How to Invest in Stocks: A 7-Step Guide for Beginners

Trading stocks can be a powerful way to grow wealth over time. Whether you can invest thousands or just $25 a week, this beginner’s guide will help you take your first steps in stock investing. From setting investment goals to choosing the right stocks, follow these seven essential steps.

Key Takeaways:

• Investing in stocks is a means of growing your wealth but carries risks.
• You can lower risk, though you can’t eliminate it.
• There are more resources than ever for new investors to get expert advice.

Step 1: Set Clear Investment Goals

Start by specifying your financial objectives, both short-term and long-term, as these will influence your investment strategy. For example:

Tips for Setting Goals:

• Be specific, e.g., “Save $500,000 for retirement by age 50.”
• Identify your investment horizon—longer timeframes allow for more aggressive strategies.
• Regularly review and adjust your goals as life circumstances change.

Step 2: Determine How Much You Can Afford to Invest

A careful financial assessment ensures responsible investing without compromising your financial stability.

Tips:

• Review your income and create a budget.
• Build an emergency fund to cover several months of essential expenses.
• Pay off high-interest debts first, as they can outweigh stock returns.

Important:

• Only invest money you can afford to lose.
• Never put yourself in a vulnerable financial position for the sake of investing.

Step 3: Determine Your Risk Tolerance and Investing Style

Understanding your risk tolerance helps align your investments with your comfort level and goals.

Assess Your Risk Tolerance:

• Reflect on your comfort with market fluctuations. Are you willing to take more risk for higher returns, or do you prefer stability?
• Time horizon plays a role: longer timelines often allow for riskier investments, while shorter ones require more conservative choices.

Investing Styles:

Step 4: Choose an Investment Account

Your account type impacts your tax situation, investment options, and strategy.

Considerations:

• Fees and commissions: Watch for trading commissions, account maintenance, and inactivity fees.
• Minimum balances: Some brokers require a minimum amount to start investing, but many have eliminated these thresholds.

Step 5: Fund Your Account

Once you have selected your broker and account type, it’s time to fund your stock account. Decide whether you want to:

• Deposit a lump sum for immediate investment, or
• Set up automatic contributions over time for dollar-cost averaging.

Check for promotions where brokers offer bonuses for new accounts or deposits.

Step 6: Pick Your Stocks

Now that your account is funded, research and choose stocks. Diversification is critical to reducing risk. Options include:

Considerations:

• Research companies thoroughly.
• Aim for a mix of different sectors and industries to spread risk.

Step 7: Monitor and Adjust Your Portfolio

Once your investments are set, regular monitoring is essential. The market will fluctuate, as will your financial goals, which means you’ll need to adjust.

Best Practices:

• Periodically review your portfolio to ensure it aligns with your risk tolerance and goals.
• Rebalance your portfolio as necessary—buy or sell assets to maintain your preferred investment mix.
• Stay informed about market trends, company performance, and changes in your financial situation.

Step 5: Fund Your Stock Account

After choosing the right broker based on your investment objectives, you must fund your account to start trading. You’ve already decided whether you want a cash account, which requires full payment for your investments, or a margin account, which lets you borrow funds to purchase securities. A margin account allows you to buy more stocks than you could with just the cash in your account, but it also increases your risk. It’s important to understand the implications of a margin account before choosing this option.

Opening your brokerage account is simple and requires personal information such as your Social Security number, address, employment details (including your employer’s name and your job title), and financial status (including your annual income and net worth). The process usually takes around 15 minutes.

Once the account is open, it’s time to fund it. Here’s how you can proceed:

Tips for Funding Your Stock Account

• Choose a funding method:
• Bank Transfer: This is the most common option for transferring funds directly from your bank account. You can opt for electronic funds transfer (EFT) or wire transfer.
• Check Deposit: Some brokers allow you to mail a check to fund your account. Although slower, it’s a good alternative for those who prefer not to use electronic transfers.
• Transfer from Another Brokerage: If you already have an existing brokerage account, you can transfer assets directly through the ACATS (Automated Customer Account Transfer Service). This process usually takes a few days but is straightforward.
• Set up automatic contributions: One great way to build your investment over time is by setting up automatic contributions through dollar-cost averaging. This method involves regularly investing a fixed amount of money, regardless of market conditions. For example, invest $100 every month. You’ll buy more shares when prices are low and fewer when prices are high, potentially reducing the impact of market volatility on your investments. Most brokers let you schedule and customize these contributions to match your budget and investment goals.
• Start investing: You can begin trading once your funds have been transferred. You can trade once the funds are verified, so don’t worry about accidentally trading without sufficient money in your account.

If you plan to trade frequently, check out our list of brokers offering low fees for active traders.

Step 6: Pick Your Stocks

Choosing stocks can be a daunting task, even for seasoned investors. For beginners, it’s best to focus on stocks that offer stability, a solid history, and growth potential. Avoid the temptation to gamble on volatile stocks for quick profits. Successful long-term investing is usually a gradual process, not a get-rich-quick scheme. By focusing on stable stocks, you can build a secure foundation for your investment journey.

Here are a few stock types that are generally a good choice for new investors:

• Blue-chip stocks: These belong to large, well-established companies with solid financials and a history of stable performance. Typically, these are listed in the Dow Jones or S&P 500 indexes. They offer stability, especially during market downturns.
• Dividend stocks: Companies that regularly pay dividends can be great for beginners. Not only do they offer regular income, but you can also reinvest dividends to buy more shares. Check out our guide on how to buy dividend stocks for more insights.
• Growth stocks: While growth stocks have the potential for higher returns, they are also riskier. If interested, target industries with long-term growth potential, like healthcare or technology.
• Defensive stocks: These stocks tend to perform well even during economic downturns. Sectors like utilities, consumer goods, and healthcare are examples. Defensive stocks can offer a safety net for beginners.
• ETFs: Exchange-traded funds (ETFs) track market indexes such as the S&P 500. They offer diversification, reducing the risks associated with individual stock investments. As you gain experience, you can explore thematic ETFs that align with your investment goals or interests.

Start conservatively by focusing on stable, well-established stocks or ETFs. This strategy will help you build confidence as you grow your investment knowledge.

Step 7: Learn, Monitor, Review

Investing is a continuous learning process. As the stock market fluctuates, staying informed and reviewing your goals regularly is essential. Here’s how you can stay on top of your investments:

Tips for Learning and Monitoring Your Stocks

• Read widely: Make it a habit to follow credible financial news sources. Stay updated on global economic conditions, market trends, and the companies you’re invested in. Avoid sources that promise unrealistic returns or use gimmicks to sell you their products or services. Instead, focus on trusted books and articles on investment fundamentals and diversification.
• Use stock simulators: Simulators allow you to practice trading without financial risk. They’re a great way to apply investment strategies before using real money. Investopedia’s stock simulator is a popular choice and is free to use.
• Diversify: As you gain experience, you’ll want to diversify your investments across various asset classes. This helps spread risk and boosts your chances of achieving higher returns. Once you’re ready, explore our resources on portfolio diversification.

Monitoring your stocks and staying informed allows you to make timely adjustments and keep your financial goals on track.

Best Stocks for Beginners

Starting from scratch as a new investor can be overwhelming due to the many options available. However, you can simplify the process by focusing on investments favored by experts. Here are some solid options for beginners:

• Index Funds: While not technically individual stocks, index funds trade like them. These funds track a specific market index, such as the S&P 500, and are known for their low fees and diversification. Although they may need more excitement in picking individual stocks, they offer the benefit of investing in a wide range of companies at once. Historically, most actively managed funds fail to outperform the S&P 500 over the long term, making index funds an excellent choice for passive investors.
• Blue-chip stocks: These well-established, stable companies are industry leaders with solid market positions. Blue-chip stocks are ideal for beginners because they provide stability and the potential for steady, long-term returns. Examples include Apple, JPMorgan Chase, Johnson & Johnson, and Coca-Cola.
• Dividend aristocrats: These companies have increased their dividends for at least 25 consecutive years. Investing in dividend aristocrats offers the potential for rising income and compound growth. Examples include ExxonMobil, Procter & Gamble, and Walmart.
• Low-volatility stocks: Companies with lower price volatility provide investors with a smoother ride. These stocks are usually from defensive sectors like utilities, healthcare, and consumer staples. Examples include Johnson & Johnson, Procter & Gamble, Berkshire Hathaway, and Hershey.
• Quality factor ETFs: These funds focus on financially healthy companies with solid balance sheets, low debt, and consistent earnings growth. Some well-known quality ETFs include iShares MSCI USA Quality Factor ETF and Invesco S&P 500 Quality ETF.

While these investments might not offer the rapid growth of riskier stocks, they provide a foundation for long-term success. Compounding dividends and steady returns increase over time, making patient, disciplined investing a reliable strategy. Remember, successful investing is often a marathon, not a sprint.

Frequently Asked Questions

How Much Money Do I Need to Start Investing in Stocks?

The money you need to start investing depends on the brokerage and the investments you’re considering. Some online brokers have no minimum deposit requirements, making it possible to begin with a small sum. However, individual stocks and mutual funds or ETFs may require a higher initial investment.

Fortunately, more low-cost investment options are available today than years ago, so even those with limited funds can begin investing.

Are Stock Funds Good for Beginner Investors?

Yes, stock funds like mutual funds and ETFs are excellent for beginners. They offer diversification, reducing risk by spreading your investment across various stocks. Managed by professional fund managers, stock funds allow beginners to invest in multiple stocks with a single investment. Over time, you’ll gain valuable insights into the stocks these funds hold, which will help you when you’re ready to invest in individual stocks.

What Are the Risks of Investing?

All investing involves some level of risk. There’s always a possibility that your investment’s value may not grow over time. Different asset classes come with varying levels of risk, so it’s essential to manage this risk according to your financial goals and investment horizon.

Do I Have to Live in the U.S. to Open a Brokerage Account?

You don’t have to be a U.S. resident to open a brokerage account with a U.S.-based firm. Many firms accept international clients, but the process may require additional documentation, such as proof of identity and residency. Some services and investment products may also have restrictions for non-U.S. citizens.

How Do Commissions and Fees Work?

Most brokers charge a commission for each trade. Limiting the number of trades you make is wise to keep costs down. Some investment products, such as ETFs, may carry additional fees to cover fund management expenses.

The Bottom Line

Starting to invest in stocks can be a manageable sum of money. With research, you can determine your investment goals and risk tolerance while considering brokerage fees. By choosing the right broker and investments, you’ll set yourself up for financial growth over the long term.