How to invest in stocks

1.Determine the way you want to invest

There are plenty of ways to start investing. Here are some options representing possible investing ways based on how hands-on you would like to be in picking and choosing the stocks you invest in.

-“I would like to choose stocks on my own”

-“I would like an expert to manage the process for me”

– “I would like to start investing in my employers’ 401 (k)”

2.Choose an investing account

In order to invest in stocks you will need an investment account. This typically involves a brokerage account. In the beginners’ case, this could involve opening an account through a robo-advisor. Both options enable you to open an account with very little money. 

2.1.Opening a brokerage account on your own

A digital brokerage account usually offers the fastest and least expensive way to buy stocks and many other investments. Using a broker, you can open a personal retirement account, also known as an IRA, or you could open a taxable brokerage account if you’re already saving for retirement in an employer 401 (k) or other plan.

2.2.Opening a robo-advisor account

This provides the benefits of stock investing without requiring you to do the work needed to pick individual investments. Robo-advisor will ask you about your investing goals during the onboarding process and will then build you a portfolio designed to achieve these goals. This might sound expensive, but the management fees are usually a fraction of the cost of what a human investment manager would charge.

3.Learn the difference between investing in stocks and funds

Most people choose between these two investment types:

3.1.Stock mutual funds or exchange-traded funds: They enable you to purchase small pieces of several different stocks in a single transaction. You can put several funds together to build a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds. The benefit of mutual funds is that they are inherently diversified, which decreases the risk which makes it the default choice for most people.

3.2.Individual stocks: If you would like to invest in a specific company, you could purchase a single or a few shares as a way to diversify your portfolio. The benefit of individual stocks is that a wise pick could generate a large profit. However, the chance that any individual stock will make you rich is very low.

4.Set a budget for your stock market investment

Here we will cover the two most common questions made by new investors:

4.1.“How much money do I need to get started?”

This depends on how expensive the shares you want to buy are (these could vary from just a few dollars to thousands of dollars). If you are choosing mutual funds and have a small budget, an exchange-traded fund (EFT) is your best choice. Mutual funds usually have a minimum of $1,000 or more, but EFTs trade like a stock meaning that they can be purchased for a share price.

4.2.“How much money should I invest in stocks?”

If you are investing in funds you could allocate a fairly large portion of your portfolio toward stock funds, especially if you are thinking of a long-term investment. On the other hand, if you want to focus on individual stocks you should keep in mind that they need to involve a small portion of your investment portfolio.

5.Focus on investing for the long-term

It has been proven that stock market investments are one of the best ways to grow long-term wealth. Throughout several decades, the average stock market return is around 10% annually. However, this is just the average across the entire market. Some years will be good and some years will be bad and individual stocks themselves will vary in their returns. That is why no matter what is happening day-to-day or year-to-year, the stock market is the best option for long-term investors. What you should do after you start investing in stocks or mutual funds is to avoid looking at them. Unless you are trying to beat the odds and succeed at day trading, it is good to avoid the habit of compulsively checking how your stocks are doing all the time.

6.Manage your stock portfolio

Even though it is not suggested to check in on your stocks on a daily basis, there will be times when you will need to do that. If you followed the above steps and bought mutual funds and individual stocks over time, you would have to revisit your portfolio a few times a year in order to make sure it is still in line with your investment goals.

A few things to keep in mind: You don’t want your portfolio to be too heavily weighted in one sector or industry. Consider buying stocks or funds in a different sector to build more diversification. Also make sure you include as much as 40% of international stocks.