Investing in stocks is one of the best ways to build lasting wealth by buying shares of public companies— if you do it right.
There are several ways to invest in stocks, and getting started can feel intimidating.
In this step-by-step guide, we’ll help you define your goals and show you exactly how to start investing in stocks.
How To Invest In Stocks For Beginner Investors
Here’s my step-by-step beginner’s guide to investing in stocks:
- Decide How to Invest
- Choose an Investment Account
- Choose an Investment Platform
- Choose What to Invest in
- Decide How Much to Invest
- Manage Your Investments
Step 1: Decide How to Invest
The first decision you’ll face as a new stock investor is choosing how you want to invest.
There are a few different approaches to managing your investments, and it’s important to identify your preferences to choose the right one.
- Robo-advisor: Robo-advisors are online investment platforms that use an algorithm to create an investment portfolio for you, automating your investments to match your goals, timeline, and risk tolerance. They’re a good fit if you want to be hands-off.
- Human advisor: If you’d prefer access to a financial advisor, you can opt for a traditional brokerage where a CFP handles your investments. Just note that this service typically comes with a higher fee than a robo-advisor.
- DIY: If you want to get your feet wet and have the time to research and actively manage your account, you can use a brokerage account to invest in stocks and index funds yourself.
Step 2: Choose an Investment Account
Once you’ve decided how you want to invest, you need to choose where to invest. To start investing, you’ll need to open an account before you can begin trading stocks.
There are essentially two types of accounts for you to choose from — a brokerage account or a robo-advisor account.
With both options, you can open either a taxable brokerage account or an individual retirement account (IRA).
Both taxable brokerage accounts and IRAs give you access to stocks, ETFs, and mutual funds. Which one is right for you depends on your goals.
If you’re already saving towards retirement with a workplace retirement account and want to be able to access your funds at any age, you’ll probably want to stick with a brokerage account. That being said, an IRA is a great option if you’re saving specifically for retirement and aren’t concerned with liquidity.
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Step 3: Pick an Investment Platform
Your next step is choosing the right brokerage. Follow the steps below as you compare online brokers:
- Look at fees: Most online brokers have done away with commission fees, but be sure to read the fine print for a breakdown of account management fees.
- Check out features: See what research, tools, and educational resources each broker offers. Also, note what all securities you can trade and whether or not fractional shares are offered.
- Consider customer support: Read reviews, check out customer service options, and consider whether or not there are local branches if face-to-face assistance is important to you.
- Don’t forget user experience: Some brokerage websites and apps are easier to navigate than others. Take a look around and choose a user-friendly platform that won’t stress you out every time you try to access your account and manage your portfolio.
- See what other people are saying: Scope out reviews from other investors and check out our reviews of online stock brokers for beginners.
Step 4: Choose What to Invest In
As a beginning investor, you’ll want to stay on the safer side of the street. One of the best strategies for beginners is to favor stocks from 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.
There’s even a specific list of stocks you can choose from, called dividend aristocrats. Many of these stocks are easily recognizable names:
- Cardinal Health
- Clorox, Chevron
- General Dynamics
- Johnson & Johnson
To qualify as a dividend aristocrat, the stock must be an S&P 500 company with at least 25 consecutive years of increasing their dividend and meet a 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. Start investing with these dividend aristocrats, then add more speculative stocks as you gain more confidence.
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Step 5: Decide How Much to Invest in Stocks
There’s no magic number that you should invest in the stock market. The right amount for you depends on your goals and timeline.
How much should you allocate to stocks?
Asset allocation is the breakdown of your portfolio between different assets. The younger you are, the more stocks your portfolio can hold. Because the stock market fluctuates, you should scale back your stock allocation as you get older and hold more steady investments like CDs and bonds.
Some experts recommend subtracting your age from 110 to determine what percentage of your funds should be invested in stocks. So if you’re 30 years old, the rule of thumb says you can invest 80% of your money in stocks and stock funds. You can adjust that figure based on your risk tolerance.
How much do you need to start investing in stocks?
You should be able to live without your investment funds for three to five years, because the stock market can be volatile.
That means you shouldn’t use a stock brokerage account as your emergency fund or for other short-term goals, like your wedding ceremony next year or a downpayment on a house.
Fortunately, most online brokerages have little to no account minimum, so you can start investing with a few dollars. And a lot of brokerages offer fractional shares of stocks. With a fractional share, if the price of a stock is $500, you could 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 fractional shares.
How much should you continue to invest in stocks?
It’s crucial to decide how much money you’re going to invest upfront. But just as importantly, you should be ready to commit to a regular plan to save money for future investments.
When it comes to investing, you shouldn’t just buy a couple of growth stocks and then wait for them to take off. And you don’t initiate stock trades erratically, even if they are commission-free. The better investment 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 for your budget.
Step 6: Manage Your Investments
Once you’ve established your goals and used your chosen broker to start investing in stocks, it’s important to manage your portfolio. If you chose to invest with a robo-advisor or a living breathing financial advisor, this is a pretty easy step.
If you’re actively managing your own portfolio, you’ll be faced with more decisions, like when to buy and sell to keep your goals on target. To make these decisions, you’ll need to depend on market data and research tools offered by your brokerage.
Regardless, it’s important to check in on your investments routinely and continually reassess your goals, which will change as you get older and hit different milestones in life.
But you should also remember that the market dips and rises frequently, so you shouldn’t check your performance too often or make rash decisions.
Tips for New Stock Investors
1. Choose the Right Stocks
If you’re determined to find the next Apple or Amazon and 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.
It’s also wise to invest a significant portion of your portfolio into funds. Consider investing in an S&P 500 index or ETF for a safe bet with long-term growth.
2. Stay Committed to Learning about Stock Trading
Learning to buy individual stocks takes time, so be patient with yourself. Once you’ve experienced a nice gain on some stocks and a stiff loss on some others, you’ll begin to get a feel for what you’re doing and learn your risk tolerance.
3. Work With a Full-Service Broker
As a new investor, it’s best to stick with the biggest investment brokers. While there may be discount brokers that offer interesting specialties, as a new investor, you’ll need as much broker support as you can get.
As you become a more experienced investor, you can investigate other platforms that may be more to your liking. Apps that allow you to invest in stocks like Robinhood and TradeStation can give you a connection to the stock market.
But for the time being, you’ll need the resources, tools, and support that are most abundant with the most prominent brokers. If I were starting out in stock investing today I’d look into:
4. Build Your Stock Portfolio Using Dollar-Cost Averaging
Dollar-cost averaging is a great way to gradually escalate your portfolio. For example, let’s say you start with $1,000 across ten different stocks, with an average of $100 invested in each stock. You can dollar-cost average of $250 per month into your portfolio by buying an additional $25 worth of each of the ten stocks you own each month.
The advantage of dollar-cost averaging is that you avoid taking a big position in any stock all at once. Instead, you’ll gradually add to each stock position in your portfolio.
For example, if you buy stock in 12 equal monthly installments, your investment in the stock won’t be based on a single stock price. Instead, it’ll be based on the average price of the stock over the course of a full year. Even if the stock price falls after your initial purchase, you’ll be buying subsequent shares at lower prices.
5. Diversify your stock 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.
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.
Frequently Asked Questions
How much money do you need to invest in stocks?
You can start investing in stocks with as little as $1 with some online brokers by purchasing fractional shares.
Fractional shares are fractions of a full share of a company’s stock. They help you to buy into stocks for less than full price, and you can use them to create a diversified portfolio with fractions of many different stocks.
How do beginners invest in stocks?
To begin investing in stocks, new investors can open an investment account with an online brokerage, where they can buy and sell stocks. You can also open a robo-advisor account that is managed by an algorithm or work directly with a financial advisor at a brick-and-mortar brokerage for a fee.
Are robo advisors good for stock trading?
For the most simple and affordable stock investing experience, hands-off investors can invest through robo-advisors.
The leading stockbrokers have their own built-in robo-advisors now, but you can also use one of the leading standalone robo-advisors to manage part of your portfolio. Some of the most prominent investment options include:
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Do you have to pay taxes on stocks?
When you have a taxable brokerage account and sell a stock for a profit, or you earn dividends, your earnings will typically be taxed. The capital gains tax rate can vary based on your income and how long you held the stock.
If your stocks are in a Roth IRA or a 529, you won’t have to pay taxes on your earnings. There are also several steps you can take to practice tax-efficient investing.
Are investing apps safe?
If an investing app is registered with FINRA and the SEC, it’s safe to use. Your funds will be protected by up to $500,000 by SIPC insurance if the brokerage goes under.
Most investing apps also have security measures in place to protect your information, which they should spell out on their websites.
Can you open a stock brokerage account if you live outside of the U.S.?
Some online brokerages allow non-US residents to open an account and purchase shares of US companies’ stocks. However, eligibility and rules can vary from one broker to the next. Be sure to consult with your broker to understand the limits and requirements for international investors.
As you can see, there’s nothing especially complicated about learning 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.
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.