How to start investing in stocks
Stock investing can help you build wealth by putting your money to work for you. And you don't need to be a financial whiz to do it. While you can eventually deep-dive into complex strategies if you like, getting started just takes some time, thought and knowledge of basic concepts.
In this article, we guide you through the step-by-step process to begin investing in stocks, including defining some key terms you should know.
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How to start investing in stocks
Investing in stocks doesn't have to be hard. Follow these steps to get started today.
1. Choose an investment approach
The first step is deciding how you want your investment to be managed. How much time do you want to spend on investing? How hands-on do you want to be? You have three options to choose from:
- Managing your own portfolio: Also known as active investing, managing your own portfolio leaves all of the choices up to you. You decide which stocks to buy and when to trade them. This method is best suited for experienced investors willing to devote significant time to their investments, so beginners are better off choosing one of the two options below.
- Using a broker: This is a form of passive investing. You rely on an experienced portfolio manager who chooses the best investments for your goals, monitors your portfolio and adjusts it as needed. If you're new to investing, a broker can be a great way to get started.
- Using a robo-advisor: Robo-advisors are another form of passive investing. You identify your investing goals and risk tolerance, and the service automatically manages your portfolio for you. Robo-advisors tend to be less expensive than human advisors and are a great option if you'd like to "set it and forget it."
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2. Create an investment budget
The next step is to decide how much you want — and can afford — to spend on investing. Review your monthly budget to make sure you have enough to spend on day-to-day expenses, putting money toward savings and investing. You don't need to invest a huge amount. The important thing is just getting started so your investments have more time to grow.
Once you've identified your investing budget, you also want to consider asset allocation. It's important to include a mix of asset classes (such as stocks, bonds and gold) in your portfolio to reduce risk. When it comes to what percentage of your portfolio you keep in stocks, the rule of thumb is to aim for 100 minus your age. So, if you're 40, stocks should make up 60% of your portfolio.
Whatever amount you decide to invest, you have plenty of options, from individual stocks (which can cost anywhere from a few dollars to a few thousand dollars) to exchange-traded funds (ETFs) (which can cost less than $100).
3. Open an investing account
Next, it's time to open an investing account. If you want to actively manage your portfolio, an online brokerage account will allow you to hand-pick your investments. If you want to use a broker, a managed broker account will let you leave the work to an investment advisor.
A robo-advisor is a more affordable alternative to a human investment manager. Like traditional brokers, robo-advisors collect information from you to identify your needs and goals, then create and adjust your portfolio. Because their services are automated, their fees are lower than human brokers, and they don't charge commissions. However, if you prefer speaking to someone for more nuanced advice, a broker might be worth the cost for you.
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4. Choose what to invest in
Note: This step is only for DIY investors who choose to actively manage their portfolios.
If you're going the hands-on route, you'll need to know the different investment types available to you:
- Individual stocks: When you buy individual stock shares, you're investing in the success of the company in question. Your success depends directly on the company's success. For this reason, it's essential to research each company you're considering investing in. This is better left to experienced investors.
- Mutual funds: Mutual funds are pooled investment funds that allow you to invest in a collection of stocks, diversifying your portfolio across industries, regions and more. Mutual funds are usually actively managed by a professional manager who buys and sells stocks based on their expertise.
- Exchange-traded funds (ETFs): ETFs work similarly to mutual funds but are typically managed passively by tracking a major stock index. They can be a great way for beginners to get involved in the stock market because they're usually less expensive and more tax-efficient than mutual funds.
5. Review your portfolio periodically
Whether you're actively managing your portfolio or using a broker or robo-advisor, it's important to keep an eye on your investments to ensure you're on track to reach your goals. For example, you might decide you want to invest more, diversify into a new industry or sector or transition to more conservative investments as you near retirement. So, periodically review your portfolio's performance to make sure it's achieving what you want it to.
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The bottom line
Stock investing doesn't have to be intimidating. Start slow, continue educating yourself and don't be afraid to ask questions as you go. There are plenty of resources to tap into to build your knowledge. Consult a financial professional for customized guidance on building a portfolio that meets your needs.
