How to Invest in Stocks: A Beginner’s Guide

Investing is a tried-and-true way to put your money to work for you while you work to make more. Warren Buffett, a famous investor, said that investing is “giving up something you want now so you can have more of what you want later.”

If you spend your money often, you may be able to make it grow by a lot over time. That’s why it’s important to start saving as soon as you can and as soon as you have enough money saved. The stock market is also a good place to begin.

You can start whether you have saved up $1,000 or can only find $25 extra a week. Keep in mind that if you want to be financially successful, there is a lot you can and should learn about buying in stocks. But for now, read on to find out how to start the process.

KEY TAKEAWAYS

  • Investing is putting money or other resources into something with the goal of making more money or profit from it.
  • Investing is different from spending because it puts money to work so it can grow over time.
  • But there is also a chance that you will lose money when you buy.
  • The stock market is a popular way for buyers, no matter how much experience they have, to make long-term investments.
  • Beginners who want to buy stocks can get help from professional advisors, let robo-advisors choose and handle their portfolios, or buy stocks on their own.

Steps to Get Started

1. Define Your Tolerance for Risk

How willing are you to take risks (the chance that you might lose money when you invest)? There are different ways to put stocks into groups, such as large capitalization stocks, small capitalization stocks, bold growth stocks, and value stocks. They are all different in how dangerous they are. Once you know how much danger you are willing to take, you can invest in stocks that match it.

2. Decide on Your Investment Goals

You should also think about why you want to spend. Online brokers like Charles Schwab or Fidelity will ask you about your investment goals and the amount of risk you are willing to take when you open a brokerage account.

  • If you are just starting out in your job, one of your investment goals could be to make more money. If you are older, you may want to make money, grow your wealth, and keep it safe.
  • You might want to invest so you can buy a house, save for retirement, or pay for college. Over time, goals can change. Just make sure to write them down and look at them from time to time so you can keep your mind on reaching them.

3. Determine Your Investing Style

Some buyers want to manage their investments themselves, while others would rather set it and forget it. Your choice may change, but you need to choose a way to start.

  • You could handle your investments and portfolio on your own if you are sure in your knowledge and skills. You can buy in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds with traditional online brokers like the two above.
  • A broker or financial advisor with a lot of knowledge can help you choose investments, keep an eye on your portfolio, and make changes to it. This is a good choice for people who don’t know much about investing but know it’s important but want some help.
  • A robo-advisor is an automated, hands-off choice that usually costs less than working with a broker or financial advisor. Once a robo-advisor program knows your goals, how much risk you are willing to take, and other information, it trades for you automatically.

4. Choose Your Investment Account

Retirement plan at work: If your workplace offers a plan like a 401(k), you can invest in different stock and bond mutual funds and “target-date” funds. It may also give you the chance to buy stock in the company where you work.

Once you sign up for a plan, payments are made automatically at an amount you choose. Your employer may match what you put in on your account. Your payments are tax-deductible, and the money in your account grows without taxes being taken out. This is a great way to get the most out of your money without much work. It can also teach people the practice of investing regularly.

An IRA or Taxable Account at a Brokerage:

You can also start buying stocks by starting a personal retirement account (even if you already have a plan at work). Or, you can go with a standard brokerage account that charges fees. When you want to buy stocks, you usually have a lot of choices. These could include individual stocks, stock mutual funds and exchange traded funds (ETFs), and stock options.

A Robo-Advisor Account:

As was said above, this type of account takes your business goals and makes a stock portfolio for you.

5. Learn to Diversify and Reduce Risk

Diversification is a key financial idea that you should know about. In a nutshell, if you invest in a variety of assets, or “diversify,” you lower the chance that the performance of one investment will hurt the overall return of your portfolio. It’s a way of saying that you shouldn’t put all of your money in one place.

If you only have a small budget, it can be hard to mix when you buy individual stocks. For instance, you might only be able to invest in one or two companies with $1,000. This makes the risk bigger.

Mutual funds and ETFs can help with this. Both types of funds usually have a lot of stocks and other types of investments. This makes them a better choice than a single stock because they have more options.

Minimums to Open an Account

There are often minimum deposit standards at many financial institutions. In other words, your account application won’t be accepted unless you put a certain amount of money.

It pays to look around, and not just to find out the minimum amounts. See our reviews of brokers below. Some companies don’t have a minimum payment amount. Others may lower costs like trading fees and account management fees if you have a sum above a certain level. Still others may let you open an account for a certain number of trades with no fees.

The Costs to Invest in Stocks

Commissions and Fees

Economists often say, “There’s no such thing as a free lunch.” In some way, all agents have to make money off of their clients.

Most of the time, when you buy or sell stocks, your broker will charge you a fee. Trading costs range from $2 to $10 per trade. Some companies don’t charge any fees for trades, but they make up for it in other ways.

Depending on how often you trade, these fees can add up, reduce the amount of money you have to spend, and affect the return on your portfolio.

Here’s what I mean:

Let’s say you decide to use your $1,000 to buy one share of stock in each of five businesses. Using a $10 transaction fee as an example, you will have to pay $50 in selling costs, which is equal to 5% of your $1,000.

If you sold these stocks, the round trip (buying and then selling) would cost you $100, or 10% of the $1,000 you put down when you started. On their own, these costs can take a big bite out of your account amount before your investments even have a chance to pay off.

Mutual Fund Loads

Mutual funds are pools of money from investors that are handled by professionals and put into different markets.

You should be aware of the different fees they charge. The management cost ratio (MER) is one of these. The MER is the fee that investors in a mutual fund or exchange-traded fund (ETF) pay to cover the costs of running the fund.

It is based on the total amount of a fund’s assets. The MER can be anywhere between 0.5% and 2% per year. Keep in mind that the more the MER goes up, the more it affects the total return of the fund.

Loads are another name for sales charges. There are loads on the front and loads on the back. Before you buy a fund, make sure you know if it comes with a sales load. Check with your broker for a list of no-load funds and no-transaction-fee funds to avoid these fees.

If you are just starting out as an investor, you may find that the fees for mutual funds are more manageable than the charges you have to pay when you buy individual stocks. Also, you can start with a fund for less money than you would probably pay to buy individual stocks.

By the way, you can get the benefits of dollar cost averaging (DCA) by investing small amounts regularly over time in a mutual fund. This will lessen the effect of volatility.

Online Brokers

Brokers are either full-service or discount.

Full-Service Brokers

As the name suggests, full-service brokers give a full range of traditional brokerage services, such as financial advice for planning for college, retirement, an estate, and other events and opportunities in life. The higher fees they usually charge, compared to other agents, are justified by the fact that they give personalized advice. These can include a percentage of your transactions, a percentage of your funds under management, and sometimes an annual membership fee. The smallest account amount is $25,000.

Discount Brokers

Discount brokers were once rare, but now they are the rule. You can use the tools they give you to choose transactions and place orders. Some also offer “set it and forget it” robo-advisory services (see below for more information). Many of them have educational tools on their websites and mobile apps that can help investors who are just starting out.

Some companies don’t have a minimum deposit requirement or have a very low one. They may, however, have other rules and fees. Check both of these when you’re looking for a brokerage account that meets your wants for buying and selling stocks.

Compare the Best Online Brokers
Company Category   Investopedia Rating Account Minimum Basic Fee
 Fidelity Investments Best Overall, Best for Low Costs, Best for ETFs  4.8 $0  $0 for stock/ETF trades, $0 plus $0.65/contract for options trade
 TD Ameritrade  Best for Beginners and Best Mobile App  4.5 $0  $0 for stock/ETF trades, $0 plus $0.65/contract for options trade
 Tastyworks  Best for Options  3.9 $0  $0 stock/ETF trades, $1.00 to open options trades and $0 to close
 Interactive Brokers  Best for Advanced Traders and Best for International Trading  4.2 $0 $0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value

Robo-Advisors

After the financial crisis of 2008, robo-advisors, a new type of investment advisor, came into being. People often say that Jon Stein and Eli Broverman of Betterment were the first ones in the space.

Their goal was to use technology to make financial advice easier and cheaper for investors.

Since Betterment started, other companies with robo-first services have been started. Charles Schwab and other well-known online dealers have added services that are similar to what a robot would do. 58% of Americans say they will use some kind of robo-advice by 2025, according to a study by Charles Schwab.

A robo-advisor could be for you if you want a program to handle your investments, including tax-loss harvesting and rebalancing. Also, the success of index trading shows that a robo-advisor may be right for you if your goal is to build wealth over time.

Compare the Best Robo Advisors
Company Category Investopedia Rating Account Minimum  Fees 
Wealthfront Best Overall / Best Goal Planning 4.8 $500 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
Betterment Best Beginners / Best Cash Management 4.5 $0 0.25% (annual) for digital plan, 0.40% (annual) for the premium plan
Interactive Advisors Best SRI / Best Portfolio Construction 4.2 $100 to $50,000 0.08-1.5% per year, depending on advisor and portfolio chosen
M1 Finance Best Low Costs / Best Sophisticated Investors 4.2 $100 ($500 minimum for retirement accounts) 0%
Personal Capital Best Portfolio Management 4.2 $100,000 0.89% to 0.49%
Merrill Guided Investing Best Education 4.4 $1000 0.45% annually, of assets under management, assessed monthly. With advisor – 0.85% Discounts available for Bank of America Preferred Rewards participants
E*TRADE Best Mobile 3.9 $500 0.30%

Stock Market Simulators

A stock market simulator could be helpful for people who are new to trading and want to try it out without putting their own money at risk. There are many different trading simulations, some of which cost money and some of which don’t. The model on Investopedia is free to use.

Stock market simulators give users fake money to put in a portfolio of stocks, options, exchange-traded funds (ETFs), or other securities. Most of the time, these simulators keep track of how the prices of investments change. Depending on the simulator, they may also keep track of things like trade fees or dividend payments.

Investors make trades with virtual money just like they would with real money. Users of the simulator can learn about trading and see what happens when they make choices about their virtual investments in this way, without putting their own money at risk. Some simulators even let users fight against each other, which gives them another reason to invest carefully.

What Is the Difference Between a Full-Service and a Discount Broker?

Full-service brokers offer a wide range of financial services, such as advice on saving money for retirement, health care, schooling, and other things. They can also give you a lot of ways to spend your money and help you learn. They have generally been for people with a lot of money, and they often require big investments. Discount agents have much lower entry requirements, but their services tend to be simpler. Users can make their own deals with discount brokers. They also have tools to help teach.

What Are the Risks of Investing?

Investing is putting money away now to reach a financial goal in the future. Risk comes in many forms, and some asset classes and investment products are naturally much riskier than others. There is always a certain amount of risk when you buy. There is always a chance that your investment won’t grow in value over time. Because of this, one of the most important things for buyers to think about is how to handle risk so they can reach their financial goals, whether they are short-term or long-term.

How Do Commissions and Fees Work?

Most brokers charge a fee for every trade that a customer makes. Fees for each deal can reach about $10. Because commissions cost money, most buyers think it’s best to limit the number of trades they make so they don’t spend more money on fees. Some other options, like exchange-traded funds, have fees to cover the costs of managing the funds.

The Bottom Line

You can buy stocks with a relatively small amount of money if you are just starting out as a trader. You’ll need to do your research to figure out your financial goals, how much risk you’re willing to take, and the costs of buying stocks and mutual funds. You should also look into different brokers to find out what their standards are and which one might fit your needs the best.

Once you do, you’ll be in a good situation to take advantage of the many ways that stocks can help you make money over time.
Options trading comes with a lot of danger, and not all investors should do it. There is more risk with some complex options schemes. Please read Characteristics and Risks of Standardized Options before you trade options. If needed, supporting documents for any claims will be given if asked for.

There is a regulatory fee for both buying and selling options, which is called the “Options Regulatory Fee.” The fee could go up or down. For more information, visit Fidelity.com/commissions.

Also Read: Powerball Drawing Winner

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