Beginning investors often see investing in stocks as a complicated process. You must first determine your investment goals, your budget, risk tolerance, and investment style. After going through this process, you must then find a suitable brokerage firm, fund your account, then start trading. No wonder investing in stocks can be so intimidating!
If you’re only starting out in investing and are now considering getting into stocks, then this guide should help. To begin investing in stocks, approach this with the right mindset. Bear in mind that stock investment is not a get-rich-quick scheme; it is part of the larger process of building wealth steadily over the long term.
So, how do you start investing in stocks? Are there disadvantages when investing in stocks? In this guide on investing in stocks for beginners, InvestmentNews provides some insight into stock investing.
For beginners, investing in stocks can stir up both feelings of excitement and apprehension. This type of investment holds the potential to build significant wealth, but many of those starting out can feel discouraged when they see how complex the process seems.
What beginning investors choose to invest in stocks, a little knowledge can go a long way. In fact, even beginners can and should invest in stocks. With this guide, beginners can even start investing in stocks with a small amount of money after a few minutes of planning.
If you don’t feel comfortable choosing stocks on your own, you have the option of hiring a professional to help you. The challenge will be finding a broker or brokerage firm that will suit your needs, financial goals, and your budget.
Since it’s possible to invest in low-cost mutual funds, Exchange-Traded Funds or ETFs and even buy fractional shares, you can start investing in stocks with a little money.
When it comes to making stock investments, there’s the complex and difficult way, and there’s the easy way. For beginners, going about stock investing is best done the easy way. Here's how beginners can get into stocks:
Before we get into investing in stocks, let’s start with the basics with this article on investing for beginners. That should give you a good overview of the practice of investing.
The first step in stock investing is to decide on which investment approach you want to use. At this time, you can map out your financial goals and investment goals, determine your risk appetite and set the deadline or time horizon for these goals. You don’t have to rush this process, and you may still go ahead and invest in stocks. Meanwhile, choose your investment strategy, which can be either:
This is more suited to more experienced investors and those with more time to research stocks and devote themselves to their investments. The active approach is a more DIY one and requires that the investor set up their own brokerage account.
This investment approach is more “invest then forget” than DIY. In passive investing, you let another person, typically a finance professional like a broker or wealth manager, handle your stock investments. You pay them a percentage of the assets they handle for you as their fee.
There are two possible ways you can set up your passive investment approach:
Enlisting the services of a financial expert like a wealth manager is the most common way to passively manage your stock investments. This is an ideal strategy for those who have very little knowledge about investing, especially in stocks.
Also called a “robo”, using a robo advisor is a recent technological advancement in stock investing. Although the name suggests it, this is not an actual physical robot, rather, it is an automated algorithm that chooses stock investments for you after you program it with your investment preferences.
Once you’ve programmed the robo and established your investment plan, you can deposit funds in your investment account, then the robo does the rest. In most instances, using a robo costs less than hiring a human investment manager.
While you can choose either of these investment strategies, the passive strategy works best for beginners in stock investing. Research has also shown that passive strategies outperform active strategies when it comes to earnings.
After you’ve decided on your investment approach, you can set up your investment account. There are a couple of options for this:
If you go this route, you can enlist the services of an online broker. An online broker lets you buy stock and many other kinds of investments, including bonds, Exchange-Traded Funds (ETFs), mutual funds, etc. The best online brokers offer no-fee commissions on stocks and may provide a lot of educational and research resources at no additional cost.
You can hire a human financial advisor to design a stock portfolio and assist you with your investment goals, like saving for your child’s college fund. A human advisor will often charge an hourly fee or charge the equivalent of 1 percent of your assets annually – but with a high minimum investment.
Or you can hire a robo-advisor to design a stock portfolio that matches your time horizon and risk tolerance. Less costly than a human advisor, robos can also offer planning services to help maximize your wealth and handle most of your investing needs.
The next important step is choosing which stocks to invest in. While it may sound like a difficult exercise, it’s made much easier by using a robo advisor or a human advisor.
Whether you use a human or a robo advisor, you actually won’t need to make detailed investment decisions and choose which stocks to invest in – this is part of the value of these services.
For instance, when you open a robo-advisor account, you’ll be asked questions about your risk tolerance and when you need your money (time horizon). The robo-advisor will then assemble your portfolio and choose the funds to invest in for you. All you must do is add money to the account, then the robo advisor creates your portfolio.
Investing through a brokerage can be complicated, as you’ll have to select each investment and make trading decisions on each of them. With a brokerage, you can invest in individual stocks or stock funds, which own hundreds of stocks. The best brokerages can offer free research and a ton of resources on how to buy stocks to assist beginners.
The not-so-secret formula for building wealth with stocks is to do this over a long period of time. Add money to your account, then let compound interest work its magic. But for compound interest to work, you must invest money monthly or weekly. Setting aside some money for this purpose is crucial.
Here’s a video showing the basics of investing in stocks. The presenter shows you how the stock market works, how businesses raise money with stocks, and more basic stock concepts. You can learn more on how to get into the stock market and buy and sell stocks by watching the video.
If you need help with investing in stocks, contact one of the top names in the financial services industry. Take your pick from our list of winners from the 2024 Investment News Awards.
When setting up an account to house your stock investments, it’s important also to know how much taxes you’ll have to pay for them. These are the most common vehicles where you can place your stock investments and how they’ll be taxed:
Apart from the potential of growing your wealth, there are other benefits to stock investing, such as:
Better earnings in the long run – Long-term equity returns from investments like stocks are often better than the earnings of cash or bonds. While stock prices tend to rise and fall over time, these stock market fluctuations eventually smooth over after longer periods.
Stock investments can protect your wealth – The tax treatment on stocks is better than other investments in the long run, and this can help cushion the negative effects of inflation and other taxes.
Maximized returns – Some US stocks offer dividends or issue special distributions. Payments like these can be used as regular investment income to buy even more shares. The tax treatment for dividends can be favorable for investors, leaving them more money in their pockets.
The amount of money you should place in stocks depends largely on your time horizon and budget. More experienced investors advise that you can always invest whatever amount you are comfortable with, but you should leave the investment in your account for at least three years.
Ideally, leaving money in an investment account for stocks for five years or more would be better. This is so that the investments can have more chances and time to grow and outlast the inevitable dips in the stock market.
If you find it difficult to keep money in your investment account without withdrawing from it, consider building up an emergency fund first to pay for unexpected expenses. This way, you avoid getting out of an investment early and the account can ride out any fluctuations in the value of your stocks.
These days, you don’t need hundreds of thousands of dollars to begin your stock investment journey. Most investment accounts have very small to zero minimum balances, making it entirely possible to start with a small amount.
There are many brokers who even allow purchases of fractional shares of stock or ETFs. So, if you cannot afford entire shares, you may still buy portions of them.
This is a strategy where the focus is to increase investor's capital. In growth investing strategy, the money is placed on stocks of small startups whose earnings are expected to grow at a certain level. These are usually tech companies that exhibit high growth potential.
Index investing is placing your money into index funds. These are investment funds that follow or mimic a benchmark index, like the S&P 500 or the Nasdaq 100. When you invest in an index fund, your money is used to invest in all the companies that make up a particular index, which gives you a more diverse portfolio than if you were buying individual stocks.
This is the practice of investing a fixed dollar amount regularly, regardless of what the share price is. Dollar-cost averaging can be a sound investment strategy, since it’s a good way to develop disciplined investing habits. It’s also a more efficient way of investing that can lower both your stress level and your costs.
For beginners, investing in general can be daunting. Even more daunting is the thought of investing in stocks, which can take years of experience apart from the relevant skills and education to become good at. But thanks to the developments in fintech like robo advisors and online trading, investing in stocks doesn’t have to be as complicated or intimidating as once thought, especially for beginners.
To have some degree of success and modest gains, it helps to view stocks not as a short-term effort to make some money, but as a long-term commitment to grow your wealth over time. Learning how to invest in stocks and making money as you go along sounds scary, but it’s now common practice for many investors.
There’s a wealth of knowledge about investing in stocks that you can pick up by reading books written by investment experts. You can also learn from online sources or take short courses on stock investments.
Beginners shouldn’t let the fear of losing keep them from stock investing, especially if they start with a small amount, gain some knowledge and skills, and trust the learning process.
Looking for more resources to build your knowledge and boost your confidence in investing? Read and bookmark our section on Investing for the latest updates and trends.
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