How to Invest In Stocks (7-Step Guide for Beginners)
Investing your money in the stock market is a great long-term strategy to accumulate wealth—but where do you start?
In this guide I'm going to show you how to invest in stocks for beginners.
1. Decide What Type Of Investor You Are
You must decide what type of investor you are before you can invest money in stocks. Basically, there are two options to pick from when investing in stocks.
- The “I want to research and pick my own stocks” option. If you'd like to learn how to pick stocks for yourself, visit our Best Investing Books post. Here, I explore the best stock market investing books of all time.
- Otherwise, there is the “I want to make money in stocks, but I want someone else to manage the process for me” option. There are plenty of options available to you if you'd like to go down this route. You can purchase index funds, mutual funds—or have your money managed by a Robo-advisor.
Once you have decided how you want to invest in stocks, it's time to set up an account.
2. Open a Brokerage Account
You will need to open a brokerage account to buy stocks. This is where you will place your buy and sell orders.
Brokerage accounts can be managed online or with a broker at your local firm.
Brokerage fees typically range from 0.30% to 2% per trade. The higher the value of your stock purchase—the lower the relative fee will be—percentage-wise.
Stock trading is simple these days, and you can make a purchase in under five minutes.
Many brokerages offer apps downloadable via the app store for Apple devices, and the google play store for android devices.
One of the most popular investment apps is Acorns—as I will explore below!
3. Find the Best Place to Buy Stocks
There are many ways to invest in stocks passively and here is one of my favorites!
Introducing Acorns—an industry-leading micro-investing platform with over 3,500,000users.
Acorns uses a feature called round-ups to help you translate your everyday purchases into stock market investments—and also allows you to make lump-sum investments.
The app is primarily targeting the younger generations (Millennials and Gen Zs) as they spend more time on their mobile devices than anyone else.
Before Investing with Acorns
Remember that they charge fees of $1-3$ a month, which will add up if you only invest money with round-ups. You should only use Acorns if you plan to make lump sump investments on top of your round-ups.
Best Discount Stockbroker
If you'd prefer to invest through a traditional stockbroker, you can check out Webull.
Webull is a trading platform that gives you the tools you need to analyze and buy stocks—commission-free.
This makes Webull a great option whether you’re new to investing or an experienced trader.
Webull specializes in the following investments:
- Exchange-traded funds
4. Choose an Investment Strategy
Now it is time to choose an investment strategy.
There are many commonly used investment strategies, some are very risky—but can provide you with high returns.
While others are a safer and more stable way to invest your funds—while providing the same if not higher annual returns on your investments.
Some common investment strategies are listed below:
Value investing is an investment approach whereby you will purchase stocks you believe are undervalued, or “on-sale”.
People employing this strategy believe they have an above-average chance of attaining a high return with minimal risk.
You will look at certain accounting and financial metrics to determine whether a stock is undervalued. Typically, you will observe the price to earnings ratio, book value, and earnings history—among other metrics.
Successful Value Investors: Some of the most successful value investors of all time include Warren Buffett and Benjamin Graham.
Through the employment of this strategy, they have achieved higher returns than the market for a prolonged period.
Warren Buffett is arguably the greatest investor of all time—and achieved average annual returns of 20.5% against the S&P 500's 9.7% over a 53-year period!
This is only a basic description of value investing. Visit our post on Benjamin Graham for more info on how to employ this strategy.
The Growth Stock Approach
The growth stock approach is an investment strategy whereby your main goal is achieving capital appreciation—or an increase in the trading price of your stock.
Typically, growth stocks pay minimal dividends—in exchange for a rapid increase in per-share price—typically faster than the market.
Some hot growth stocks right now include the popular “FAANG” stocks. Including Facebook, Apple, Amazon, Netflix and Alphabet's Google.
Essentially, the growth stock approach promises consistent increases in the price per share of your stock. Consequently, you are expected to achieve above-average returns while employing this strategy.
This strategy is more attractive to those aspiring to achieve high returns—while putting you at a higher risk of losing money.
Dividend investing is an investment strategy in which stocks with a strong long-term record of earnings and dividends are favored.
When adopting this strategy, your goal will be to receive regular income while experiencing a low level of portfolio volatility.
Dividend investors will generally experience less volatility in the value of their portfolio.
You can generally achieve this by:
- Purchasing companies with a strong financial position and;
- A long history of consistent dividend payments and;
- A large market capitalization—among other factors
Technical analysis is an investment strategy that focuses on a stock's past price and volume performance as a method of forecasting future prices.
Often considered the opposite of fundamental analysis, which focuses on economic, financial and other qualitative and quantitative factors.
Those employing this strategy often have a short-term outlook. They can obtain profits in a short amount of time once the stock goes up, (long position) or down, (short position).
While I believe educating yourself in the field of technical analysis may be beneficial. I do not believe relying on its methodology alone will provide you is a safe way to invest in stocks—over the long-term.
Now that you have chosen an investment strategy—it's time to properly allocate your money!
5. Ensure That Your Funds Are Properly Allocated
The next thing you want to do to ensure success is to create an asset allocation plan.
Your asset allocation plan will determine what percentage of your funds will be allocated to separate investment vehicles. In our case, stocks or bonds.
There are many common asset allocation plans, so I am going to start with a quote from one of the most successful investors of all time.
75% Stocks And 25% Bonds
Benjamin Graham in his book, “The Intelligent Investor” said: “the investor should never have more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.”
This strategy provides you with a cushion against market dips, while simultaneously increasing your upside potential.
Bonds Are Less Volatile Than Stocks
Typically, fluctuations in the trading price of bonds are 30% less than those experienced in stocks. Therefore, less portfolio volatility will be experienced during adverse market conditions.
You should take measures to protect yourself against market recessions, as they are an inevitable event.
Allocating 100% of your funds towards stocks is risky. In the event of a market crash, your portfolio consisting only of stocks will be hit hard.
You will be less affected by this event when investing a maximum of 75% of your funds in stocks.
Assuming you had 75% of your portfolio in bonds, you will have a significant amount of capital to be allocated to now, “cheap” stocks.
Stocks Provide Higher Returns Than Bonds
I personally choose to allocate roughly 75% of my investment funds towards stocks at most times. As I believe, given the right strategy and adequate research, there is more profit to be made in stocks. Irrespective of the market cycle.
For more info on asset allocation, I would recommend the book Unshakeable by Tony Robbins—you can learn more about the book here.
Once you have created an asset allocation plan, it's time for the next step.
6. Other Ways to Invest Your Money In Stocks
While you can buy individual stocks on a stock exchange, there are other ways to invest too—I will explore a few of them below.
Exchange Traded Funds (ETFs)
You can purchase an ETF, or “exchange traded fund”. ETFs are investment funds that are, as the name suggests, able to be traded on an exchange—under a ticker symbol.
ETFs often hold assets including stocks, commodities, or bonds. Some ETFs track popular indexes, providing the investor with similar results to that index.
Index Funds: These are known as index funds. Index funds are a great way to diversify your stock portfolio—while typically charging minimal annual fees.
Index funds beat managed funds 80% of the time and are recommended by some of the greatest investors of all time. To quote Warren Buffett: “Both large and small investors should stick with low-cost index funds”.
If you are looking to gain exposure equity markets without the hassle of managing your funds yourself, ETFs are the way to go.
A mutual fund is an investment fund that is professionally managed and pools money from investors to purchase securities.
Mutual funds typically charge annual fees of 0.50-2% and are generally comprised of stocks and/or bonds.
This type of fund normally requires that you invest a minimum of $1,000 at a time.
Mutual funds are a great way to have your investment funds managed by a professional fund manager.
Real Estate Investment Trust's (REITs)
Another way to invest in the stock market is through a “Real Estate Investment Trust” or “REIT”.
A real estate investment trust is a company that owns incoming producing real estate.
Commonly, REITs are listed on some of the larger stock exchanges, providing you with a no-hassle way of purchasing real estate.
As a part-owner of a trust, you are entitled to part of the income received in the form of rent. Paid out regularly in the form of dividends.
Visit our how to invest 1000 dollars post—to learn other ways to invest!
7. How to Buy Stocks
Stocks are only available for purchase during market opening hours.
In most cases, stock market trading hours are between 9:30am-4:00pm, Monday to Friday.
The market will often close on public holidays including New Year’s Day and Independence Day.
Market Orders and Limit Orders
There are two types of orders to choose from when purchasing stocks. Order types include market and limit orders.
A market order is placed at the current trading price of the stock.
Whereas, limit orders give you the freedom to set the maximum price you are willing to pay per share.
Now that you know how to invest in stocks for beginners, visit the Best Investing Books post to learn about some of the best investing books in 2020.
Or visit this post for a list of the best income-producing assets.