How to Invest in Stocks: 7 Proven Steps

Investing in the stock market can be both confusing and profitable. However, if you read this article carefully, you will have an advantage over the average investor. Remember to prioritize patience and discipline to succeed in today’s stock market.

This article aims to teach you the basics of stock investing and provide you with reliable strategies to profit from the stock market. To start, it is essential to learn the fundamentals of stock investing, which this article will cover.

After understanding the basics, you will learn how to invest your money wisely. By the end of this article, you will be equipped with the knowledge and tools needed to succeed in the stock market.

Basics of stock investment

Stock is a type of security that represents a claim on a portion of a corporation’s assets and earnings and indicates ownership in that corporation.

The following are the two most common and preferred types of stocks:

  • Common stock: This type of stock gives you certain rights as an owner of a company. When you own common stock, you have the ability to vote at shareholder meetings and you may also receive dividends if the company decides to issue them.
  • Preferred stock: This is a type of stock that usually doesn’t come with voting rights, but it does offer some benefits that are better than common stock. One of these benefits is that preferred stockholders get paid dividends before common stockholders in certain situations, like if the company goes bankrupt. This means that if the company runs into financial trouble, preferred stockholders are more likely to receive some money back compared to common stockholders.

The fundamentals of stock investing are so simple that few people understand them. When you lose sight of the fundamentals, you lose sight of why you invested in the first place.

Here’re the things to keep in mind:

  • Know the risk and volatility involved: Investing your hard-earned money in stocks can be risky, and it’s crucial to understand the types of risks you may face. One of the most significant risks is volatility, which refers to how quickly the price of a stock or investment can change. This term is often used when there is a sudden drop in price over a short period of time. It’s essential to learn more about the different types of investment risks and how they can affect your portfolio. Learn more about different types of risks in investment.
  • Assess your financial situation: You need a firm awareness of your starting point and where you want to go.
  • Understand approaches to investing: You want to approach investing in a way that works best for you.
  • See what exchange-traded funds have to offer: Exchange-traded funds (ETFs) are like mutual funds, but they can be traded like stocks.

If you’re thinking about investing in stocks, it’s important to do your research before jumping in. Don’t just transfer money to a brokerage account or impulsively click “buy stock” on a website. It’s crucial to understand everything about stocks and how they can help you reach your financial goals.

To help you get started, we’ve put together a step-by-step guide:

How to invest in stocks in 6 steps

1. Decide how you want to invest in the stock market

Are you interested in investing in stocks but not sure where to start? Don’t worry, there are a variety of options available to suit different investment styles and levels of involvement. Here are some of the most popular approaches to investing in stocks:

Choose stocks on your own: If you’re a hands-on investor who likes to be in control, selecting individual stocks may be the way to go. This approach requires more research and knowledge about the market, but it can also offer greater potential returns. To get started, you’ll need to choose the right account for your investing needs and compare different stock investments.

Have an expert manage your stock investment: If you prefer a more hands-off approach, consider using a robo-advisor. These are investment management services with low fees that invest your money according to your goals. Many major brokerage firms and independent advisors offer these services, making it easy to get started.

Invest in your employer’s 401(k): For beginners, this is one of the most common ways to invest in stocks. By focusing on the long-term and taking a hands-off approach, it teaches new investors some of the most proven investing methods. 401(k)s typically provide a limited selection of stock mutual funds, but not individual stocks.

Now that you know the options, it’s time to choose the right account based on your preferences.

2. Choose an investing account

If you’re interested in investing in stocks, the first step is to set up an investment account. Usually, this is done through a brokerage account. However, if you’re looking for some guidance along the way, a robo-advisor could be a great option.

It’s important to note that both brokers and robo-advisors allow you to open an account with very little money. This means that you don’t need to have a lot of cash to get started with investing.

Here’s a breakdown of both approaches:

The DIY option: Opening a brokerage account

The quickest and least expensive way to invest in stocks, funds, and a variety of other assets is through an online brokerage account. If you’re already contributing adequately to retirement in a 401(k) or another plan through work, you can open a taxable brokerage account through a broker.

If you need more information, we have a guide on how to open a brokerage account. Look for a broker that considers factors such as costs (trading commissions, account fees), investment selection (if you prefer funds, look for a good selection of commission-free ETFs), and research and tools for investors when evaluating brokers.

The passive option: Opening a robo-advisor account

A robo-advisor provides the benefits of stock investing without the hassle of picking individual stocks. It is an investment management service that uses computer algorithms to build and manage your investment portfolio. During the onboarding process, you’ll answer a few questions about your investment goals, and the robo-advisor will create a customized portfolio to help you meet those goals.

One of the best things about robo-advisors is that they typically charge much lower fees than human investment managers. In fact, most robo-advisors charge only 0.25% of your account balance. That means you can keep more of your investment earnings for yourself.

If you’re interested in opening an IRA, you can do that with a robo-advisor too. And while robo-advisors are generally inexpensive, it’s still important to choose your provider carefully. Some robo-advisors require you to hold a certain percentage of your account in cash, which can result in lower interest rates and a less-than-optimal allocation for your investments.

If you’re ready to get started with a robo-advisor, you probably don’t need to read the rest of this article. But if you prefer to manage your investments on your own, keep reading for more tips and advice.

3. Learn the difference between investing in stocks and funds

Considering DIY? No problem. You don’t have to be an expert to invest in stocks. You can choose between these two investment types:

Stock mutual funds or exchange-traded funds. A mutual fund is a pool of money collected from many investors, used to buy a variety of stocks in different companies. By investing in a mutual fund, you can own a small portion of many different stocks all at once. For example, a mutual fund that tracks the Standard & Poor’s 500 index would invest in the stocks of the companies that make up that index.

Investing in mutual funds is a great way to diversify your portfolio, meaning you spread your money across different types of investments to reduce risk. By investing in multiple funds, you can further diversify your portfolio and potentially earn more money.

Mutual funds that invest in stocks are often called equity funds. So, if you’re interested in investing in the stock market but don’t want to choose individual stocks, consider investing in a mutual fund to get started!

Individual stocks. Buying shares of stock can be compared to buying a business, according to Warren Buffett, a renowned investor. When you purchase stock, you are essentially purchasing a part of a company. It’s important to keep this in mind before investing, even if it’s a small amount. By looking at investing in this way, you can be more careful when choosing a particular company to invest in.

To select the right company, it is crucial to learn as much as possible about it. What products and services does the business offer? Which part of the business generates the most revenue? Which part generates the least revenue? Is the company too diversified? Who are its competitors? Is there a market for the company’s products? Is the company a market leader? Are there any planned mergers or acquisitions? You should wait until you have a thorough understanding of the company’s operations and performance before making an investment decision.

Stock mutual funds, which are inherently diversified, can help you reduce your risk. Mutual funds are the best way for the majority of investors to invest their retirement savings.

However, mutual funds are unlikely to rise as quickly as individual stocks. Individual stocks can be profitable if chosen wisely, but the chances of becoming wealthy from any one stock are extremely remote.

4. Set a budget for your investment in the stock market

During this step of the process, many new investors have two questions:

What is the minimum amount I need to invest in stocks? To buy an individual stock, you need to know how much it costs. The price of shares can vary widely from just a few dollars to several thousand dollars. If you have a limited budget but still want to invest in mutual funds, exchange-traded funds (ETFs) might be your best option. ETFs are traded like stocks, and you can buy them at a share price that can be as low as $100. In contrast, mutual funds often require a minimum investment of $1,000.

How much should I invest in stocks? Financial advisors typically recommend investing through funds, especially if you’re planning for the long term. For example, if you’re in your thirties and investing for retirement, you might allocate 80% of your portfolio to stock funds and the remaining 20% to bonds. Individual stocks should make up only a small portion of your investment portfolio.

5. Focus on your investment goals

Are you trying to decide whether to invest in stocks for the short-term or long-term? It’s an important question because the success of a stock can depend on how long you plan to invest in it. You have three main options: short-term, intermediate-term, or long-term investing.

If you invest in a quality stock and hold onto it for a long time, the investment becomes less risky. While stock prices can fluctuate daily, they generally trend up or down over time. Even if a stock you invest in drops in value in the short-term, it will likely bounce back and possibly even surpass your initial investment if you have the patience to wait and let the stock appreciate.

Short-term stock investing

If you’re considering investing in stocks for the short term, you should know that it can be quite unpredictable. Even the most promising stocks can experience dramatic ups and downs in a short period of time. This means that short-term stock investing can be risky, especially in an unstable market.

Trying to predict stock prices is nearly impossible for the average investor, so it’s generally not a good idea to rely on stocks to meet financial goals that are due in less than a year. Instead, it’s usually better to choose more stable, interest-bearing investments that are better suited for short-term goals. For example, certificates of deposit at your local bank are a good option to consider. They offer a fixed interest rate and are insured by the FDIC, making them a low-risk investment choice.

Considering intermediate-term goals

When it comes to your financial goals, it’s important to break them down into different time frames. Intermediate-term financial goals are ones that you hope to achieve within the next two to five years.

For example, if you want to save money for a real estate investment that’s four years away, you might want to consider some growth-oriented investments. However, not all stocks are suitable for intermediate-term investments. Some stocks are fairly stable and hold their value well, like those of large or established dividend-paying companies. Other stocks have volatile prices, like those of unproven companies that haven’t been around long enough to develop a consistent track record.

So, if you’re planning to invest in the stock market to meet your intermediate-term goals, it’s important to consider large, established companies or dividend-paying companies in industries that provide necessities of life (like food and beverage or electric utilities). In today’s economic environment, it’s especially important to invest in stocks associated with companies that provide basic human needs. These stocks are particularly well-suited for intermediate investment objectives.

Preparing for the long term

If you’re looking to generate long-term profits, stock investing might be your best bet. Stocks tend to outperform other investments over a period of five to ten years or more. Even if you bought stocks during the Great Depression, you would have still seen profitable growth in your portfolio after a decade.

Stocks outperform other financial investments, such as bonds or bank investments, in almost every ten-year period over the past 50 years, when measured by total return. This takes into account reinvesting and compounding of capital gains and dividends.

Of course, choosing a long-term investment is just the first step. You still need to do your research and pick stocks wisely because even in good times, you can lose money if you invest in failing companies.

There are many different types and categories of stocks available, making it easy for any long-term investor to include stocks in their investment portfolio. Whether you’re saving for your child’s college fund or your future retirement goals, carefully selected stocks have proven to be a superior long-term investment.

6. Manage your stock portfolio

Investing can be a great way to grow your money over time. But it’s important to approach it with a long-term perspective. Don’t worry too much about daily fluctuations in the stock market – they won’t make much of a difference to your overall portfolio.

However, it’s a good idea to check in on your investments periodically. If you’ve been buying mutual funds or individual stocks over time, it’s a good idea to review your portfolio every few years to make sure it still lines up with your investment goals.

As you get closer to retirement, you may want to consider moving some of your investments from stocks to more conservative fixed-income investments. And if your portfolio is heavily concentrated in one sector, it’s a good idea to diversify by purchasing stocks or funds in a different sector. It’s also important to diversify geographically – experts recommend that up to 40% of a portfolio’s stocks should be international. A mutual fund that invests in international stocks can provide this exposure.

Remember, investing is a long-term game. Stick to your strategy and periodically review your investments to make sure they’re still aligned with your goals.

7. Sharpen your investment skills

Investors who analyze a company can better judge the value of its stock and profit from buying and selling it. Your greatest asset in stock investing is knowledge (and a little common sense). To succeed in the world of stock investing, keep in mind these key success factors:

  • Understand why you want to invest in stocks. Are you seeking appreciation (capital gains) or income (dividends)?
  • Timing your buys and sells does matter. Terms like overbought and oversold can give you an edge when you’re deciding whether to purchase or sell a stock. Technical analysis is a way to analyze securities through their market activity (past prices and volume) to find patterns that suggest where those investments may be headed in the short term.
  • Do some research. Look at the company whose stock you’re considering to see whether it’s a profitable business worthy of your investment dollars.
  • Understand and identify what’s up with “The Big Picture.” It’s a small world after all, and you should be aware of how the world can affect your stock portfolio. Everyone from the bureaucrats in Europe to the politicians in the U.S. Capitol can affect a stock or industry like a match in a dry haystack.
  • Use investing strategies as the pros do. I’m very big on strategies such as trailing stops and limit orders, and fortunately, today’s technology gives you even more tools to help you grow or protect your money. 
  • Consider buying in smaller quantities. Buying stocks doesn’t always mean that you must buy through a broker and that it must be 100 shares. You can buy stock for as little as $25 using programs such as dividend reinvestment plans.
  • Do as others do, not as they say. Sometimes, what people tell you to do with stocks is not as revealing as what people are actually doing. This is why I like to look at company insiders before I buy or sell a particular stock. I even touch on insider trading done by Congress.
  • Keep more of the money you earn. After all your great work in getting the right stocks and making the big bucks, you should know about keeping more of the fruits of your investing.

You may also explore other legit ways to make money online.

People Also Ask FAQs

Are stock investments safe for beginners?

Absolutely! As long as you’re responsible, investing in stocks is not as daunting as it may seem. In fact, there are many helpful tools available to help you get started.

If you’re just starting out, consider investing in stock mutual funds. They are low-cost and straightforward, making them a great choice for beginners. You can hold these funds in a 401(k), IRA, or taxable brokerage account. One popular option is an S&P 500 fund, which allows you to own a small portion of 500 of the largest U.S. companies.

Another option is to use a robo-advisor. These services build and manage a portfolio for you, for a fee. This can be a great choice if you don’t have the time or expertise to manage your investments yourself.

Overall, with the right approach and tools, investing in stocks can be a safe and rewarding choice for beginners.

Is it safe to invest in stock through apps?

When it comes to investing apps, the good news is that most of them are safe to use. However, there have been some newer apps that have had issues with reliability. Unfortunately, this has resulted in some users losing their funds or experiencing limited functionality.

While it is important to note that your funds are typically still safe in these instances, it’s understandable to have concerns about temporary access to your money.

To avoid these potential issues, it’s recommended to choose an investing app from a large and established brokerage. Some of the best options include Fidelity, TD Ameritrade, and Charles Schwab. These brokerages have scored highly on lists of the best stock apps and are among the largest brokerages in the United States. By choosing a reputable brokerage, you can have peace of mind knowing that your investments are in good hands.

Can I invest a small amount in stocks?

Investing in the stock market used to require a lot of money, but that’s not the case anymore. Most brokerages today have no minimum account funding requirement, which means you can open an account without having to put any money in it right away. Plus, some brokerages offer fractional trading, which lets you invest as little as $5 or $10 instead of having to pay for a whole share of stock.

However, there is a challenge when it comes to investing small amounts: diversifying your portfolio. Diversification means spreading your money out among different investments to reduce risk. But with less money, it can be harder to diversify effectively.

One solution is to invest in stock index funds or exchange-traded funds (ETFs). ETFs are often available at low prices, and they usually have a low investment minimum. Some brokers, such as Fidelity and Charles Schwab, also offer index funds that don’t require any minimum investment.

Investing in index funds or ETFs can solve the diversification problem because they hold many different stocks within a single fund. This means you don’t have to worry about buying individual stocks to diversify your portfolio.

It’s important to remember that investing is a long-term game. Don’t invest money that you might need in the short term, such as a cash cushion for emergencies. Keep your eyes on the long-term goal and stick to your investment plan.

What stocks should I invest in?

If you’re saving for a long-term goal, like retirement, it’s best to invest in mutual funds. These are like big baskets of investments, which can include stocks and bonds. We recommend investing in mutual funds through a professional financial advisor.

One type of mutual fund is an index fund, which tracks a certain index, like the S&P 500, and includes all the stocks in that index. This can be a good way to invest in lots of different stocks without having to pick individual ones yourself.

While it might be tempting to try to pick individual stocks to invest in, it’s usually not a good idea. It’s hard to predict which stocks will do well, and you could end up losing a lot of money. If you really want to invest in individual stocks, we recommend only using 10% or less of your portfolio.

Investing in stocks can help your money grow faster than if you just put it in a savings account. But stocks can also be risky, and the value of your investments can go up or down. As you get closer to your goal, it might be a good idea to start investing more in bonds, which are generally safer than stocks.

If you’re investing for a short-term goal, like saving for a vacation next year, it’s probably best to avoid stocks altogether. Stocks can be too volatile in the short term, and you might not have enough time to recover if the value of your investments goes down.

Finally, it’s important to consider your comfort level with risk. If you get really anxious when the stock market goes down, it might be a good idea to invest a smaller amount in stocks and more in safer investments like bonds. A financial advisor can help you figure out the right balance for your situation.

If I live outside the U.S., can I open a brokerage account?

It depends on the broker you choose. International investors can trade with Firstrade, TDAmeritrade, Lightspeed, Interactive Brokers, eOption, TradeStation, ZacksTrade, Charles Schwab, and Webull, though they have differing requirements and restrictions.

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