Investing in stocks can help you outpace inflation and build wealth over time. Historically, the stock market has delivered higher returns compared to savings accounts or CDs. While starting out may feel daunting, beginners can easily begin their investment journey by opening a brokerage account with one of the best stock trading apps.
Granted, investing in individual stocks can be riskier than broad-based investing, like putting money into mutual funds or ETFs that provide exposure to a variety of underlying stocks. Or, you might start out by using brokerage tools that help you build a custom portfolio of stocks.
The good news is that the process for investing in stocks is relatively straightforward. Whether you’re looking to contribute a large chunk of your savings or simply dip your toes in the proverbial investment waters, here is some crucial information you need to know so you can buy stocks and diversify your portfolio.
Why invest in stocks?
Investing in stocks can provide several benefits, such as:
Potential for wealth creation
Many investors have made their fortunes by holding shares of companies, otherwise referred to as investing in stocks. That’s not to say you can buy stocks and quickly get rich, but over time, investments can grow substantially.
For example, the S&P 500 index, often used as a proxy for the stock market, has returned roughly 10% per year on average. That means that a $10,000 investment growing at that rate for 30 years would reach nearly $175,000.
Historically, stocks have outperformed many other asset classes in the long run, compared to typically lower-risk investments like bonds or gold.
Remember that there is no guarantee that your stocks will have a positive return. Depending on the market’s performance, your stocks could lose value instead of appreciating.
Ownership in companies you believe in
Purchasing shares of stock is a quick way for investors to obtain partial ownership in companies they have faith in. Every company has a unique company culture, and every business that gains prominence has something that it contributes to the broader market.
Not only might that lead to wealth creation, but by investing in stocks, you can obtain an ownership stake in companies that are working to create innovative or socially beneficial technology, to improve the health of their customers, or actively contribute to other notable causes.
Diversification benefits
Diversification, or not putting all your eggs into one basket, is an approach that is almost always encouraged by financial experts. By using this strategy, you can help manage the downside risk associated with individual securities or even entire asset classes.
By investing in stocks alongside other asset classes such as bonds, real estate, and commodities, you can build a well-diversified portfolio that may retain its value far more effectively than just investing in one asset class.
Moreover, stocks can have some diversification elements within them. For example, instead of investing in physical real estate, you might invest in the stocks of real estate companies. Or, you might invest in mining companies rather than gold.
That said, the level of diversification varies significantly based on the specifics of your portfolio, so consider using online portfolio-building tools or speaking with a financial advisor for more information.
Keep in mind that it’s also simply hard to consistently achieve above-market-average returns over the long run, because usually a handful of winners bring up the average, and it’s hard to find those diamonds in the rough. So, choosing individual stocks to invest in is usually more of an advanced strategy, but you might reduce your risk by investing in a broad range of stocks for diversification.
How to start investing in stocks (step-by-step)
Here is the step-by-step guide to buying stocks.
Step 1: Set financial goals
The first step in stock investing is to outline your goals. Ask yourself questions like:
- Why are you looking to invest in the first place?
- Do you want to build up a nest egg so you can retire?
- Are you looking to save up money for a down payment on a home?
- What is your time horizon? In other words, how long are you looking to invest in a stock (or stocks) before you cash out?
Connected to setting your financial goals is establishing your risk tolerance. Yes, you might be trying to invest for retirement, but how much volatility are you willing to stomach along the way? Or if you’re saving for a down payment, are you willing to take the risk that a market downturn delays your home ownership plans?
Individuals who are looking to build wealth over the long term (for example, saving for their retirement) should generally be willing to assume more significant risk, as doing so will frequently deliver superior returns when compared to taking an approach that provides less risk in the short term. Meanwhile, if you have short-term goals, you might take on less risk to try to maintain a more stable portfolio value.
Step 2: Choose a brokerage account
Stocks are bought and sold on stock exchanges, but you can’t purchase shares directly from these marketplaces. Instead, a brokerage account is where to start investing in stocks as an individual, as your brokerage handles the order routing to enable you to buy and sell stocks.
Brokerage accounts work similarly to bank accounts, except they’re where to buy stocks and other securities. You choose a provider and open the account online, move money into it, and you’re ready to buy stocks in a few clicks. You can even use a brokerage to gift stock to someone else, though you’ll need their account information to initiate the transfer.
There are many licensed brokers to choose from, and the decision revolves around your individual needs and priorities. When it comes to choosing a broker, there are three main options:
- Full-service brokers: “Traditional” full-service brokers offer a variety of services, including specialized research and advice, and perhaps other financial services like retirement planning, tax assistance, estate planning, access to shares of initial public offerings (IPOs), and more. Because of this, they can charge substantial fees.
- Discount brokers: This type of broker leaves you to make your own decisions. Discount brokers typically just trade on behalf of clients but don’t offer specialized investing advice. While they once were the exception, they are now the norm, preferred by investors because they’re more affordable and charge low fees. What they lack in specialized advice, they usually make up for with a vast array of tools and general educational resources.
- Robo-advisors: Robo-advisors are automated investing platforms that select and manage investments on your behalf based on your specific goals and timeline, typically following a passive investing strategy by putting your money in inexpensive ETFs or other index funds. They appeal to the “set it and forget it” type of investor who prefers to be more hands-off.
Once you open a brokerage account, you have access to research and analytical tools, so it’s a good idea to get a sense of these resources when making your decision.
Most brokerage platforms will give you access to a stock’s fundamentals, including the prospectus, quarterly earnings, as well as relevant ratios and growth projections, to garner a more robust understanding of where a company’s shares currently stand and where they might be headed.
Step 3: Fund your account
After you set up a brokerage account, the next step is to fund that account so you can use the resources to purchase stocks. One way to do this is by linking your brokerage account to a checking or savings account and then transferring funds into your brokerage account.
There are several other ways to fund a brokerage account. For example, you can transfer funds from one brokerage account to another. In some cases, financial institutions offering brokerage accounts will allow you to deposit checks directly into such accounts.
Important: When you open your brokerage account, you may be asked if you’d like a cash account or a margin account. When you invest on margin, you borrow money from your broker to buy securities, including potentially more complex ones like options and futures. Keep in mind you’ll have to pay interest, and the practice is generally not advised as the best way to get into stocks, as it’s generally a more advanced/complex way of investing.
Step 4: Research and select stocks
The stock market involves thousands of publicly traded companies, each with different offerings. Determining exactly how to pick stocks can feel overwhelming, but it might help to think about how picking stocks is generally a combination of objective and subjective factors. Not everyone will agree with your analysis of a company’s potential, which will ultimately affect the stock price, and that’s a risk you have to be willing to take.
If you do want to select individual stocks to invest in, one place to start is by reviewing the company’s annual report, formally known as Form 10-K, which provides a comprehensive overview of its financials as well as a letter to shareholders. You can also use brokerage tools that help you screen stocks based on your preferred criteria, or they might offer tools that help you build a portfolio of stocks based on your goals and risk tolerance.
If you do try to analyze individual stocks, there are two main approaches:
- Fundamental analysis: This form of investment analysis involves evaluating a company’s financial fundamentals, including metrics like price-to-earnings ratio and looking over a company’s balance sheet, to determine whether it seems undervalued or overvalued.
- Technical analysis: This involves evaluating a security’s price movements to get a better sense of what trend it is following and what it seems likely to do in the future. Armed with this information, you can try to single out a good time to purchase that security, such as trying to catch a stock during a period of strong buying volume. Granted, trying to time the market can be risky and extremely difficult.
Another thing to be mindful of is tax considerations. Some stocks that pay dividends might increase your yearly tax bill, for example. And think about whether you’re likely to buy and hold the stock for more than a year, as doing so can mean capitalizing on long-term capital gains tax treatment, which generally comes with a much lower rate than short-term capital gains. In general, long-term and diversified investing is recommended by most experts anyway.
Step 5: Place your orders
Before buying a stock, you’ll need to select an order type, which informs the purchasing process. You have two main options when executing trades through a brokerage account: market and limit orders.
- Market orders: These types of orders tell your broker to purchase the stock or security immediately, without any guarantee of its price. Market orders are usually the default option. The benefit is that you can typically complete an order, because as long as there are interested buyers and sellers as is the case with most stocks at any given time during market hours, your order is guaranteed to go through.
- Limit orders: While market orders instruct your broker to get you into a stock as fast as possible, a limit order specifies a certain price for your order. The order gets fulfilled only if there’s a seller who’s willing to part with the shares at your specified price. Limit orders give investors more control over the price they pay for a security. However, that might not be worth it for some stocks. For example, a stock might be trading at $50 per share, and with a market order, you might get the stock at $50.01, which might be worth it to get the guaranteed order. In contrast, if you set a limit order at $50, and the price moves up to $50.01 and above, your order might never go through.
There are also some more complex order types, like stop orders or stop-limit orders, but those probably aren’t where you’ll start.
The exact process for placing your stock order varies by brokerage, but generally it will involve something along the lines of inputting the ticker symbol of the stock you want to buy, and then you’ll see a screen that asks you to input information such as how many shares you want to buy, and you can then choose the order type. Once you place your order and it executes, your portfolio will immediately update to reflect your newly purchased shares.
Step 6: Monitor and review
Once you have constructed a portfolio, you can track its performance. Keep in mind that the stock market can be quite volatile, so you can save yourself a lot of time (and stress) by looking at your portfolio every now and then instead of reviewing it on a daily basis.
You might want to evaluate your portfolio once a quarter, or once a year, for example. One good way to measure the performance of a portfolio is to compare it to a benchmark index like the S&P 500 or the Dow Jones Industrial Average.
If you’re finding that picking individual stocks to invest in isn’t working too well in comparison to these indexes, you might prefer to invest in an index fund that tracks these benchmarks. But remember, markets can be volatile, so looking at short-term performance can be misleading.
Risks of buying stocks
While there are several potential benefits of investing in stocks, particularly as it relates to growing your long-term wealth, there are some risks to consider first, such as:
- Loss of principal: All investments carry risks, and stocks in particular carry the risk of loss of principal. That means that you could lose some or all of the money you invest in stocks. If managed wisely, though, such as through diversification and taking a long-term approach, you can reduce your risk of losses.
- Market volatility: Market volatility is the risk of prices swinging up and down quickly. This can cause irrational behavior, like panic selling when stock prices fall or rushing in to buy stocks after a big run-up due to fear of missing out.
- Company-specific risks: Investing in stocks means you’re getting exposure to particular companies, which can carry all sorts of risks of their own. For example, if you’re investing in tech stocks, there are risks around whether competitors will overtake the companies you chose, or whether regulation will affect their growth potential. This ties into the risk of loss of principal, but it can also simply mean achieving smaller gains than other companies’ stocks.
Investing in stocks vs. investing in funds
Deciding whether to invest in individual stocks vs. investing in funds depends on your goals and risk tolerance. In general, investing in funds makes more sense for beginners, given the ease of diversification and the difficulty of picking individual stocks that beat the broader market. That said, here are some factors to consider:
Individual stocks
One major appeal of picking individual stocks is that the shares you select may outperform the broader markets. In addition, choosing individual stocks gives you the opportunity to obtain partial ownership in companies that you believe in.
The downside of individual stock picking is that by taking this approach, you may underperform the broader markets. Another consideration is the time and energy you may need to invest in order to select companies that are a fit for your portfolio.
Mutual funds and exchange-traded funds (ETFs)
Investing in funds such as mutual funds and ETFs can provide investors with quick, cost-effective diversification. Passive funds, also called index funds (which can fall under either the broader mutual fund or ETF category) can be particularly efficient and lead to better results than trying to actively pick stocks.
These funds provide a good way for investors to gain exposure to vast swathes of the stock market. By purchasing an ETF that tracks the S&P 500 index, for example, an individual can gain access to companies accounting for roughly 80% of the total available stock market.
Robo-advisors
If you’re unsure whether to invest in stocks or index funds, investors can also make use of the best robo-advisors, which are platforms that can create portfolios based on individual preferences.
While the fees are generally higher than index funds on their own, they’re still relatively affordable and can help you create a portfolio. They’re generally built with a variety of funds, but choosing multiple funds this way can provide you with more of that customization that you get with buying individual stocks.
Stock investment strategies
There are several ways to approach stock investing. Some common strategies include:
- Buy-and-hold strategies: A buy-and-hold strategy is a long-term approach. As the name suggests, you buy the stocks (or funds) and hold them indefinitely. This can be useful for reaching goals like retirement.
- Dollar-cost averaging: Dollar-cost averaging means continuing to invest in the same securities periodically, rather than being one and done. In doing so, you’re adjusting your average purchase price. For example, you might start by buying one share of a mutual fund for $100. If it goes down 10% in a month to $90, but you then buy another share, now your average purchase price is $95 (since you bought one share at $100 and one at $95). If you keep going with investments every month, you can potentially reduce the risk of volatility and avoid trying to time the market.
Active vs. passive investing
As mentioned, active investing involves trying to beat an index or achieve a particular investment goal, while passive investing involves trying to match an index. When comparing passive investing vs. active investing, active investing is generally more hands-on, and it can be risky trying to time the market and beat the average.
Even professionals struggle, especially when factoring in fees. So, many beginners are better off at least starting with passive investing.
Growth vs. value investing
Growth stocks are shares of companies that are expected to experience high growth rates, such as in terms of revenue and profit. Thus, their current value is typically quite high in relation to their current earnings. The idea is typically that in the future, earnings will catch up to growth, and the valuation will reflect the company’s future size.
In contrast, value stocks are typically those that investors feel are undervalued based on their financial fundamentals. They might not have much growth potential, but they often are consistently profitable.
Whether growth or value stocks are better is subjective. In general, growth stocks typically have higher risk/reward, but there are times when value stocks gain in price faster than growth stocks, and vice versa.
Rebalancing
If you have a particular investment strategy that involves different buckets of investments, such as a certain percentage in stocks vs. bonds, then rebalancing can be valuable.
“Rebalancing is the practice of periodically selling and buying investments in your underlying portfolio to make sure certain target weights are stable over time. For example, let’s say you are an aggressive investor with 90% of your portfolio in stocks and 10% of your portfolio in bonds. Over time, as stocks and bonds perform differently, those weights will drift,” explains Kenny Senour, CFP, private wealth advisor at Legacy Wealth Partners.
“Without periodic rebalancing, your portfolio could become 95% stocks and 5% bonds, which may not be in line with your intended financial goals for the account. There’s no ‘perfect’ timeframe for rebalancing as some financial professionals suggest doing so every quarter, but conventional wisdom says at a minimum rebalancing at least once per year can make sense,” he adds.
Best stocks for beginners
As mentioned, beginners often benefit from diversified stock investing, such as through index funds. That said, if you want to choose individual stocks to invest in as a beginner, without taking on too much risk, you might consider so-called blue-chip stocks.
These are companies that have typically been around for a long time and have been consistently successful. They might not provide huge returns, but they often are more stable than other stocks. Most of them are household names, involving products you use in your daily life, or they might be critical B2B businesses.
That said, determining the best stocks for beginners varies by situation. Consider consulting with a financial advisor for more support.
Start investing
FAQs about how to buy stocks
You can potentially start investing with a very small amount of money. As long as you have enough money to pay for a share (or fractional share if your broker allows it) and any associated transaction fees, you can start buying stocks. That might mean getting started with as little as $1
You can potentially start investing with a very small amount of money. As long as you have enough money to pay for a share and any associated transaction fees, you can start buying stocks.
Investing in stocks does come with risks, but there are many different steps you can take to mitigate these risks. Portfolio diversification can help you overcome concentration risk, and long-term investing can help you manage the risk associated with short-term volatility. In addition, you can potentially invest across many different sectors, therefore managing sector risk.
Deciding whether to select individual stocks or harness a robo-advisor should depend on key considerations such as your experience and how comfortable you feel with DIY investing. Keep in mind that you can also choose funds like ETFs to quickly gain exposure to broad swathes of the stock market.
The best way to invest in the stock market highly depends on your financial goals and risk tolerance. That said, many experts recommend general approaches such as diversified, long-term stock market investing.
