Wondering how to invest in stocks? Most beginning investors buy shares in exchange-traded funds or mutual funds. I recommend this approach for beginners. ETFs, especially, help you put money in the stock market even when you aren’t quite sure what you’re doing.
If you stick with investing, the temptation to trade in individual stocks — to build and diversify your own portfolio of stock shares — will eventually grab you. Index funds just won’t give you the same jolt as stock trading.
But how do you pick growth stocks? How do you know whose investment advice to listen to? How do you become a stock trading expert?
My Stock Market Advice For Beginning Investors
You’ll need to learn more about stock market investing before jumping into individual stock trading.
So here’s my step-by-step beginner’s guide to investing in stocks.
- Make a commitment: Stock trading is a long-term play. You will experience some short-term losses, but if you’re committed and you stick with it, you can learn how to make money on the stock exchange.
- Commit to learning, too: You’re not going to become Warren Buffett overnight. There’s a lot to learn, and while you can learn a lot by studying the market and choosing an investment strategy in advance, there’s no teacher-like experience.
- Hire a full-service stock broker: The biggest brokerage firms offer the most support for beginning investors.
- Use dollar-cost averaging: Building your positions gradually will help insulate you from the effects of a sharp drop in stock prices.
- Start with ‘dividend aristocrats’: Everybody likes picking the dark horse on any given stock exchange, but why not start with proven winners — the best stocks?
- Continue diversifying: There’s no substitute for a diversified portfolio built to weather a variety of stock market storms.
- Don’t overdo it: There’s more to investing than stock trading. Mix in some stability: bonds, a high yield savings account, or a CD ladder. And keep your mutual and exchange-traded funds in play even if it’s just through a robo-advisor.
Let’s explore these steps one by one:
1. Make a Commitment to the Long Game of Stock Trades
Investing in the stock market is a long-term endeavor. Successful investing requires you to make a firm decision to endure. You have to commit to sticking with investing for years to come.
You’ll need this kind of commitment to weather the short-term ups and downs that are inevitable in any stock exchange.
Decide how much money you’re going to invest upfront. But just as importantly, 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 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.
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2. Extend Your Commitment 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 exactly what you’re doing. And you start to learn your own risk tolerance. This won’t happen in months, but more likely over a few years.
And you don’t have to tie up a ton of money in the Dow Jones Industrial to learn. Most investment brokerage firms today let you open a brokerage account with no money at all. And you can often begin investing with as little as $100, or even less.
Buy Fractional Shares
How can you invest in stocks with so little money? Because of fractional shares. Brokers let you buy fractions of shares — which is where the term “fractional share” comes from.
For example, 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.
So fractional shares help you to buy into stocks for less than full price, and you can also use this strategy to create a portfolio with fractions of many different stocks.
Pay No Fees or Commissions
Most major brokerage firms today charge no trading fees, thanks to Robinhood and some other new trading platforms that stopped charging fees and commissions. This means you’ll be able to use whatever investment funds you have for stock market investing. Your investment won’t be eroded 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!
3. Work With a Full-Service Broker
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 and educational content.
That last one is critical to a new investor who is ready to open a brokerage account.
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.
For that reason, the best investment brokers on all counts are likely to be Charles Schwab and Fidelity Investments.
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. 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.
Funny thing is, full-service brokers now charge no commissions or fees unless you work with an individual broker or financial advisor.
If I were starting out in stock investing today I’d look into:
Charles Schwab is the largest investment brokerage firm in the world. Since the firm has over $3.4 trillion in customer accounts, you’ll be in good company. The customer support is among the best in the industry and is available 24/7.
And if you need face-to-face contact, Schwab also offers more than 300 local branches with locations in most major cities around the United States.
Schwab requires no minimum opening account balance and has no trading fees on stocks, exchange-traded funds (ETFs), or options. This firm also offers more than 4,000 no-fee mutual funds. You may not be interested in all those investments at first, but they’ll be a nice option if you ever decide to go in those directions.
Fidelity is the second largest investment broker and it works a lot like Charles Schwab. Fidelity offers excellent customer service 24/7 and also has about 200 local branches.
This broker offers all the tools, resources, and investment accounts that a beginning investor needs to become a more advanced investor.
There is no minimum initial investment required, and you can trade stocks from the Dow, Nasdaq, and S&P 500. You can also trade ETFs, and options with no trading fees. There are also more than 3,700 no-fee mutual funds.
Ally Invest’s Self-Directed Trading account allows you to make commission-free trades on stocks, options, mutual funds, ETFs, and securities. There’s no minimum balance required to open an account, and you can withdraw your funds at any time.
As a beginner investor, you may benefit from Ally Invest’s Managed Portfolio account which is the company’s equivalent of a robo-advisor account. Ally’s financial strategists research and select the funds your money goes into.
A unique feature of Ally’s Managed Portfolio is that 30% of your funds will always be allocated in cash. This cash portion will earn around the same APR as Ally’s high-yield savings account (HYSA), which is more than 15x the national average.
This brokerage house offers a lot, too. I especially like TD Ameritrade’s educational tools which are just right for beginning investors.
Like Schwab and Fidelity, TD Ameritrade has adopted the Robinhood model of commission-free trading and no account minimums. Ameritrade has great choices in funds and individual stocks.
Charles Schwab is in the process of acquiring TD Ameritrade so your Ameritrade account may soon be a Schwab account. As of this writing, the biggest drawback to Ameritrade is its huge fee for broker-assisted trades.
But with so much good educational and research content, you should be able to find the right kind of financial advice — or you can check with your own financial advisor.
4. Build Your Stock Portfolio Using Dollar-Cost Averaging
A process known as dollar-cost averaging provides a great way to gradually escalate your portfolio. You’ll create a portfolio of stocks and 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 each month.
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 stock price isn’t as important.
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. In that way, even if the stock price falls after your initial purchase, you’ll be buying subsequent shares at lower prices. This strategy minimizes the impact of any price declines.
5. Start Investing with ‘Dividend Aristocrats’
This is the toughest piece of advice to give 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 the best 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’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.
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 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. This is likely because high dividends limit price declines, making these stocks friendly investment options, especially for beginners.
Start investing with these dividend aristocrats, then add more speculative stocks as you gain more confidence.
6. Keep Diversifying Your Investment Accounts
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.
7. Don’t Overdo It on the Stock Market
You should also invest beyond stocks. Start with an emergency fund safely set aside in an FDIC-insured savings account.
The cash in your interest-bearing savings account should cover at least three months’ living expenses. This will not only provide you with cash in an emergency, but it will also help you avoid needing to sell stocks to pay for an unexpected expense.
And if you aren’t contributing to an IRA or getting the company match in your 401(k), do that first before getting into stocks. Your retirement account shouldn’t depend exclusively on Wall Street. Savings accounts, CDs, real estate investments, and bond investments should be part of your plan, too.
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 U.S.
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.
Best Robo-Advisors for Stock Trading
For most simplicity, you can also choose to 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:
Each will design a portfolio for you, then manage it going forward using a computer algorithm. 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 investment 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.
Can You Invest Without Stock Trading?
Not everyone understands how to invest in stocks or is even comfortable with the process, and that’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 of a broader investment portfolio.
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. This is an investment strategy that, given enough time, should pay off without you getting too involved in the details. Plus, it fits just about anybody’s risk tolerance.
And, yes, your portfolio can grow without individual stocks. But at some point, you will probably want to learn real stock trading. After all, most people on the Forbes 400 List of Richest Americans — which is topped by Jeff Bezos and Warren Buffett — are experts on trading stocks.
Stock Trading 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.