investment objectives, but many people get started buying stocks without having any goals in place. Don’t be one of them!
Setting clear, achievable, yet challenging goals will push you to stay on the path to financial stability well into your retirement. When setting investment goals, make sure to consider the time horizon of each, focusing on short-term goals like paying off credit card debt, medium-term goals like funding your children’s education, and long-term goals like retirement.
Also, make sure that your goals are achievable. If you want to save $80,000 for your child’s education fund, that’s probably not realistic to do in a year or two. Creating unrealistic goals sets you up for failure, which could sap your interest in the market in the future.
2. Choose an Investment Strategy
Your investment strategy will keep your portfolio on track while keeping emotions that can devastate your returns out of the equation. A well put together strategy will help to shield your portfolio from significant market volatility while providing access to potential profits.
When choosing your investment strategy, there are a few things you’ll want to keep in mind:
- Risk Tolerance. Everyone has a different level of comfort with risk. Some investors are highly risk tolerant while others are highly risk averse. Ask yourself how much risk you’re comfortable with before choosing a strategy.
- Active vs. Passive. Some investment strategies involving investing in individual stocks are relatively active, requiring you to keep tabs on what’s going on in the market at all times. Other strategies, like investing in index funds, are more passive. Passive strategies let you step away from the market and trust that your investments are working for you in the background.
- Do You Want to Manage Your Investments? You could decide you don’t want to manage your investment portfolio at all and instead work with a robo-advisor like Betterment or a professional financial advisor.
Now that you know what should play a role in your strategy decision, there are a few common investment strategies to choose from:
Selecting Individual Stocks
When most beginners think about investing, this is the style of investing they imagine. Investors select individual stocks they like, creating a diversified portfolio in an attempt to generate profits in the market.
These investors generally pick stocks based on a combination of the following three factors:
- Growth. These stocks have experienced a long-standing upward trend in revenue, earnings, and price. Growth investors attempt to tap into these trends to create a profit.
- Value. These stocks are trading at lower valuations than their competitors, suggesting the investor is buying them at a discount. Investors use a wide range of valuation metrics to determine how big the discount is before diving in.
- Income. These stocks are known for stable movement and the production of income through dividends. Income investors take a low-risk approach, often generating a regular paycheck in the process.
If you choose individual stocks, regardless of which you choose to invest in, it’s important to do your research. Research builds the foundation for smart investment decisions, while blindly throwing your hard-earned money into the market can be a painful mistake.
If you’re not interested in picking individual stocks, consider indexing. Indexing is the process of investing in investment products like exchange-traded funds (ETFs) or mutual funds that are designed to track the performance of a market index like the S&P 500 index.
Indexing is a great option for risk-averse investors because it offers a layer of protection through diversification. These portfolios invest in hundreds or even thousands of stocks. So if one stock falls in value, gains in others will help to pick up the slack.
Robo-advisors like Betterment and Acorns have become a popular option, especially among millennials. These platforms use the latest and greatest technology to pick your investment portfolios for you. All you need to do is contribute money to your portfolio, and the AI investment advisor will handle the rest.
Robo-advisors are best for investors who don’t have the time or understanding of the market required to manage their own investment portfolios.
There’s no shame in seeking investment advice from a financial advisor if you’re not sure where to go with your strategy. Also, it’s perfectly fine to mix multiple investment strategies if that’s what you decide will be best to help achieve your goals.
3. Decide How Much Money You Want to Invest
You don’t have to be rich to build wealth in the stock market; you just need to be willing to be diligent about making contributions. Start by deciding how much money you’re comfortable starting your investment portfolio with.
Again, you don’t have to have a ton of money. You can start with $20, $200, $2,000, or $200,000, the most important thing is getting started right away to take advantage of the power of compounding gains.
Once you’ve decided how much money you’ll start your portfolio with, it’s time to think about regular contributions. Even if you’re only adding $10 per week to your investment portfolio, you’ll be making a difference.
However, don’t limit yourself. Think about how much money you can comfortably afford to invest every time you get your paycheck, and become diligent about doing so. Many platforms even let you automate contributions so they transfer into your investment account automatically.
4. Open an Investment Account
You’ve got your goals and strategy down, and you’re ready to get started. Now, it’s time to set yourself up with a brokerage account. This is the account in which your stock investments will take place.
Brokerage firms facilitate trades in the market, and there are a ton of online brokers and platforms to choose from. Keep in mind that a broker offers a financial service, so it’s important to work with one you trust. When comparing brokers, consider the following:
- Cost. There are several low-cost brokers that offer commission-free trading. Don’t get stuck having to pay commissions on your trades — choose an investment account that offers $0 commision trades.
- Access to Fractional Shares. Especially as a beginner, proper diversification may require the ownership of fractional shares. You may not have enough money in the account to afford whole shares of some of the biggest and best companies, but that’s OK. Several brokers like Charles Schwab, Robinhood, and Fidelity offer access to fractional shares with zero trade commissions.
- Customer Service. When you have questions about your investment portfolio, you’ll want to make sure someone knowledgeable is ready and willing to answer them.
5. Choose Your Stocks and Funds
Now comes the fun part, it’s time to buy stocks! You’ll need to choose the ones you’ll start your portfolio with. Here are a few tips to help you choose the right stocks:
- Look for Long-Term Opportunities. Keep in mind, you’re a beginner and should not be trying to day trade stocks. When choosing stocks, only invest in a company or investment fund you plan on holding onto for the long haul.
- Stick to Your Strategy. Your investment strategy will protect you from accepting significant losses. Stick to it. Even if a knee-jerk reaction to some piece of news suggests you should sell when your strategy says buy, or vice versa, ignore the emotions and stick to your strategy.
- Invest In What You Know. Investing in a company requires research. You’re more likely to do adequate research when looking into a company you know.
- Invest In Industries of Interest. You’re more likely to do detailed research when investing in an industry that interests you. For example, if you’re into technology, consider starting your research with tech stocks you might want to invest in.
- Diversify Your Holdings. Diversification is the process of spreading your investments across a wide range of different stocks. This helps to ensure that if one stock or a group of stocks in your portfolio takes a hit, growth in other assets offsets some of the pain.
Once you’ve chosen your stocks, simply log into the brokerage of your choice and place a buy order. To do so, search for the stock you’re interested in buying, click “Buy,” and input how much of the stock you’d like to purchase. Once you confirm your purchase, congratulations, you’re a stockholder!
6. Monitor Your Portfolio
No investor is perfect. A stock you thought would go up will go down one day. Even the great investor Warren Buffett makes mistakes. The key is catching those mistakes in time to do something about them.
Take time to regularly monitor your portfolio. With most strategies suitable for beginners, you won’t have to check in on stock charts every hour, or even every day. However, it is best to at least peek at your portfolio once weekly to make sure no stocks you’re holding are taking a plunge.
If you find that a stock in your portfolio is experiencing significant losses, avoid irrational actions. Before selling a stock that has declined, do a bit of research to see why the stock is falling — has something fundamental about the company changed or is it a response to some external or temporary event from which it’s likely to recover?
7. Rebalance Your Portfolio Periodically
A well-balanced portfolio offers you the opportunity to generate a meaningful return while protecting you from risk through asset allocation. By mixing high-risk assets like stocks with low-risk assets like bonds, investors create a safety net should something go wrong in the market.
Over time, some assets will move at faster rates and in different directions than others, pushing the risk-reward balance in your portfolio out of line.
When this happens, you’ll either be overexposed to risk or underexposed to reward.
Correct the imbalance by regularly rebalancing your portfolio. With the most active strategies, rebalancing should take place monthly or weekly. With more passive portfolios, rebalancing quarterly or every six months will work just fine.
Investing in the stock market is a very simple process. Although there will be some research and a bit of a learning curve in the beginning, you’ll quickly find that you don’t have to be a three-piece suit on Wall Street to be successful.
The most important factors to consider when investing are your goals, your strategy, and your willingness to research opportunities. Once you get those three things down, you’ll be well on your way to stock market success.