A Beginner’s Guide on How to Invest in the Stock Market

People are always asking me “How can I learn to invest in the stock market? Is there a way to learn and make a lot of money?” That’s the big question and oh, if there were only just a simple answer.

Stock certificates representing how to invest in the stock market

The truth is that it is simple and yet very complicated. No one can ever guarantee you will make “a lot” of money investing, so if you hear that, then run. There are risks and those risks are either small or medium or large. In all cases, there are risks. So understanding that simple rule helps answer the questions you may have and yes, you can learn to invest in stocks and invest well!

What Is a Stock?

For starters, stocks are an investment into publicly traded companies to gain ownership of a business. The investing goal is to share in the business profits (i.e. dividends) or capital gains (appreciation of the share price).

Let me tell you right from the start that there is no recipe that works for everyone the same way. And that’s actually a great thing. But no matter how much or how little money you have to invest or how much knowledge about the stock market you have, you can start investing at any time. Just make sure that you are ready to risk whatever you want to invest.

Investing Basics

Many people interchange investing with trading. There is a difference. I want to make a clear what that distinction is.

With investing, the goal is long-term growth. In contrast, trading has a shorter time horizon with traders focusing on share price changes for quick profits, but that often comes with even a greater risk of losses.

When you buy stocks, you basically purchase a small share in a company that’s publicly listed on the stock market. If the company does well financially over time, the shares you bought reach a higher price. As a result, your stocks are worth more than when you purchased them. You can sell at a higher price and profit.

Set Your Investing Goals

Before diving into the stock market, you want to understand your investment goals. Are you looking to invest for independence or invest for retirement? What’s your time frame? Have you assessed your risk tolerance? It can seem overwhelming at first thought, but the truth is investing in stocks is easier than most think. And the best news is that there are tons of options to achieve your investment objectives.

Understand Your Risk Tolerance

When you’re a beginner investor, the fear of market volatility probably gives you some real anxiety. It’s understandable since uncertainty affects us all, and no one wants to risk losing their money. But statistics show that a decline of 5% to 10% on the stock market usually recovers in one month. That doesn’t mean investing in the stock market is without risk, but it sure isn’t something to avoid because of fear of uncertainty. And without risk, there is also no gain.

The bottom line about investing in the stock market is clear. Over time, the market makes gains and money and wealth grows. For some investors, that’s a huge wealth builder and for some, it doesn’t ever happen. The total always grows in time but the individual fortunes are never a guarantee. That’s why it’s important to understand your risk tolerance.

You Have Investment Options

Let’s break down how to invest in stocks so you can decide how to approach your investments. First of all, you can invest on your own.

You can open a brokerage account (to buy and sell stocks, mutual funds, and bonds) from a variety of brokerage firms. The firm will act as an intermediary between the investments and you. You can transfer the money in and out of this account, just like you do with your other accounts. You can also take your money out at any time.

Keep in mind a standard brokerage account is called a taxable brokerage account. Find the best online brokerage for a beginner.

The great news is that there are many online brokerages to choose from. The majority will allow you to invest in individual stocks, exchange-traded funds (ETFs), and even fractional shares. Of course, investing on your own requires doing your own stock analysis and a better understanding of market conditions.

Have you heard about a “robo-advisor”?

Don’t want to go at it alone? A robo-advisor can provide investment advice based on your goals, risk tolerance, and time horizon. A robo-advisor will manage your funds for you for a fee–a percentage of your account balance for the services, it’s usually around 0.25%. This option is good for beginners who cannot yet afford or don’t want to actually pay an investment manager or financial advisor to manage the investments.

Investing at Work in Your 401(k)

The reality is that you might already be investing in the stock market and you don’t know it yet. Your employer’s 401(k) offers you the possibility to invest in some stock mutual funds, that are more diversified and more steady, which means they are also less risky. With 401(k) plans, investment options are given based on your retirement goals. You’ll often find these plans offer “target-dated” stock (mutual) funds. Basically, that means they are geared for the long term, like your retirement 30 years from now. With 401(k) plans, you cannot invest in individual stocks, just mutual funds. The goal of these plans is specifically for retirement savings.

Opening a Brokerage Account

To start investing in stocks, you’ll need a brokerage account. It can be a self-directed account (you make every decision and transaction order), a robo-advisor, or a managed brokerage account. It is all investing.

Through an online stock brokerage, you can open an account with as little as $1 and buy/sell stocks with zero commission fees. This is a really good option for investors who want to get started and then grow into active investing.

In contrast, robo-advisors have minimum balance requirements, often starting at $100. This option is best for passive investors who also want some kind of financial advice.

On the other hand, a managed brokerage account means that a human investment advisor makes the decisions for your money. In return for this service, you typically pay a fee based on your account balance.

Choose Your Stocks

If you’ve decided on an active approach to trading stocks, you’re probably wondering what stocks to invest in. Stock market investing requires your due diligence. When building your stock portfolio, some experts recommend looking at your favorite companies, the ones you use and love.

That’s a great way to actually see the business in operation. Go to visit a McDonald’s, for example, and see exactly what they do there and you don’t need to read a complicated business prospectus to get the info!

But you can also do it yourself and invest in mutual funds which are a collection of stocks. Instead of trying to figure out which stock to choose, you can invest in an industry or a fund that follows an index (like the S&P 500). For most retail investors, you can invest in a type of mutual fund referred to as index funds or exchange-traded funds (ETFs).

Investing in stocks is great for beginners because you don’t need any previous experience. If you want to invest in stocks, you should first learn how to read a financial statement. If you do not understand what the numbers mean, then you may lose money when investing in stocks. That is why many think that for most newbie stock investors, it’s best to focus on mutual funds which include index funds and ETFs.

In any event, it is important to always understand this: if anyone is promising you quick riches by investing in a specific stock, be wary because you may lose your entire investment.

You Can Start Small to Invest in the Stock Market

When it comes to your budget, don’t get discouraged if you don’t have a big sum to invest at the moment. Sometimes you can start investing with as little as $100 through an online brokerage account in individual stocks. In fact, there’s a strategy called Dollar Cost Averaging (DCA) where you invest smaller equal sums on a regular basis (for example, $200 a month). DCA helps to reduce the risk of a poorly timed lump-sum investment and minimizes the effect of volatility on your investments.

Find good and steady companies that have a share price that you can afford and dip your toes in the water of your first investment. If you are a beginner who wants to invest in the stock market, it’s best to start out small and grow, gathering experience and knowledge along the way.

Final Thoughts

When you choose to invest in the stock market, it is a long-term commitment, or at least that’s how it should be. When you look at your investment strategy from that perspective, you no longer get affected by the market’s fluctuations. Why? Because in the long term, the historical charts state you’ll most probably have an average return of about 10% per year. That is besides the occasional price increase that might bring you a nicer and juicier profit when you decide to sell some of your stocks while at their peak moment.

One final thought: Warren Buffett said it best that individual stock picking is not for everyone. His advice for the average person is to think like a long-term investor and choose a simpler strategy. Buffet knows what he’s talking about and it works for him!

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