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How to Invest in Stocks: A Step-by-Step Guide

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The idea of investing in stocks could be somewhat overwhelming for beginner investors. There are hundreds of questions, starting with, is it the right investment for you? How can you pick the right stocks? How much money do you need to start investing?

Rest assured that stock markets are one of the most proven ways for wealth creation in human history. In fact, long-term stock market investments can help you grow your initial capital several-folds.

That brings us to the most important question: How can a beginner investor start investing in the stock markets? Let’s find out.

Choose the right account to start investing in stocks and etfs

Your stock market investments start with choosing the right investment account for your portfolio.

If you want to manage your own investments (buy or sell stocks, review portfolio), you can start with a brokerage account. Most brokerages offer different types of accounts, including IRAs and other retirement accounts, for holding your stock investments. You can open online brokerage accounts of most companies (Fidelity, Charles Schwab, TD Ameritrade, or Robinhood).

For those seeking professional help in managing their investments, managed brokerage accounts can be a good choice. In a managed brokerage account, you handover the authority to trade stocks to a brokerage firm, where qualified financial advisors make the trading calls to achieve your desired financial goals. You can choose between full-service brokerages or opt for research/investment advice. These services come with account management fees, so you should compare different brokerages based on their services, past performance, and management charges.

Another growing avenue for stock management is through robo advisors. Robo advisors are algorithmically-driven automated advisors that manage your investments to offer the desired financial outcomes through proven algorithms. Robo advisors are comparatively cheaper and offer state-of-the-art, science-driven investment management services. Some robo advisors even offer commission-free investment management up to a certain limit ($10,000 usually).

Robo advisors offer a variety of features, including:

  • Automatic portfolio rebalancing
  • Dividend reinvesting
  • Tax-loss harvesting, and much more.

How to pick a suitable stock market investment for your portfolio

Once you have opened a brokerage account, the next step is to choose how you want to invest in the stock markets.

  • Individual stocks: These are stocks of individual firms trading on exchanges, such as NYSE and Nasdaq. You can invest in reliable, blue-chip firms or create a portfolio of hot technology firms. Ideally, you should pick stocks after carefully analyzing their risk profile, past performance, and price movements. Focusing on the fundamentals instead of the share price is the ideal way to create a portfolio.
  • Mutual funds: Mutual funds are bundles of different stocks. They offer the benefit of diversification, distributing your money across various companies, thereby mitigating high risks. Mutual funds follow different themes, including investing in large, mid, or small-cap stocks, investing in different sectors, or tracking an index. If you want to limit your risk and diversify your funds, investing in the stock markets through mutual funds can be a good strategy.
  • ETFs: Exchange-traded funds function the same way as mutual funds, but there are no holding periods for these investments. You can purchase and trade ETFs like individual stocks. Since ETFs comprise multiple stocks with different investment themes, you benefit from diversification without giving up investment flexibility or being tied up in lock-in periods.

Ideally, your investment portfolio should carry different types of assets, including stocks, mutual funds, bonds, real estate, and other fixed-income products. Financial advisors recommend investors to create a goal-based investment strategy that aligns with the risk tolerance capability of the investor.

How much money do you need to start investing in stocks?

One of the most popular questions new investors ask is how much money they need to start investing in stocks.

Well, it depends on several factors, starting with the price of stocks and the choice of investments. While the stocks of tech companies, such as Tesla and Amazon, cost hundreds or thousands of dollars, you can add Ford Motor Company (common stock) to your portfolio for under $10.

The second factor is the type of investment you intend to add to your portfolio. Some mutual funds require minimum investments of $1,000 or above. On the contrary, you can purchase the share of an ETF for as little as $100.

If you’re working with a managed brokerage account, these brokerages have minimum investment requirements that can go very well into a couple hundred thousand dollars.

For those choosing robo advisors for stock market investments, you can start with as little as $500 or $100 for some robo advisors. Several robo advisors offer fee reductions as your portfolio grows in value.

How to manage your stock market investments

A critical aspect of investing in stocks is to manage your investments. While it doesn’t mean you should go check your portfolio every single day, which could go terribly wrong, it is essential to monitor growth on a monthly or quarterly basis.

  • Check monthly/quarterly portfolio performance: Ideally, your broker will share monthly, or quarterly performance reports on your registered email. If you’re a DIY investor, it is important to evaluate your portfolio performance on a quarterly basis. Although some long-term investments may take a longer period to provide the desired growth.
  • Adjust your portfolio for new goals: Making goal-based investments is a proven strategy. Whenever you have a new financial goal, short-term (down payment of your house) or long-term (saving for retirement), allocate investments for that new goal. For short-term goals, stick with large-cap stocks or fixed income products. For long-term goals, create a diversified portfolio of stocks, bonds, and other stock market products.
  • Focus on tax-efficient investment instruments: It is excellent to invest for the future, but you have to be careful about investing through the right accounts. Investing in a traditional IRA will provide an immediate tax break, whereas investing through a Roth IRA will offer tax-free distributions. Implement a tax-efficient investment strategy with the correct retirement plan.
  • Rebalance your portfolio as you reach retirement: Your portfolio allocations will witness a gradual change as you approach retirement. Ideally, young investors should allocate the majority of their portfolios towards equity investments, but as they approach retirement, a shift towards bonds or other fixed-income products (savings accounts, CDs) is essential.

Long-term versus short-term stock investing strategy

Financial advisors recommend a long-term investing strategy when it comes to stocks. In fact, historical returns indicate that investors with little to no knowledge about stock markets booked handsome growth through long-term, consistent index fund investments.

If you’re a passive investor, adding a couple of index funds along with ETFs and mutual funds is all you need to do for long-term growth. Stock market experts such as Warren Buffett recommend passive investors to choose index funds or similar instruments over individual stocks. Also, if you’re investing in stocks, take an investment horizon of at least five years or longer.

A short-term investing strategy doesn’t apply well in the stock markets. You may book some returns, but you’ll pay higher commissions or brokerage charges.

FAQs about how to invest in stocks

How do I start investing with little money?

Several beginner investors are worried about having an insufficient amount of money to invest. You can start by investing in ETFs. Think of ETFs as a package where you can invest in multiple companies under one trading symbol. ETFs vary in prices, and it is a good way to diversify and start investing. Some stockbrokers even provide fractional investing in ETFs and stocks.

Can you invest in stocks with $100?

Yes, you can start investing with as little as $100. Some of the investment options include:

  • Stocks: Focus on the fundamentals of the company instead of the stock price alone. Just because one company’s stock price is trading at $300 and another’s is trading at $150 doesn’t mean one is better than the other.
  • ETFs: Choose ETFs for diversification and risk optimization. Get exposure to a variety of companies that trade under one symbol.
  • Fractional shares: Invest in fractional ETFs and stocks.

How do you make money from stock market investments?

There are several ways to generate money through stock investing. Investors make money through capital appreciation and dividend income (quarterly/annually). Ideally, a long-term investment strategy is the best way to maximize your gains from stock markets.

Are stocks a good investment for beginners?

Stock market investments can boost an investor’s portfolio. Beginner investors can earn better returns through various stock market products, including mutual funds and ETFs. Mutual funds and ETFs provide diversification and better risk management (against volatility) to new investors.

What stocks should I invest in?

If you’re a beginner investor, you should start with diversified stock market investments, such as mutual funds and ETFs. These investments ensure that your money is spread out across a variety of stocks, ensuring that fluctuations in a particular stock don’t affect your entire portfolio.