Investing in stocks can be a practical way to grow wealth but you must approach it wisely. A huge part of this is understanding the ins and outs of the stock market. But stock investing often involves a complicated process, which can be intimidating, especially if you’re new to the craft.
If you’re a new investor and wondering whether getting into stocks is a good idea, this guide can serve as a useful resource. Here, InvestmentNews answers the most pressing questions new investors have about how to invest in stocks, so let’s dive right in.
Public companies issue stocks, also called equities, to raise capital for various projects. These can include releasing new products and expanding to different markets.
Buying stocks gives you partial ownership of a company. In essence, you become a shareholder and are entitled to some of the profits, which are issued in the form of dividends. If you’re new to investing, a unit of stock is also called a share.
Do you think a business has strong growth potential? You can buy its stocks. If the business performs well, you get a return on your investment. But if it doesn’t, you could see your investment go down the drain.
Let’s say you sell shares and earn a profit. You get what’s called capital gain. If the sale causes you to lose money, you get capital loss.
You can buy and sell stocks through various national exchanges. The biggest ones are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). You can find the complete list of national exchanges on the Securities and Exchange Commission’s (SEC) website.
Check out this beginner’s guide to learn more about how to invest in stocks.
When it comes to investing in stocks, one of your biggest decisions is choosing how you want your money to be managed. There are several paths you can take depending on your investment style and industry knowledge. These are the most common ways:
If you’re just starting on your investment journey and have limited knowledge of stock investing, this is the way to go. An experienced financial advisor or wealth manager can make important investment decisions on your behalf.
Looking for one? Check out our special report on the top financial advisors in the US, where we put the spotlight on the industry’s best and brightest.
Robo-advisors can be a good choice if you have clear and straightforward investment goals. They use complex algorithms to evaluate your risk profile and financial goals to identify the best stocks to invest in.
One advantage of working with robo-advisors over investment professionals is that they charge lower annual fees – around 0.25 percent to 0.5 percent of your account. While robo-advisors make picking stock investments easier, they aren’t guaranteed to perform better than humans.
Going the do-it-yourself route is a good option if you have good knowledge of the stock market and can devote time and energy to making investment decisions. This approach allows you to invest in stocks or funds of your liking. You will also need to open your own brokerage account.
Get practical tips and strategies on how to buy stocks in this guide.
Anyone who plans on investing in stocks must first open a brokerage account. Doing so involves a few simple steps:
There are several factors that you need to consider when choosing a brokerage firm. Here’s a checklist:
Before you can open an account, you’ll be asked to disclose some personal information, including:
“The broker should ask you about your investment goals and personal financial situation... Be honest,” the SEC advises. “The broker relies on this information to determine which investments to recommend to you.
“If a broker tries to sell you an investment before asking you these questions, that's a very bad sign. It signals that the broker has a greater interest in earning a commission than determining whether the investment is consistent with your investment goals and tolerance for risk.”
After filling out the online application, there might be some forms you need to sign and questionnaires about your investor profile that you need to answer. Typically, the process takes between 10 and 20 minutes. Once approved, you can transfer funds to your account and start investing in stocks.
Brokerage accounts, also referred to as investment accounts, come in different forms. If you’re having a hard time figuring out which account suits you, it’s best to consult an experienced financial advisor.
Here are the most common types of investment accounts:
Regular brokerage accounts are standard accounts for trading stocks. With a cash account, you can buy stocks using money in the account. Marginal accounts, which are more suited for experienced investors, meanwhile, let you borrow funds to buy additional stocks.
Managed accounts are where investment decisions are made by professional advisors on your behalf.
Dividend reinvestment plans (DRIP) reinvest dividends automatically into additional shares.
Retirement accounts allow you to save for retirement while accessing tax benefits. These include employer-sponsored accounts such as 401(k), 403(b), and 457 plans. Individual accounts such as traditional IRAs and Roth IRAs also fall into this category.
Education savings accounts help you save funds for future education costs. The most popular type are 529 plans offered in all states, with varying benefits. Money from this tax-advantaged savings account can be used for educational expenses, including tuition and textbooks.
Health savings accounts (HSA) are tax-advantaged savings accounts that allow you to set aside money for future medical expenses.
Choosing the right investment account is part of a sound investment strategy. Learn more about smart investing for beginners in this guide.
When investing in stocks, you have plenty of options that can match your investment goals and risk tolerance. You can choose to invest in:
Let’s go over these options:
In this type of investment, you buy shares from a particular company. But to build a diversified portfolio, you will need to invest in several individual stocks. This requires a lot of research. If you’re just starting out, these types of stocks may be your best options.
Mutual funds pool money from investors and invest the funds in various assets, including stocks, bonds, and other securities. Unlike individual stocks, mutual funds allow you to buy shares from different companies in a single transaction.
New investors who want a diversified portfolio can benefit from investing in mutual funds. The investments are also handled by a professional fund manager, which is ideal if you prefer a hands-off approach.
Just like mutual funds, ETFs give investors access to a range of assets in a single transaction. However, exchange-traded funds track a specific index, the S&P 500 for instance, and replicates that index by buying shares from companies listed. Learn more about investing in ETFs in this guide.
Index funds are a type of mutual funds that track a specific market index, much like exchange-traded funds. But unlike ETFs, which are traded on exchanges, index funds are priced after the market closes and their shares can only be purchased directly from the fund companies.
REITs work the same as mutual funds, but instead of buying and selling shares of stocks, you buy shares of income-producing properties. This guide on real estate investment trusts delves deeper on how this type of investment vehicle works.
Most brokerage firms don’t impose a minimum amount for investing in stocks. This means that you can buy shares for as little as $1. However, your options will be limited. Many stocks and mutual funds require a minimum investment. This is on top of management fees and commissions.
When determining a suitable amount, start with one that you’re comfortable with. You can also work with an advisor to find out how much you can afford to invest. Make sure that the stocks you buy align with your financial goals.
Before trading stocks, it’s important to know how they work. The market can be unpredictable, so while there’s an opportunity for higher returns, there’s also the risk of losing money. These are some of the factors that you need to consider before you buy and sell stocks:
Your investment goals: Let your financial goals guide your investment decisions. Ask yourself, “am I aiming for long-term growth or regular income?”
Your risk tolerance: Determine how much risk you’re willing to take to reap higher returns. Are you a conservative investor whose priority is to avoid losses, even at the cost of lower returns? Or are you an aggressive type who takes the high-risk, high-reward approach to investing?
How much you want to invest: Find out how much you want to allocate to stock investments. The amount should be in line with your investment goals and time horizon.
Your investment account: Depending on the type of investment account, there may be restrictions on how much you can invest. You may also be able to access tax benefits.
You don’t need a stockbroker to buy and sell stocks – even as a beginner – but you’ll likely need to work with a brokerage firm.
Brokerages can provide you with practical advice and make trades on your behalf. If you want a more hands-on approach, brokerage firms can also give you access to a platform where you can buy and sell stocks yourself. Your choice of brokerage must align with your investment style.
Investing in stocks can feel tricky at first, but it gets easier once you learn the basics. As with any type of investment, it’s best to seek the guidance of an expert financial advisor – and you don’t have to look far to find one.
By visiting our Best in Wealth Special Reports page, you can find companies and professionals who are recognized as respected and reliable market leaders. By partnering with these industry experts, you can be sure that you’re getting the proper guidance in every step of your investment journey.
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