A Beginner’s Guide to Investing in Stocks

Investing in stocks is an excellent way to grow wealth, and the DIY route is easier than beginners might think. Once you know the basics – like setting up the right investment account for your needs and how to compare stock investments, you’ll be ready to take on the stock market.

To help you get started, here’s a simple 5-step guide:

Step 1. Set up The Right Investing Account:

To invest in stocks, hands-on investors will need a brokerage account. It’s the quickest and least expensive way to buy shares of stock or stock mutual funds. Make sure to evaluate brokers based on factors like trading commissions, account fees, investment selection, and investor research and tools.

Step 2. Choose Between These Two Investment Types:

Stock mutual funds/equity mutual funds or exchange-traded funds are the two types of investments you can make. With mutual funds, you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs are mutual funds with a portfolio constructed to replicate the components of an index; e.g., the S&P 500.

If you want to invest in individual stocks, you can buy a single share or a few shares in a specific company. Note that it takes a significant investment to build a diversified portfolio with many individual stocks.

Investing in stock mutual funds presents a lesser risk because you automatically have a diversified portfolio. Bear in mind, however, that wisely picking individual stocks may pay off handsomely.

Step 3. Set a Budget & Stick with Stock Market Basics:

If you’re around 30 years old and are investing for retirement, the answer to “How much money should I invest in stocks?,” is:

– Allocate 80% of your portfolio in stock funds (the preference of most financial advisors)

– The rest should be in bond funds, with only a small fraction allocated to individual stocks

Choose to invest in individual stocks only if you believe in the company’s potential for long-term growth.

Step 4. Don’t Fret Over Daily Fluctuations

The best thing to do after you invest in stocks is to not look at them. Avoid compulsively checking in on your stocks several times a day, unless you’re trying to succeed at day trading.

Step 5. Manage Your Stock Portfolio

It’s recommended that you revisit your portfolio a few times a year. This is necessary to make sure it’s still in line with your investment goals. E.g., if you’re planning on retiring soon, you may want to move some of your stock investments into more conservative fixed-income investments.