This article includes links which we may receive compensation for if you click, at no cost to you.
In a day and time when most investors – especially newbies – invest through funds, the whole idea of investing in stocks can be more than a bit scary.
But it doesn’t have to be. In truth, investing in stocks is just a series of steps. Once you learn how to buy stocks and get the process going, you’ll grow in both experience and confidence.
In this guide, I’ll lay out the specific steps and strategies to show you how to invest in stocks.
You can start slowly and build your positions over time. And if you’re not yet ready to take the plunge directly into investing in individual stocks, I’ll also share some alternatives to help you invest without directly buying stocks – at least at the very beginning.
Stock Investing Is A Long Game
Investing in stocks is a long-term endeavor. Before getting started, carefully evaluate what it is you hope to do.
Successful investing requires that you make a firm decision to proceed and that you’re fully committed to doing it for years to come. You’ll need that kind of commitment to weather the ups and downs that are inevitable with investing in stocks.
The long-term commitment is also important in learning how to buy stocks. That’s because you’re not going to become an expert investor overnight. There’s a lot to learn, and while you can learn much by studying in advance, there’s no teacher like experience.
Once you’ve experienced the gain on some stocks and loss on others, you begin to get a feel for exactly what you’re doing. That won’t happen in months, but most likely years.
How To Start Investing in Stocks
If you’ve decided to begin investing in stocks, the next step is to make a monetary commitment. Decide how much you’re going to invest upfront. But just as important, be ready to commit to a regular plan to save money for future investments.
When it comes to investing, you don’t just buy a couple of stocks, then wait for them to take off. The better strategy is to move into your investments gradually. So, while you might commit $1,000 to begin investing, you’ll want to add a regular monthly contribution of say, $250, or whatever number works in your budget.
Build Your Stock Portfolio Using Dollar-Cost Averaging
One of the best ways how to invest in stocks gradually is through a process known as dollar-cost averaging. That’s where you create a portfolio of stocks, then increase your holdings every month.
For example, let’s say you start with $1,000 spread across ten different stocks, with an average of $100 invested in each stock. You can dollar-cost average $250 per month into your portfolio by buying an additional $25 worth of each of the ten stocks you own.
The advantage with dollar-cost averaging is that you will avoid taking a big position in any stock all at once. Instead, you’ll gradually add to each stock position in your portfolio. When you invest this way, the price you’ll be buying the stock at isn’t as important.
For example, if you buy into stock in 12 equal monthly installments, your investment in the stock won’t be based on a single price. Instead, it’ll be the average price of the stock over the course of a full year. In that way, even if the price of the stock falls after your initial purchase, you’ll be buying subsequent shares at lower prices. That will minimize the impact of any price declines.
Can I Start Investing In Stocks With Little Money?
The short answer to this question is a resounding YES! And there are many reasons why this is true.
First, most investment brokers today enable you to open an account with no money at all. And you can often begin investing with as little as $100, or even less.
How can you invest in stocks with so little money? It’s called fractional shares, and it’s the second strategy for how to invest in stocks with very little money.
Brokers allow you to buy fractions of shares, which is where the term comes from. For example, if the price of a stock is $500, you can buy one-tenth of a share of that stock for $50. If you have $1,000 to invest, you can spread it across 20 different similarly priced stocks.
Not only do fractional shares enable you to buy stocks for less than full price, but you can also use it to create a portfolio with fractions of many different stocks.
Third, and finally, most major brokerage firms today charge no trading fees. That means you’ll be able to use whatever investment funds you have to purchase stocks. Your investment won’t be reduced by trading fees.
So, if you only have a small amount of money, like $100 or less, don’t let that stop you from investing in stocks.
Who Are The Best Stock Brokers for Beginners?
As a new investor, it’s best to stick with the biggest investment brokers. They’re the biggest for a reason – they offer the most investment tools and resources, as well as customer support. That last one is critical to a new investor. While there may be investment brokers that offer interesting specialties, as a new investor, you’ll need as much broker support as you can get.
For that reason, the best investment brokers on all counts are likely to be Charles Schwab and Fidelity.
As you become a more experienced investor and develop your own investor “personality,” you can investigate other platforms that may be more to your liking. But for the time being, you’ll need the resources, tools, and support that are most abundant with the most prominent brokers.
Charles Schwab is the largest investment brokerage firm in the world. Since they have over $3.4 trillion in customer accounts, you’ll be in good company. Their customer support is among the best in the industry and is available on a 24/7 basis. And if you need face-to-face contact, they also offer more than 300 local branches in and around most major cities in the country.
Schwab requires no minimum opening account balance and has no trading fees on stocks, exchange-traded funds (ETFs), or options. They also offer more than 4,000 no-fee mutual funds. You may not be interested in all those investments initially, but they’ll be a nice option to have if you decide to go in any of those directions.
Fidelity is the second largest investment broker and works very similar to Charles Schwab. They offer excellent customer service on a 24/7 basis and also have about 200 local branches. They offer all the tools and resources needed by a beginning investor, that will help guide you to become a more advanced investor.
There is no minimum initial investment requirement, and you can trade stocks, ETFs, and options with no trading fees. There are also more than 3,700 no-fee mutual funds.
What Are The Best Stocks To Buy For New Investors?
This is the toughest piece of advice to give to a beginning investor or any investor for that matter. But as a beginning investor, you’ll want to stay on the safer side of the street. If you’re serious about learning how to invest in stocks, you’ll need to begin by building a firm investment foundation.
As Steven J. Lee famously said: “The first rule in making money is not to lose it.”
That’s excellent advice for any investor, but especially for beginners. If you begin losing money on highly speculative stocks early in your investment career, you’ll probably give up and not try again for years.
One of the best strategies for beginners is to favor well-established companies that pay regular dividends. That will give you the opportunity to earn a steady income while you’re waiting for your stocks to grow in value.
Start with “Dividend Aristocrats”
There’s even a specific list of stocks you can choose from, called dividend aristocrats. Many of these stocks are easily recognizable names, like:
- Cardinal Health
- Clorox, Chevron
- General Dynamics
- Johnson & Johnson
To qualify as a dividend aristocrat, the stock must meet the following criteria:
- It must be an S&P 500 company (meaning a large company).
- Must have at least 25 consecutive years of increasing their dividend.
- Meet certain minimum size and liquidity requirements.
Put another way; these stocks are the bluest of the “blue chips.” The group has typically outperformed the general market but tends to perform exceptionally well in market downturns. This is likely because high dividends limit price declines.
Start investing with dividend aristocrats, then add more speculative stocks as you gain more confidence.
Diversify Your Investments
As a new investor, you’ll want to spread your investment portfolio across a minimum of 10 stocks. Ideally, you shouldn’t have any more than 10% of your portfolio invested in any one company. That will limit the downside should any single company experience a significant price decline.
If you’re starting with $1,000, spread it across ten equal shares of 10 different companies. You can even add more companies as your portfolio grows. But be careful not to add too many. If you have 20 or more stocks in your portfolio, you might as well buy a mutual fund or ETF. It can be more than a bit of a chore to monitor and manage a portfolio with too many stocks.
Invest Beyond Stocks
You should also invest beyond stocks. That should start with an emergency fund. You should have sufficient cash sitting in a safe, interest-bearing bank account with enough funds to cover at least three month’s living expenses. That will not only provide you with cash in an emergency, but it will also help you avoid needing to sell stock to pay for an unexpected expense.
But getting back to the stock portfolio, investing in stocks requires that you diversify even within your equity holdings.
For example, you’ll need to spread your stock investments across different sectors. You may want to have a couple of technology stocks, one or two healthcare stocks, then one each invested in banking, manufacturing, retail, and other sectors. You should also look for companies that have extensive foreign exposure. That will give you geographic diversification beyond the US.
As your portfolio grows, you may also want to add some bonds to the mix. This is usually best done through funds since they will provide a low-cost way to diversify across many different bond issues.
What If I’m Not Comfortable Managing My Own Investments?
Not everyone understands how to invest in stocks or is even comfortable with the process, and it’s perfectly okay.
You don’t have to jump headlong into building a stock portfolio from the very beginning. Instead, you can start with two or three exchange-traded funds as a foundation. Each fund represents a portfolio of many different stocks. You should favor index funds, since they track markets, and have very low fees.
There are two important benefits to ETFs (compared to mutual funds):
- ETFs typically have no minimum investment required. Mutual funds may require a minimum of $3,000 or more.
- Since index-based ETFs are invested in markets, you can choose specific sectors. For example, you can choose ETFs that specialize in financial stocks, industrial stocks, healthcare stocks, energy stocks, and many other groups.
Much like investing in individual stocks, you can spread a small amount of money across several different ETFs.
Best Robo-Advisors for Stock Trading
For even greater investment management, you can also choose to start investing through robo-advisors.
Some of the most prominent examples include:
Each will design a portfolio for you, then manage it going forward. All you’ll need to do is fund your account. Betterment and M1 Finance allow you to open an account with no money, while Wealthfront requires just $500. Betterment and Wealthfront charge an annual management fee of 0.25% of your account. That means you can have a $1,000 account managed for just $2.50 per year. Meanwhile, M1 Finance charges no management fee at all.
If you’re not sure how to buy stocks, start by building a foundation through either a group of ETFs or a single robo-advisor, then begin buying individual stocks gradually.
Investing In Stocks Doesn’t Have To Be Complicated
As you can see, there’s nothing especially complicated or even magical about how to invest in stocks. It’s a matter of knowing the process, then following all the steps along the way.
If you follow the strategies in this guide, you’ll be able to begin building your stock portfolio gradually. But you’ll also be growing in safety, like having an emergency fund and diversifying your stock holdings across different stocks and industry sectors.
By moving gradually to build your position, and taking your time doing it, you’ll give yourself the benefit of the time you need to eventually become an expert at investing in stocks.
Just remember that every successful investor had to start somewhere. And for most it took several years before they became proficient at it, let alone good. So, as you build your portfolio, be sure to learn all you can about the art of investing. The combination of continuing education plus real-world experience will turn you into a pro in less time than you think.