Investing in stocks: basic information
Investing in shares means only buying small shares in a public company. These small shares are called equity in the company and by investing in them you expect the company to grow and do well over time. If this happens, your shares may increase in value and other investors may be willing to buy them from you at a higher price than you paid for them. This means that if you decide to sell, you can make a profit.
One of the best ways for beginners to start investing in the stock market is to deposit money into an online investment account, from which they can invest in stocks or mutual funds stocks. With many brokerage accounts, you can start investing for the price of a stock.
How to invest in stocks in six steps
Decide how you want to invest in the stock market.
There are several ways to approach stock investing. Choose the option below that best suits the way you invest and how active you want to be in choosing and selecting the stocks you invest in.
A. «I would like to pick my own stocks and stock funds«. Read on; this article breaks down the things practical investors need to know, including how to choose the right account for your needs and how to compare equity investments.
«Consult our review of the best online brokers
B. «I would like a professional to manage the whole process for me». You may be a good candidate for a robo-advisor, a service that offers low-cost investment management. These services are offered by virtually all major brokerage firms and many independent advisors who invest your money for you based on your specific objectives.
«Check out our selection of the best robo-advisors.
C. «I would like to start investing in 401 funds(k)of my company». This is one of the most common ways for beginners to start investing. In many ways, it teaches new investors some of the most proven investment methods: small regular contributions, a focus on the long-term horizon, and a hands-off approach. Most 401(k) funds offer a limited selection of stock mutual funds, but not access to individual stocks.
2. Withdrawal from the investment account
In general, you need an investment account to invest in stocks. For practical types, this usually means a brokerage account. For those who want a little help, opening an account through a robo-advisor is a sensible option. We break down both approaches below.
Important note: Both brokers and robo-advisors allow you to open an account with very little money.
«Do it yourself» option: open an account with a stockbroker
An online brokerage account probably offers the fastest and cheapest way to buy stocks, funds and a variety of other investments. You can open an individual retirement account, also known as an IRA, with a broker, or you can open a taxable brokerage account if you are already saving enough for retirement in a company 401(k) or other plan.
If you need to go deeper, we have a guide to opening a brokerage account. You will need to evaluate a broker based on factors such as costs (trading commissions, account maintenance fees), the amount of money they will charge you, investment selection (if you prefer funds, look for a good selection of ETFswithout fees) and research and investor tools.
Passive option: create an account with a robo-advisor
A robo-advisor offers the advantages of stock investing, but does not require the owner to do the work necessary to select individual investments. Robo-advisor services offer complete investment management: these firms ask you about your investment objectives during the onboarding process and then build you a portfolio designed to help you achieve those objectives.
It may seem expensive, but management fees are usually a fraction of what a human investment manager would charge: most robo-advisors charge about 0.25% of your account balance. And yes – you can also get an IRA from robo-advisors if you want.
As a bonus, if you open an account with a robo-advisor, you probably don’t need to read any further in this article – the rest is just for the guys who make an account themselves.
3. Know the difference between investing in stocks and funds.
Going DIY? No worries. Investing in stocks doesn’t have to be complicated. For most people, investing in stocks means choosing between these two types of investments:
Equity mutual funds or exchange-traded funds. Mutual funds allow you to buy small portions of many different stocks in a single transaction. Index funds and ETFs are a type of mutual fund that tracks a particular index; for example, the Standard & Poor’s 500 fund replicates that index by buying shares of the companies that make up the index. When you invest in a fund, you also own small shares of each of these companies. You can combine several funds to create a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds.
Individual stocks. If you are interested in a particular company, you can buy a single stock or several stocks as a way to dip your toes into the waters of stock trading. Creating a diversified portfolio of many individual stocks is possible, but requires a significant investment.
The advantage of equity mutual funds is that they are inherently diversified, which reduces risk. For the vast majority of investors – especially those investing their retirement savings – a portfolio composed primarily of mutual funds is the obvious choice.
However, mutual funds are unlikely to grow at the meteoric pace that some individual stocks can. The advantage of individual stocks is that choosing them wisely can bring big returns, but the likelihood that any individual stock will make you rich is extremely small.
4. Establish a budget for stock market investments
New investors usually ask themselves two questions at this stage of the process:
How much money do I need to start investing in stocks?
The amount you need to buy each stock depends on its price (prices can range from a few dollars to several thousand dollars). If you want mutual funds and are on a tight budget, an exchange-traded fund (ETF) may be your best option. Mutual funds usually have a minimum price of $1,000 or more, but ETFs trade like stocks, meaning they are purchased at the share price-in some cases, less than $100).
How much money should I invest in stocks?
If you invest through funds – did we mention that this is preferred by most financial advisors – you can allocate a fairly large portion of your portfolio to equity funds, especially if you have a long time horizon. A 30-something investing for retirement might have 80% of his portfolio in equity funds; the rest would be in fixed-income funds. Individuals are a different story. The general rule of thumb is to keep them in a small portion of your investment portfolio.
«Do you have a small amount of cash that can appreciate in value? Here’s how to invest $500
5. Focus on long-term investment
Investing in the stock market has proven to be one of the best ways to grow your wealth over the long term. Over several decades, the average stock market return has been around 10% per year. However, remember that this is only an average for the entire market: some years will go up, some years will go down, and individual stocks will vary in their own returns. For long-term investors, however, the stock market is a good investment regardless of what happens from day to day or year to year; it is that long-term average that they are looking for.
Stock investing is full of complex strategies and approaches, but some of the most successful investors do nothing more than stick to stock market fundamentals. This usually means that the bulk of their portfolio is made up of funds, and that they only pick individuals if they believe in the long-term growth potential of the company in question.
The best thing you can do after you start investing in stocks or mutual funds may be the hardest: Don’t look at them. Unless you’re trying to beat the odds and succeed at day trading, it’s a good idea to avoid the habit of compulsively checking how these are doing several times a day, every day.
6. Manage your portfolio
While worrying about daily fluctuations won’t do your portfolio – or yourself – much good, there will of course be times when you need to check your stocks or other investments.
If you follow the steps above and buy mutual funds and individual stocks over time, you will want to review your portfolio several times a year to make sure it remains in line with your investment objectives.
There are a few things to keep in mind: If you are nearing retirement, you may want to shift some of your equity investments to more conservative fixed income investments. If your portfolio is overly concentrated in one sector or industry, consider buying stocks or funds from another sector for greater diversification. Last but not least, pay attention to geographic diversification.
Vanguard recommends that international stocks represent up to 40% of your portfolio. You can purchase international mutual funds to gain this exposure.
Expert tip: If you’re tempted to open a brokerage account, but need help choosing the right one, check out our latest roundup of the best brokers for investors. It compares today’s top online brokerages across all the metrics that matter most to investors: commissions, investment selection, minimum account opening balances, and investor tools and resources.
In which stocks to invest in 2021
Before continuing with this content we have to put a disclaimer, these actions have been tested by our experts and have given profitability, this does not ensure that investing in these at the time you read the post will ensure that you get benefits.
To start investing we recommend the study of trading and stock market or consult with professionals who advise you. If you decide to start training, make sure that the course or master you decide to study has the corresponding certifications, lately there are many scams due to the high demand for these and the lack of knowledge on the part of most people.
- Airbus shares
- Saint Gobain shares
- Michelin shares
- American Airlines shares
- Deoleo shares
- Ohl shares
- Rovi shares
- Codere shares
- Tubacex shares
- Amper shares
Frequently asked questions about stock investment
Can I open a brokerage account if I live outside the United States?
This will depend on the broker you choose. Of the brokers that NerdWallet reviews, Firstrade, TDAmeritrade, Lightspeed, Interactive Brokers, eOption, TradeStation, ZacksTrade, Charles Schwab and Webull are open to foreign investors, all with different restrictions and requirements.
Do you have any investment tips for beginners?
All of the above guidelines on investing in stocks are for beginning investors. But if we had to pick one thing to say to all beginning investors, it would be this: investing is not as difficult – or complicated – as it seems.
That’s because there are many tools available to help you. One of the best is stock mutual funds, which are an easy and inexpensive way for beginners to invest in the stock market. These funds are available inside your 401(k), IRA or any taxable brokerage account. A good starting point is the S&P 500 fund, which buys you small shares of the 500 largest U.S. companies.
The other option, as mentioned above, is a robo-advisor that will build and manage a portfolio for you for a small fee.
In summary: there are many ways to invest that are suitable for beginners and do not require advanced knowledge.
Can I invest if I don’t have much money?
Investing small amounts of money has two pitfalls. The good news? Both are easy to overcome.
The first challenge is that many investments require a minimum amount. The second challenge is that small amounts of money are difficult to diversify. Diversification, by its very nature, involves spreading money around. The less money you have, the more difficult it is to spread it out.
The solution to both is to invest in equity index funds and ETFs. While mutual funds may require a minimum of $1,000 or more, index fund minimums are typically lower (and ETFs are purchased at a share price that can be reduced even further). Two brokers, Fidelity and Charles Schwab, offer index funds with no minimums. Index funds also solve the diversification problem by holding many different stocks within a single fund.
One last thing: investing is a long-term game, so don’t invest money you may need in the short term. That includes having a cash cushion for emergencies.
Are stocks a good investment for beginners?
Yes, as long as you don’t mind keeping your money invested for at least five years. Why five years? Because it is relatively rare for the stock market to experience a downturn that lasts longer.
However, instead of trading individual stocks, focus on mutual funds. With mutual funds, you can buy a large selection within a single fund.
Is it possible, on the other hand, to build a diversified portfolio of individual stocks? Sure, but it would take a lot of time: it takes a lot of research and expertise to manage a portfolio. Equity mutual funds-including index funds and ETFs-do the work for you.
What are the best investments in the stock market?
In our opinion, the best stock market investments tend to be low-cost mutual funds, such as index funds and ETFs. By buying them instead of individual stocks, you can buy a large part of the stock market in a single transaction.
Index funds and ETFs track a benchmark index – for example, the S&P 500 Index or the Dow Jones Industrial Index – which means your fund’s performance will reflect that of the benchmark index. If you invest in an S&P 500 index fund and the S&P 500 index rises, your investment will also rise.
That means you won’t beat the market, but it also means the market won’t beat you. Investors who trade individual stocks rather than funds typically underperform the market over the long term.
How do I decide where to invest my money?
The answer to the question of where to invest really depends on two things: the time horizon of your objectives and the level of risk you are willing to take.
First, let’s address the time horizon: if you are investing for a distant goal such as retirement, you should invest primarily in stocks (again, we recommend investing through mutual funds).
Investing in stocks will allow your money to grow and outpace inflation over time. As you get closer to your goal, you can begin to gradually reduce your allocation and add more bonds, which are typically a safer investment.
On the other hand, if you are investing for a short-term goal – less than five years – you probably don’t want to invest in stocks. Consider these short-term investments instead.
Finally, another factor: risk tolerance. The stock market goes up and down, and if you tend to panic when it does the latter, you’re better off investing a little more conservatively, with a smaller allocation to stocks. Not sure? In our article on what to invest in, we have a quiz on risk tolerance and more information on how to decide.
In which stocks should I invest?
Our recommendation is to invest in many stocks through an equity mutual fund, an index fund or an ETF; for example, an S&P 500 index fund that holds all the stocks in the S&P 500 index.
But if you’re looking for the thrill of stock picking, it probably won’t do you any good. You can scratch your itch and keep your shirt by allocating 10% or less of your portfolio to individual stocks. What are they? You’ll find some ideas in our comprehensive list of the best stocks based on their current performance.
Is stock trading for beginners?
While stocks are great for many novice investors, «trading» is probably not part of the deal. We may have already hinted at this, but we will say it again: we strongly recommend a «buy and hold» strategy using equity mutual funds.
This is the exact opposite of stock trading, which requires commitment and a great deal of research. Stock traders try to time the market and look for opportunities to buy low and sell high.
To be clear: every investor’s goal is to buy low and sell high. But history tells us that you are more likely to succeed if you hold a diversified investment – such as a mutual fund – for the long term. You don’t need to actively trade.