How to invest in stocks: a step-by-step guide for beginners
Investing in stocks is a great way to harness the power of growing companies to build wealth. Still, it may seem daunting for newbies to make the leap to investing in stocks despite the potential long-term gains.
But how exactly do you invest in stocks? It’s actually simple and you have several ways to do it. One of the easiest ways is to open an online brokerage account and buy stocks or equity funds. If you are not comfortable with this, you can have a professional invest the money for you, often for a reasonable fee. Either way, you can invest in stocks online and start with little money.
Here’s how to invest in stocks and how to get started even if you don’t know much about investing right now.
5 steps to investing in stocks
So you want to start investing in stocks? Here’s a five-step checklist to get you started:
- Choose how you want to invest
- Open your account
- Decide what to invest in
- Figure out how much you can invest, then buy
- Track your portfolio
1. Choose how you want to invest
Nowadays you have several options when it comes to investing, so you can really tailor your investing style to your knowledge and the time and energy you want to put into investing. You can spend as much or as little time as you want to invest.
Here is your first big decision point:
- Do you want a professional advisor to invest your money? This “do-it-yourself” option is a great choice for those who want to spend a few minutes a year worrying about investing. It is also a good choice for those with limited knowledge of investing.
- Do you want to manage your own money? This “DIY” option is a great choice for those with more knowledge or those who can spend some free time making investment decisions. If you want to select your own stocks or funds, you will need a brokerage account.
Your choice here will determine the type of account you open in the next step.
2. Open your account
So what type of account would you like to open? Here are your options:
If you want a pro to manage your money
- A human financial advisor can help you design an equity portfolio and can help you with other wealth planning endeavors, such as planning college expenses. A human advisor can typically charge around 1% of your assets per year, with a high minimum investment. A big plus: A good human advisor can help you stick to your financial plan. Here are six tips for finding the best advisor – and what to watch out for.
- A robot advisor can design an equity portfolio that matches your time horizon and risk tolerance. They are generally less expensive than a human advisor, often a quarter of the price or less. In addition, many offer planning services that can help you maximize your wealth. Bankrate’s review of the best robo-advisers can help you select the right robo-advisor for your needs.
Bankrate also offers in-depth reviews of leading robo-advisers so you can find the advisor that best meets your needs.
If you want to manage your own money
- A online broker allows you to buy stocks and many other types of investments, including bonds, exchange-traded funds (ETFs), mutual funds and more. The best brokers offer no-cost commissions on stocks as well as a ton of education and research at no additional cost, so you can improve your game quickly. Bankrate’s review of the best brokers for beginners can help you choose the right one for your needs.
Bankrate also provides in-depth reviews of leading online brokers so you can find a broker that meets your exact needs.
If you go with a robo-advisor or an online brokerage firm, you can open your account in literally a few minutes and start planning what to invest in. If you go with a human advisor, you will need to interview some candidates to find which one will work best for your needs and keep you on track.
3. Decide what to invest in
The next major step is to figure out what you want to invest in. This step can be intimidating for many newbies, but if you’ve gone with a Robot Advisor or Human Advisor, it will be easy.
Use an advisor
If you are using an advisor – human or robot – you won’t need to decide what to invest in. This is part of the value provided by these services. For example, when you open a robo-advisor, you typically answer questions about your tolerance for risk and when you need your money. Then, the robo-advisor will create your portfolio and choose the funds in which to invest. All you have to do is add the money to the account, and the robo-advisor will invest it in your wallet.
Using a brokerage
If you are using a brokerage house, you will need to select each investment and make trading decisions. You can invest in individual stocks or equity funds, among others. The best brokers offer free research to help you with this process and offer a ton of resources to help newbies.
If you manage your own portfolio, you can also decide to invest actively or passively. The main difference between the two is that you determine how long you want to invest. Passive investors tend to take a long-term perspective, while active investors trade more frequently. Research shows that passive investors tend to do much better than active investors.
So whether you are using a robo-advisor or a brokerage, you have many ways to invest.
4. Determine how much you can invest – then buy
The key to building wealth is adding more money to your account over time and letting the power of dialing work its magic. This means that you need to set aside money to invest in your monthly plans regularly. The good news is that it’s very easy to get started.
How much should you invest?
The amount you invest depends entirely on your budget and your schedule. While you can invest anything you can easily afford, experts recommend leaving your invested money for at least three years, and ideally five or more years, so that you can weather the bumps in the market.
If you can’t commit to keeping your money invested for at least three years without touching it, consider setting up an emergency fund first. An emergency fund can save you from having to exit an investment early, allowing you to weather fluctuations in the price of your stocks.
How much do you need to get started?
Most of the big online brokerage houses these days don’t have a minimum account, so you can get started with no money. But you will still need money to buy your investments. Still, you don’t need a lot. Many brokers allow you to buy fractions of stocks and ETFs. If you can’t buy a whole share, you can always buy a part of it, so you can really start with any amount.
It’s just as easy with robo-advisers. Not many people have a minimum account and all you have to do is deposit the money – the robo-advisor takes care of everything else. Set up an automatic deposit into your robo-advisor account and you will only have to think about investing once a year (at tax time).
Once you have opened your account, deposit some money and start investing.
5. Track your portfolio
You’ve created a brokerage or advisor account, so now is the time to watch your portfolio. It’s easy if you use a human advisor or a robot advisor. Your advisor will do all the heavy lifting, manage your portfolio for the long term, and keep you on the plan.
If you are managing your own portfolio, you will need to make the trading decisions. Is it time to sell a stock or a fund? Was the last quarter of your investment a signal to buy or sell more? If the market goes down, do you buy more or sell? These are tough decisions for investors, new and old. If you are actively investing, you will need to stay on top of the news to make the best decisions.
More passive investors, however, will have fewer decisions to make. With their long-term goal, they often shop on a set schedule and don’t care much about short-term moves.
Tips for new investors
Whether you’ve opened a brokerage account or an account managed by an advisor, your own behavior is a major factor in your success, probably as important as the stock or fund you buy.
Here are three important tips for beginners:
- While Hollywood describes investors as active traders, you can be successful – even beaten most investors – by using a passive buy and hold approach. One strategy: buy regularly an S&P 500 index fund containing the largest US companies and hang in there.
- It can be helpful to follow your portfolio, but be careful when the market dips. You will be tempted to sell your stocks and stray from your long-term plan, which will hurt your long-term earnings so you can feel secure today. Think long term.
- In order not to scare you, it can be useful to look at your portfolio only at specific times (for example, the first of the month) or only at tax time.
When you first start investing, the financial world can seem daunting. There is a lot to learn. The good news is, you can proceed at your own pace, develop your skills and knowledge, and then proceed when you feel comfortable and ready.
At the end of the line
The good thing about investing these days is that you have so many ways to do it on your own terms, even if you don’t know much at first. You have the option to do it yourself or have an expert do it for you. You can invest in stocks or equity funds, trade actively or invest passively. Whichever way you choose, choose the investment style that’s right for you and build your wealth.