Investing provides a great opportunity to grow your money for future goals, like retirement. But getting into the stock market isn’t a one-and-done deal. It requires research and upkeep to make sure your investments continue to perform well. Investing in stocks can be particularly tricky too, as they’re fairly risky investments. You can also work with a financial advisor to create an investment plan for yourself.
The Basics of Investing in Stocks
Stocks are shares in ownership of a company that you are allowed to buy. This means you become a partial owner of the company, no matter how big or small your share is. As the company grows, so does your stock’s value.
Investing in stocks can give you the flexibility to buy and sell as you please. Some stocks pay dividends, which is extra money you see immediately rather than when you sell a share. Of course, investing in stock comes with some risk due to the stock market’s own volatility. In turn, it’s crucial that you understand stocks before you invest your hard-earned money.
Step #1: Learn About the Stock Market and Investing
Before diving into the stock market, it’s important to take a look at your finances and investing goals. Since investing in stock requires you to spend money, make sure there’s room in your budget to spend. You should take care of any debts or ongoing bills before you dedicate money to your stock ventures.
Then you’ll want to set some investing goals. For example, ask yourself questions like these:
- For what reason are you investing?
- Are you trying to supplement your retirement savings or are you investing solely to make money?
- Do you want to consistently buy and sell, or would you rather let your stocks sit untouched?
You should also establish your tolerance for risk, on top of learning how the stock market works. The stock market is affected by a number of factors, such as supply and demand, companies’ performances, world events and more.
Some stocks provide more security than others, which you can figure out by looking at the company’s past performance. In addition, some investors choose to invest only in safer stocks to avoid possible losses. Others try to work with the market to balance high- and low-risk investments to maximize their returns.
Step #2: Figure Out How You’re Going to Invest
Once you’ve determined what you want out of stock investing and how to go about it, you can go ahead and open a brokerage account. This requires shopping around for a brokerage with which to open your account. Some popular choices are Charles Schwab, Webull, Fidelity and Vanguard. Nowadays, you can easily find a stockbroker online.
To open a brokerage account, you’ll need to provide some personal information and proof of identification. You also have to fund the account, either with a check or via an electronic transfer. Some brokerages also have minimums for the amounts you must deposit. For instance, a brokerage may only accept deposits of at least $1,000 or $500. Be sure to check any limitations with your brokerage beforehand. That way, you’re not surprised out of any money.
There are a couple of other advisor-based methods you can use to invest in stocks too. For example, you can work with a financial advisor. Most advisors have trading licenses and can build an investment portfolio plan for your goals. If you’re disinclined to pay the fees that come with a financial advisor, consider opening an account with a robo-advisor. These automatic investment managers learn about your investor profile and build a portfolio accordingly.
Step #3: Plan Out Which Stocks You Want to Invest in
With so many stocks to choose from, it helps to research and make a plan first. That way you’ll know exactly which companies you want to buy into and how much you’ll spend for each share. You’ll also need to decide how many shares of each company’s stock you want to buy.
Although no one can predict the market, it can help to watch the stocks you’re interested in before buying. That way you can be more prepared for what you’ll see after you buy. It could also help to check up on a company’s performance. For one, you may end up rethinking buying a share in a company whose value is actively decreasing.
Of course you’ll also need to stick to your budget. If you can only afford to spend $10 per share, you’ll want to avoid any expensive shares, no matter how tempting. Your final budget will depend on the price of each share and how many shares you want to buy. Don’t forget that when you buy a stock, you’ll have partial ownership of that company.
Note that not all stocks function similarly. There are a range of different types of stocks to choose from, including blue-chip stocks, small-cap stocks, large-cap stocks, preferred stocks and more.
Step #4: Buy Your Stocks
Now it’s time to actually go ahead and buy those stocks. There are a few ways to go about buying stocks. For one, you can submit a market order. This means that you want to buy a share at the best available current market price. This happens immediately, regardless of the share’s price. Keep in mind that since the market constantly fluctuates, so will the price you pay or sell at.
Luckily, you also have the option of submitting a limit order instead. This kind of order sets the price point that you’re willing to pay for a certain company’s share. For example, say a share currently prices at $80, but you’re only willing to pay $60. You submit a limit order and your purchase (or sale) will only go through at $60.
This is when having a broker to manage your investments can really come in handy. Without a broker, you would have to make all these orders and moves yourself. A broker can lend a more professional view to your investments to make efficient trades. Plus, they’ll know more of the language specific to the stock market and trading.
Step #5: Build a Diversified Portfolio of Multiple Stocks
Buying stock is only part of your financial journey. And if you want to align your stock with your financial goals, you should aim to build an investment portfolio. This strategy puts stock, bonds, cash and other assets into a basket with a long-term focus on making money and minimizing risk.
Every time you invest, you take on some risk, which means that you can lose money when the market or asset underperforms. Determining how much risk you are willing to tolerate can guide what type of investments you will make, especially when the market goes up and down.
You should also keep in mind how long you are willing to hold on to your investment. This is called a time horizon, and whether you are investing to buy a first home or retire comfortably, putting your financial goals on a timeline will give them a greater purpose.
A broker will allow you to invest in different types of assets, including stocks, bonds, mutual funds, certificates of deposit (CD), real estate investment trusts (REITS), and other investment opportunities.
Using ETFs to Buy Stocks Indirectly
Choosing individual stocks to invest in can be a bit risky. That’s because what you’re essentially doing is choosing a single entity that you think will outperform all of its competition. You can combat this volatility by investing in multiple companies across different areas of the market. This will ensure your money is dispersed enough to mitigate any large ebbs and flows in the market.
The largest downside to the above approach is that it can be quite time-consuming to keep up with. However, an exchange-traded fund, or ETF, can take care of the work for you.
ETFs are basically baskets of investments, usually stocks, that cover certain markets. So in short, they allow you to diversify your money wisely without having to choose the investments yourself. You can buy an ETF just as easily as a stock directly through a brokerage, robo-advisor or financial advisor.
Bottom Line
Buying stocks is an important part of many people’s investing plans. It isn’t a complicated process, but it does involve a few steps and, if you’re doing it right, a decent amount of preparation. Before you find a broker and actually buy the stocks, make sure you’ve gone over your finances and know which stocks you want to buy that will help you achieve your financial goals.
Tips for Investing in Stocks
- Whether you’re new to investing or a veteran of the stock market, a financial advisor can help you refine your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- No matter how hard you try, you cannot predict or beat the stock market effectively. Stock prices rise and fall every day, and these changes and your eventual payout will depend on a number of factors, including inflation.
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