How to Invest in Stocks: Beginner's Guide
When you want to invest in the stock market but you have no idea where to begin - or what any of it means - start with this beginner’s guide to stocks.
|How to Invest in Stocks © CreditDonkey|
In this guide, you'll learn:
- Build Wealth by Investing Money
- Investing is Not Gambling
- Investing is Simple, But Not Easy
- What Are Stocks
- Why Invest Money in Stocks
- How Much Money Do You Need to Buy Stocks
- Assess Your Risk Comfort Level
- Choose a Brokerage
- Do Your Homework Before Deciding
- Don't Focus Solely on Price
Build Wealth by Investing Money
Here’s a hard truth: You can be smart about your spending budget and you can be smart about socking away some money into a savings account every month, but unless you’re a super-rich CEO with a huge income, you’re not going to get very far.
To make the most of your earnings and build up wealth, investing in stocks to some extent is usually the way to go.
- Research-Proven Ways to Build Wealth
- A Beginner's Guide to Securing Your Financial Future
- 10 Financial Commandments When You're Starting Out
Investing is Not Gambling (But Watch Out!)
We say “usually” since sometimes stocks take a tumble and take people’s hard-earned money with them. Historically, stocks offer an average return of around 10%, which is substantially more than the 1% to 2% you might be able to get with a money market or high-yield savings account. There’s risk involved with stocks and that’s why it’s smart to educate yourself (as you’re doing now) and to not all put all your extra money in one place.
It’s also smart to be cautious. Start small. As it is, more than a third of Americans say they're spooked of investing in the stock market. Some people feel like it's gambling. It is gambling if you pick a random stock because it has an interesting sounding name and bet your dollars as if you would bet a running horse.
It's called investing when you do your homework and let your wisdom - rather than chance - make your choices for you. Investors who use a mix of smart spending and investing are the ones who get to retire by the sunset while their hips and joints are still working.
- Many Americans Afraid of Investing
- Sports Betting vs The Stock Market
- Gambler or Investor? The Truth About Why We Trade
- Reddit Thread on the Investing vs Gambling Debate
"INVESTING IS SIMPLE, BUT NOT EASY"
Warren Buffett, pretty much considered the smartest investor ever, made this summation. It’s pretty simple to get started: You could already be investing in stocks through your 401(K) as many employers enroll employees automatically. And you can easily sign up to start investing on your own through an online stock broker from the comfort of a smartphone app.
The hard part is what you do next. If you have time to let your wealth build up, will you be patient when times get rough, or will you panic, pull out all your money and stuff it into your pillowcase? Will you get sucked into the hot stock of today (any of Silicon Valley’s social media darlings?) and put all your funds there, or will you diversify and come up with a risk strategy?
JUST WHAT ARE STOCKS ANYWAY?
Simply put, stock represents ownership in a particular company. The stocks we're talking about are for shares of publicly traded companies, and can be bought and sold on an exchange. Stocks can also be referred to as equities or securities; for our purposes, the terms are interchangeable.
There are two basic ways to make money by investing in stocks:
- If you can sell stock for more than you purchased it
- If the stock you own pays out dividends to shareholders
WHY INVEST MONEY IN STOCKS ANYWAY?
- You want to buy a house
- You want to save for retirement
- You want to save for your children's college education
Will Rogers once said that the fastest way to double your money was to fold it in half and put it in your back pocket. Safe advice to be sure, but not necessarily the best move if you're trying to build long-term wealth. Investing your money in the stock market certainly means taking on a higher degree of risk than stuffing dollars in your pocket, but it also paves the way towards bigger returns.
From a general perspective, investing is a must if you want to build long-term wealth. Parking your money in a savings account or CD allows you to earn some interest, but the amount is usually paltry, especially when compared to the kind of returns the market offers over the long-term. If you want to enjoy a comfortable retirement or help your kids get through college debt-free, investing money in stocks in some form has historically been the best way to generate the kind of growth needed to reach long-term financial goals.
HOW MUCH MONEY DO YOU NEED TO BUY STOCK?
While prices can fluctuate wildly from one day to the next, the average per share price for an individual stock hovers around $70, according to The Wall Street Journal. If that seems a bit pricey, keep in mind that there are stocks currently being traded at well over $500 a share.
Knowing how much money you've got to play with going in ultimately shapes your investment choices.
You can invest in the stock market with little money. Many investors start small.
Fortunately, some brokers don't require you to put in a minimum amount of money before you can start trading while some will expect you to invest at least $500 or even thousands before they’ll let you do anything. On top of what you put into your account, each trade can set you back between $4.95 (with a broker like TradeKing and OptionsHouse) to $9.99 (with a broker like ETrade and TD Ameritrade).
Look at it this way: Nothing you’ll be doing is guaranteed, so limit your investment to an amount that you'll be comfortable losing if the stocks you choose turn out to be duds.
- If You Only Have $1,000
- What Kind of Investor Are You
- Calculator: Find Out Where You'd Be Today If You Invested $100 a Decade Ago
Basics: HOW TO MAKE YOUR FIRST STOCK INVESTMENT
The next step is to map out your investment strategy. Here's a step-by-step breakdown of what buying your first stock involves.
1. ASSESS YOUR RISK COMFORT LEVEL
You have to decide upfront how much risk you're willing to take on. If you're relatively young and you have years ahead of you to invest, you may be more comfortable with an aggressive approach (remember, higher risk can result in higher returns). On the other hand, if you're nearing retirement or you're generally jittery when it comes to the possibility of losing your hard-earned dollars, playing it safe might make more sense. For retirees and those near retirement, preservation of capital is important.
Young investors have time on their side. They can reinvest their dividends and survive the ups and downs of the stock market.
There’s always the chance that the stock you've chosen will lose value over time. That’s why it’s a good idea to balance things out by mixing up your portfolio to include less volatile investments like mutual funds or bonds.
2. CHOOSE A BROKERAGE
Before you can actually begin buying stocks, you'll need to enlist the help of a brokerage to seal the deal. Going with a full-service firm means you'll have expert advice on tap at all times, but that comes at a premium since the fees tend to be higher. Opting to use a discount brokerage instead ensures that more of your investment seed money is going towards the purchase of your stocks.
|Commissions and Fees|
|Ease of Use|
|Mutual Fund Trading|
How to Make Your Choice:
There are a number of online brokers to choose from. You’ll need to take a look at their features, fees and convenience. Will you want to set up a retirement account like an IRA (you can get tax advantages with such an account) or a general brokerage account (which will result in you having to pay taxes on your earnings if you sell)?
Also be sure to pay attention to how much it will cost you to buy and sell stocks. Fees can run $5 to $10 per trade, depending on which brokerage you choose. If your strategy is to hold on to your investments over the long-term, paying the higher fee may not make much of a difference, but you'll want to look into cheaper options if you plan to trade stocks on a regular basis.
Learn which stockbroker is right for you. In some cases, paying a lower commission for trades means sacrificing some of the variety you'd get with a more expensive brokerage. E*TRADE, for example, charges $9.99 per trade plus an extra $45 for broker-assisted trades, but it also offers one of the broadest investment selections. By comparison, Scottrade charges slightly less, at $7 per trade, but feature-wise is less comprehensive.
3. DO YOUR HOMEWORK BEFORE DECIDING ON AN INVESTMENT
There’s an art to investing, and you'll need to put in the time researching what's out there before settling on your choices. You’ll want to know who the rising stars in an industry are and where they seem to be headed. You could stick with only established brands, which are usually safer bets, but you’ll pay more for them. The value of a mature enterprise will tend to grow at a slower pace than a rising (i.e., riskier) newly public company.
Learn which companies to invest in. When researching individual companies, you need to understand the company's goals and how likely it is to make a profit based on its structure and operations. If you buy stock in a startup, for example, but the people running it don't have a solid plan for turning a profit, odds are you're not going to make any money either.
Also take a look at how much debt a particular company is carrying. The more that a company borrows, the more it has to pay back with interest, which can affect the stability of its per-share stock prices.
Popular places to keep tabs on stock news:
DON'T FOCUS SOLELY ON PRICE
There's a lot more to a stock than its price.
For some, checking out the price to earnings ratio is might be better way of gauging a stock's worth. This is the price of a stock divided by its average earnings per share over the past year. The P/E ratio is used to measure a stock's projected growth; the higher it is, the more earnings the company is expected to realize. Looking at the company's previous rate of growth and the stock's pricing history can give you an idea of whether it's priced fairly based on the P/E ratio. You can also take it a step further by comparing ratios for different companies within the same industry. The key is to weigh a specific stock's potential for growth against its per share price to determine whether the investment is really worth it.
Buying your first stock can be hit-or-miss if you haven't done your research beforehand.
Understand how the market works before making your first trade, and you'll be setting the tone for success.
Rebecca Lake is a journalist at CreditDonkey, a stock broker comparison and financial education website. Write to Rebecca Lake at firstname.lastname@example.org. Our data-driven analysis has been recognized by major news outlets across the country and has helped investors make savvy financial and lifestyle decisions.
Disclaimer: Opinions expressed here are those of the author's alone. Please support CreditDonkey on our mission to help you make savvy financial decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.