Investing in stocks is an effective way to build wealth by putting your money to work for you, even if you’re not a financial expert. Although you can dive deep into complex strategies later on, getting started is relatively simple and only requires some time, consideration, and basic knowledge of essential concepts.
This article provides a step-by-step guide to help you start investing in stocks, along with defining key terms you should be familiar with.
How to start investing in stocks
Investing in stocks doesn’t have to be hard. Follow these steps to get started today.
1. Choose an investment approach
There are three options available, and it is important to consider how much time and effort one is willing to put into managing their investment.
The first option is managing your own portfolio, which is also known as active investing. This option is best suited for experienced investors who are willing to devote significant time to their investments. They decide which stocks to buy and when to trade them.
The second option is using a broker, which is a form of passive investing. With this option, an experienced portfolio manager chooses the best investments for your goals, monitors your portfolio and adjusts it as needed. This option is ideal for beginners who are new to investing and want guidance from an expert.
The third option is using a robo-advisor, which is also a form of passive investing. With this option, you identify your investing goals and risk tolerance, and the service automatically manages your portfolio for you. Robo-advisors tend to be less expensive than human advisors and are a great option if you’d like a more hands-off approach to investing.
2. Create an investment budget
The first step in investing in stocks is to determine how you want your investment to be managed. You have three options: managing your own portfolio, using a broker, or using a robo-advisor. If you choose to manage your own portfolio, you will have complete control over which stocks to buy and when to trade them. This option is best suited for experienced investors who are willing to devote significant time to their investments. For beginners, using a broker or robo-advisor may be a better option.
The next step is to decide how much you want to spend on investing. Review your monthly budget to ensure that you have enough to spend on day-to-day expenses, savings, and investing. You don’t need to invest a large amount of money, but it’s important to get started as soon as possible so your investments have more time to grow.
When determining your investing budget, you should also consider asset allocation. A mix of asset classes, such as stocks, bonds, and gold, can help to reduce risk in your portfolio. A general rule of thumb is to aim for a percentage of your portfolio in stocks that is equal to 100 minus your age. For example, if you are 40 years old, stocks should make up 60% of your portfolio.
Finally, once you have determined your investing budget and asset allocation, you have plenty of options for investing. You can invest in individual stocks, which can range in price from a few dollars to several thousand dollars, or in exchange-traded funds (ETFs), which can cost less than $100.
3. Open an investing account
Now it’s time to set up an investing account. If you want to actively manage your portfolio, you can open an online brokerage account, which allows you to personally choose your investments. If you prefer to use a broker, a managed broker account is available where an investment advisor handles the work for you.
Another option is to use a robo-advisor, which is a more affordable alternative to human investment managers. A robo-advisor collects information from you to understand your needs and goals, and then creates and manages your portfolio accordingly. As their services are automated, their fees are generally lower than human brokers, and they don’t charge commissions. However, if you prefer speaking to someone for more nuanced advice, a broker might be a better choice for you, despite the higher cost.
4. Choose what to invest in
(Note: This section provides guidance on the different investment types available to DIY investors who choose to actively manage their portfolios.)
When actively managing your own portfolio, it’s important to know the different investment types available to you:
- Individual stocks: Buying individual stock shares means investing directly in the success of the company you choose. Your success is tied to the company’s performance, so it’s important to research each company before investing. This option is better suited for experienced investors.
- Mutual funds: Mutual funds are pooled investment funds that enable you to invest in a collection of stocks, diversifying your portfolio across various industries and regions. A professional manager usually actively manages mutual funds by buying and selling stocks based on their expertise.
- Exchange-traded funds (ETFs): ETFs work similarly to mutual funds but are generally managed passively by tracking a major stock index. They are typically less expensive and more tax-efficient than mutual funds, making them a great option for beginners.
5. Review your portfolio periodically
It is crucial to regularly review your investment portfolio, whether you are managing it yourself or using a broker or robo-advisor, to ensure that it is aligned with your investment goals. You may want to invest more or diversify into new sectors or industries, or switch to more conservative investments as you approach retirement age. Periodic portfolio performance evaluations can help you determine if your investments are performing as intended and if you are on track to achieve your financial goals.
