How to Invest in Stocks: 7 Proven Steps

Today’s stock market is a little puzzling but it can still be rewarding. I can only promise you that if you read this book seriously, you’ll do much better than the average investor. Just keep in mind that patience and discipline count now more than ever.

The purpose of this article is not only to tell you about the basics of stock investing but also to let you in on solid strategies that can help you profit from the stock market. Before you invest, you need to understand the fundamentals of stock investing, which I introduce in this article. 

Then I give you an overview of how to put your money where it will count the most.

Basics of Stock Investment

The basics of stock investing are so elementary that few people recognize them. When you lose track of the basics, you lose track of why you invested, to begin with.

Knowing the risk and volatility involved: Perhaps the most fundamental (and therefore most important) concept to grasp is the risk you face whenever you put your hard-earned money in an investment such as a stock. Learn more about different types of risks in investment.

Related to risk is the concept of volatility. Volatility refers to a condition in which there is rapid movement in the price of a particular stock (or other investment); investors use this term especially when there’s a sudden drop in price in a relatively short period of time.

Assessing your financial situation: You need a firm awareness of your starting point and where you want to go.

Understanding approaches to investing: You want to approach investing in a way that works best for you.

Seeing what exchange-traded funds have to offer: Exchange-traded funds (ETFs) are like mutual funds, but they can be traded like stocks.

The bottom line in stock investing is that you shouldn’t immediately send your money to a brokerage account or go to a website and click “buy stock.” The first thing you should do is find out as much as you can about what stocks are and how to use them to achieve your wealth-building goals.

Before you continue, I want to get straight exactly what a stock is. Stock is a type of security that indicates ownership in a corporation and represents a claim on a part of that corporation’s assets and earnings. The two primary types of stocks are common and preferred:

Common stock: This type of stock, which I cover throughout this book, entitles the owner to vote at shareholders’ meetings and receive any dividends that the company issues.

Preferred stock: This type of stock doesn’t usually confer voting rights, but it does include some rights that exceed those of common stock. Preferred stockholders, for example, have priority in certain conditions, such as receiving dividends before common stockholders in the event that the corporation goes bankrupt. Additionally, preferred stock seeks to operate similarly to a bond for investors seeking stable income.

How to invest in stocks in six steps

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

There are several ways to invest in stocks. Below, select the option that best represents your investment style and how hands-on you’d like to be in selecting stocks.

Choose stocks on your own: In this article, you’ll learn what hands-on investors need to know, such as how to choose the right account for your investing needs and how to compare stock investments.

Have an expert to manage stock investment: You may be a good candidate for a robo-advisor, an investment management service with low fees. These services are available with virtually all major brokerage firms and many independent advisors, who invest your money according to your goals.

Investing in employer’s 401(k): For beginners, this is one of the most common ways to invest. 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.

You are now ready to search for an account based on your preference.

2. Choose an investing account

You need an investment account to invest in stocks. Typically, this is a brokerage account. Anyone who would like a little assistance should consider opening an account through a robo-advisor. Both processes are described below.

One important point is that you can open an account with very little money with both brokers and robo-advisors.

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

With a robo-advisor, you get the benefits of stock investing without the work that goes into picking individual investments. Robo-advisors provide comprehensive investment management: During the onboarding process, these companies will ask you about your investment objectives, and build you a portfolio designed to meet those objectives.

The fees here may seem steep, but compared with a human investment manager, a robo-advisor is usually just 0.25% of your account balance. If you wish, you can also open an IRA at a robo-advisor.

You should read the fine print and choose your provider carefully even though robo-advisors are relatively inexpensive. Cash is required by some providers for a certain percentage of an account. In general, cash providers pay very low-interest rates, which can be a major drag on performance and create an allocation that is not optimal for investors. In some cases, cash allocation positions are more than 10%.

You probably don’t need to read the rest of this article if you’re going to open an account at a robo-advisor – the rest is for those who are DIY-oriented.

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. In a mutual fund, you can buy small pieces of multiple stocks at once. A mutual fund that tracks an index tracks that index by buying the stock of the companies that make up that index. For instance, a Standard & Poor’s 500 fund buys the stock of the companies that make up that index. Investing in a fund means you own small pieces of each of those companies. You can make your portfolio diversified by buying several funds. Funds that invest in stocks may also be referred to as equity funds.

Learn more about mutual funds and ETFs

Individual stocks. Purchasing shares of stock is like buying a business. That’s the way Warren Buffett, one of the world’s most successful investors, views it— and his philosophy is certainly worth noting. When you buy stock, you’re actually buying a portion of a corporation.

If you wouldn’t want to own the entire company, you should think twice before you consider buying even a piece of it. If you think of investing in these terms, you’ll probably be a lot more cautious when singling out a specific company.

It’s important to become acquainted with all of the details of the company you’re considering. What products and services does the company offer? Which part of the business accounts for the greatest revenue? Which part of the business accounts for the least revenue? Is the company too diversified? Who are its competitors? Is there a demand for the company’s offerings? Is the company an industry leader? Are any mergers and acquisitions in the works? Until you understand exactly what the company does and how well it does it, it would be wise to postpone your investment decision.

You can lessen your risk by investing in stock mutual funds because they are inherently diversified. For the majority of investors, mostly mutual funds are the best way to invest their retirement savings.

Nevertheless, mutual funds are unlikely to rise as rapidly as some individual stocks. Individual stocks can prove lucrative if you pick them wisely, but the chance of you becoming rich from any one stock is exceedingly slim.

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 range from a few dollars to a few thousand dollars. Exchange-traded funds (ETFs) may be your best bet if you want mutual funds but have a limited budget. ETFs trade like stocks, so you purchase them at a share price, which can be as low as $100. Mutual funds often have a $1,000 minimum investment; ETFs do not.

How much should I invest in stocks? Have we mentioned that most financial advisors tend to recommend investing through funds? If you have a long time horizon, you can allocate a significant portion of your portfolio to stock funds. Investing for retirement might make up 80% of a 30-year-old’s portfolio; the rest would be made up of bonds. The rest would be individual stocks. It is a good idea to keep them to a small portion of your investment portfolio.

5. Focus on your investment goals

Are your goals long-term or short-term? Answering this question is important because individual stocks can be either great or horrible choices, depending on the time period you want to focus on. Generally, the length of time you plan to invest in stocks can be short-term, intermediate-term, or long-term.

Investing in quality stocks becomes less risky as the time frame lengthens. Stock prices tend to fluctuate daily, but they have a tendency to trend up or down over an extended period of time. Even if you invest in a stock that goes down in the short term, you’re likely to see it rise and possibly exceed your investment if you have the patience to wait it out and let the stock price appreciate.

Short-term stock investing

Short-term stock investing is very unpredictable. Stocks — even the best ones — fluctuate in the short term. In a negative environment, they can be very volatile. No one can accurately predict the price movement (unless he has some inside information), so stocks are definitely inappropriate for any financial goal you need to reach within one year. You can better serve your short-term goals with stable, interest-bearing investments like certificates of deposit at your local bank.

Considering intermediate-term goals

Intermediate-term refers to the financial goals you plan to reach in two to five years. For example, if you want to accumulate funds to put money down for investment in real estate four years from now, some growth-oriented investments may be suitable.

Although some stocks may be appropriate for a two- or three-year period, not all stocks are good intermediate-term investments. Some stocks are fairly stable and hold their value well, such as the stock of large or established dividend-paying companies. Other stocks have prices that jump all over the place, such as those of untested companies that haven’t been in existence long enough to develop a consistent track record.

If you plan to invest in the stock market to meet intermediate-term goals, consider large, established companies or dividend-paying companies in industries that provide the necessities of life (like the food and beverage industry or electric utilities). In today’s economic environment, I strongly believe that stocks attached to companies that serve basic human needs should have a major presence in most stock portfolios. They’re especially well-suited for intermediate investment goals.

Preparing for the long term

Stock investing is best suited for making money over a long period of time. Usually, when you measure stocks against other investments in terms of five to (preferably) ten or more years, they excel. Even investors who bought stocks during the depths of the Great Depression saw profitable growth in their stock portfolios over a ten-year period. 

In fact, if you examine any ten-year period over the past 50 years, you see that stocks beat out other financial investments (such as bonds or bank investments) in almost every period when measured by total return (taking into account reinvesting and compounding of capital gains and dividends)!

Of course, your work doesn’t stop at deciding on a long-term investment. You still have to do your homework and choose stocks wisely, because even in good times, you can lose money if you invest in companies that go out of business.

Because so many different types and categories of stocks are available, virtually any investor with a long-term perspective should add stocks to his investment portfolio. Whether you want to save for a young child’s college fund or for future retirement goals, carefully selected stocks have proven to be a superior long-term investment.

6. Manage your stock portfolio

The care you take with daily fluctuations will do little for your portfolio – or for you – but you will need to check on your stocks or other investments from time to time.

Following the steps above to buy mutual funds and individual stocks over time, you’ll want to review your portfolio every few years to ensure that it still aligns with your investment goals.

You might want to consider moving some of your stock investments over to more conservative fixed-income investments if you are approaching retirement. Consider diversifying your portfolio by purchasing stocks or funds in a different sector if it is too heavily concentrated in one sector. Do not forget to diversify geographically as well. Vanguard suggests that up to 40% of a portfolio’s stocks should be international. A mutual fund with international stocks can provide this exposure.

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.

Learn more about stock investment strategies.

People Also Ask FAQs

Are stock investments safe for beginners?

Yes, as long as you approach it responsibly. In fact, investing isn’t as hard as it may seem.

It’s because you have a lot of tools at your disposal. Stock mutual funds are a good investment option for beginners since they are easy and low-cost. Your 401(k), IRA, or taxable brokerage account can hold these funds. You may want to consider investing in an S&P 500 fund, which gives you a small piece of ownership in about 500 of the biggest U.S. companies.

Another option, as mentioned above, is a robo-advisor, which builds and manages your portfolio on your behalf for a fee.

Is it safe to invest in stock through apps?

In general, investing apps are safe to use. In recent years, some newer apps have had reliability issues, resulting in users losing their funds or limited functionality.

Although your funds are typically still safe in these instances, temporary access to your money is still a legitimate concern. If you’re hoping to avoid these issues, you should choose an investing app from a large and established brokerage: Fidelity, TD Ameritrade, and Charles Schwab all scored highly on our list of the best stock apps, and they are among the biggest brokerages in the U.S.

Can I invest a small amount in stocks?

Definitely. In most brokerages today, there is no minimum to open an account (meaning you can open an account without funding it first), and some offer fractional trading, meaning you can invest low dollar amounts – like $5 or $10 – rather than paying the price of an entire share.

It comes with a challenge when investing small amounts: diversifying your portfolio.  Diversification requires you to spread your money out. With less money, this is more difficult.

Investing in stock index funds and exchange-traded funds is one solution. ETFs are often available for low share prices (and ETFs have a low investment minimum), and some brokers, like Fidelity and Charles Schwab, offer index funds with no minimum investment requirement. In addition, index funds and ETFs solve the diversification problem since they hold many different stocks within a single fund.

Last but not least, investing is a long-term game, so you shouldn’t invest funds you may need in the short term. This includes a cash cushion for emergencies.

What stocks should I invest in?

When it comes to what you should invest in, it really comes down to two things: the time horizon for your goals, and the level of risk you’re comfortable taking.

Investing for a long-term goal, like retirement, is best done through mutual funds (again, we recommend doing this through them).

Stock mutual funds, index funds, or exchange-traded funds are common ways to invest in many stocks – for example, an S&P 500 index fund holding all the S&P 500 stocks.

Picking stocks, however, is unlikely to deliver the thrill you’re seeking. By dedicating 10% or less of your portfolio to individual stocks, you can scratch your itch without losing your shirt. 

You can increase your money’s rate of growth and outpace inflation by investing in stocks. As you near your goal, you can gradually increase your bond allocation, which is generally a safer investment.

On the other hand, if your investment goal is short-term – less than five years – then you probably won’t want to be invested in stocks at all.

Last but not least, risk tolerance. If you tend to panic when the market falls, you are better off investing slightly more conservatively, with a smaller allocation to stocks.

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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