How to invest in stocks: Best ways for beginners to get started
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Investing in stocks is a great way to build wealth by harnessing the power of growing companies. Getting started can feel daunting for many beginners looking to get into the stock market despite the potential long-term gains, but you can start buying stock in minutes.
So how exactly do you invest in stocks? It’s actually quite 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 stock funds. If you’re not comfortable with that, you can work with a professional to manage your portfolio, often for a reasonable fee. Either way, you can invest in stocks online and begin with little money.
Here’s how to invest in stocks and the basics on how to get started in the stock market even if you don’t know that much about investing right now.
Investing in stocks: 4 easy steps to get started
So you want to begin investing in stocks? Here’s a four-step checklist to help get you going:
- Choose how you want to invest
- Open an investment account
- Decide what to invest in
- Determine how much you can invest – then buy
1. Choose how you want to invest
These days you have several options when it comes to investing, so you can really match your investing style to your knowledge and how much time and energy you want to spend investing. You can spend as much or as little time as you want on investing.
Here’s your first big decision point: How will your money be managed?
- A human professional: This “do-it-for-me” option is a great choice for those who want to spend just a few minutes a year worrying about investing. It’s also a good choice for those with limited knowledge of investing.
- A robo-advisor: A robo-advisor is another solid “do-it-for-me” solution that has an automated program manage your money using the same decision process a human advisor might – but at a much lower cost. You can set up an investment plan quickly and then all you’ll need to do is deposit money, and the robo-advisor does the rest.
- Self-managed: This “do-it-yourself” option is a great choice for those with greater knowledge or those who can devote time to making investing decisions. If you want to select your own stocks or funds, you’ll need a brokerage account.
Your choice here will shape which kind of account you open in the next step.
2. Open an investment account
So which kind of account do you want to open? Here are your options:
If you want a pro to manage your money
- A human financial advisor can help you design a stock portfolio and can help with other wealth-planning moves such as planning for college expenses. A human advisor typically charges a per-hour fee or around 1 percent of your assets annually, with a high investment minimum. One big advantage: a good human advisor can help you stick to your financial plan. Here are six tips for finding the best advisor – and what you need to watch out for.
- A robo-advisor can design a stock portfolio that matches your time horizon and risk tolerance. They’re typically cheaper than a human advisor, often a quarter of the price or less. Plus, many offer planning services that can help you maximize your wealth. The best robo-advisors can handle most of your investing needs.
Bankrate offers in-depth reviews of the major robo-advisors so you can find the advisor who meets your requirements most closely.
If you want to manage your own money
- An online broker allows you to buy stock and many other kinds of investments, including bonds, exchange-traded funds (ETFs), mutual funds, options and more. The best brokers offer no-fee commissions on stocks as well as a ton of education and research at no additional cost, so you can power up your game quickly. Check out the best brokers for beginners for the top players.
Bankrate also provides in-depth reviews of the major online brokers so you can find a broker that meets your exact needs.
If you go with a robo-advisor or an online brokerage, you can have your account open in literally minutes and start investing. If you opt for a human financial advisor, you’ll need to interview some candidates to find which one will work best for your needs and keep you on track. Use Bankrate’s free financial advisor matching tool to help you find a financial advisor in your area.
3. Decide what to invest in
The next major step is figuring out what you want to invest in. This step can be daunting for many beginners, but if you’ve opted for a robo-advisor or human advisor, it’s going to be easy.
Using an advisor
If you’re using an advisor – either human or robo – you won’t need to decide what to invest in. That’s part of the value offered by these services. For example, when you open a robo-advisor, you’ll typically answer questions about your risk tolerance and when you need your money. Then the robo-advisor will create your portfolio and pick the funds to invest in. All you’ll need to do is add money to the account, and the robo-advisor will create your portfolio.
Using a brokerage
If you’re using a brokerage, you’ll have to select every investment and make trading decisions. You can invest in individual stocks or stock funds, among many other assets. The best brokers offer free research to help with this process and offer a ton of resources to aid beginners.
If you’re managing your own portfolio, you can also decide to invest actively or passively. The key difference between the two is that you determine how long you want to invest. Passive investors generally take a long-term perspective, while active investors often trade more frequently. Research shows that passive investors tend to do much better than active investors.
4. Determine how much you can invest – then buy
The key to building wealth is to add money to your account over time and let the power of compounding work its magic. That means you need to budget money for investing regularly into your monthly or weekly plans. The good news is that it’s super simple to get started.
How much should you invest?
How much you invest depends entirely on your budget and time frame. While you may invest whatever you can comfortably afford, experts recommend that you leave your money invested for at least three years, and ideally five or more, so that you can ride out any bumps in the market.
If you can’t commit to keeping your money invested for at least three years without touching it, consider building an emergency fund first. An emergency fund can keep you from having to get out of an investment early, allowing you to ride out any fluctuations in the value of your stocks.
How much do you need to start?
Most major online brokerages these days don’t have an account minimum (or the account minimums are extremely low), so you can get started with very little money. Plus, many brokers allow you to buy fractional shares of stocks and ETFs. If you can’t buy a full share, you can still buy a portion of one, so you really can get started with virtually any amount.
It’s just as easy with robo-advisors, too. Few have an account minimum and all you’ll need to do is deposit the money — the robo-advisor handles everything else. Set up an auto-deposit to your robo-advisor account and you’ll only have to think about investing once a year (at tax time).
Once you’ve opened your account, deposit money and get started investing.
How to manage your investments
You’ve established a brokerage or advisor account, so now’s the time to watch your portfolio. That’s easy if you’re using a human advisor or robo-advisor. Your advisor will do all the heavy work, managing your portfolio for the long term and keeping you to the plan.
If you’re managing your own portfolio, you’ll have to make trading decisions. Is it time to sell a stock or fund? Was your investment’s last quarter a signal to sell or buy more? If the market dips, are you buying more or selling? These are tough decisions for investors, both new and old.
If you’re investing actively, you’ll need to stay on top of the news to make the best decisions.
More passive investors will have fewer decisions to make, however. With their long-term focus, they’re often buying on a fixed regular schedule and not worrying much about short-term moves.
Tips for beginning investors
Whether you’ve opened a brokerage account or an advisor-led account, your own behavior is one of the biggest factors in your success, probably as important as what stock or fund you buy.
Here are three important tips for beginners:
- While Hollywood portrays investors as active traders, you can succeed – even beat most professional investors – by using a passive buy-and-hold approach. One strategy: Regularly buy an S&P 500 index fund containing America’s largest companies and hold on.
- It can be valuable to track your portfolio, but be careful when the market dips. You’ll be tempted to sell your stocks and stray from your long-term plan, hurting your long-term gains in order to feel safe today. Think long-term.
- To keep from spooking yourself, it can be useful to look at your portfolio only at specific times (say, the first of the month) or only at tax time.
As you begin investing, the financial world can seem daunting. There’s a lot to learn. The good news is that you can go at your own speed, develop your skills and knowledge and then proceed when you feel comfortable and ready.
Best stocks for beginning investors
As a new investor, it can be a wise decision to keep things simple and then expand as your skills develop. Fortunately, investors have a great option that allows them to purchase shares in hundreds of America’s top companies in one easy-to-buy fund: an S&P 500 index fund. This kind of fund lets you own a tiny share in some of the world’s best companies at a low cost.
An S&P 500 fund is a great option because it provides diversification and reduces your risk from owning individual stocks. And it’s a solid pick for investors – beginners to advanced – who don’t want to spend time thinking about investments and prefer to do something else with their time.
If you’re looking to expand beyond index funds and into individual stocks, then it can be worth investing in “large-cap” stocks, the biggest and most financially stable companies. Look for companies that have a solid long-term track record of growing sales and profit, that don’t have a lot of debt and that are trading at reasonable valuations (as measured by the price-earnings ratio or another valuation yardstick) so that you don’t buy stocks that are overvalued.
Stock investing FAQs
No, non-U.S. investors are able to open brokerage accounts and invest in U.S. companies, but they might face a few additional hurdles in getting started. Investors residing outside the U.S. may need to show additional forms of identification to prove their identity when opening an account and there can be even more forms on top of that to ensure proper tax reporting. Be sure to check with the broker for guidance on investing when living outside the country.
Not much. Most online brokers have no minimum investment requirements and many offer fractional share investing for those starting with small amounts. You’ll want to make sure that the money you’re investing won’t be needed for regular expenses and can stay invested for at least three years. Building up some savings in an emergency fund is a good idea before getting started with investing.
If you hold those stocks in a brokerage account, dividends and gains on stocks will likely be taxed. The rate you pay on capital gains will depend on how long you’ve held the investment and your income level. If you hold stocks in tax-advantaged accounts such as a Roth IRA, you won’t pay taxes on gains or dividends, making these vehicles ideal for retirement savings.
The great 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 the start. You have the option to do it yourself or have an expert do it for you. You can invest in stocks or stock funds, trade actively or invest passively. Whichever way you choose, pick the investing style that works for you and start building your wealth.