How to Invest in Stocks for Beginners
Investing in stocks has become increasingly more accessible, with beginners able to open an account with little money through a brokerage‘s website or mobile app.
Owning a stock represents an ownership stake in a company as a common shareholder. Common stocks allow shareholders to vote on company issues, with most companies granting one vote per share. Some companies also offer stockholders dividend payouts, giving investors a stream of income on top of the market value of the stock. These payouts typically change based on the company’s profitability.
In 2021, the S&P 500, an index of some of the biggest stocks, gained 27%, driven by gains in some of its largest companies including Meta Platforms Inc. (ticker: FB), Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG, GOOGL). If you had invested in these companies or the index as a whole through an index fund, your investments would have increased in value considerably last year.
Stocks are considered a risk asset that can provide growth and income to an investment portfolio. This means it’s an asset class that carries a high degree of price volatility. With stocks, beginner investors must consider the degree of risk that they can take. Typically, the more risk in an investment, the greater the potential reward. But investors need to be willing to take the risk of losing money in case high returns don’t come. History shows that stocks have been a reliable asset class for strong annual average returns over time.
Here’s what else you need to know about investing in stocks:
- Where to start investing in stocks.
- How much should you start investing?
- Have an investing strategy.
- How to choose which investments to make.
- Invest on your own or with a financial advisor?
- Stocks for beginner investors.
- When to sell a stock.
Where to Start Investing in Stocks
The first step is for you to open a brokerage account. You need this account to access investments in the stock market.
The next step is to fund your brokerage account by transferring money from your bank account to fill trades of stocks you want to buy. The amount of money you choose to invest depends on your risk tolerance, goals and how much money you’re comfortable potentially losing.
Remember that while, over time, the stock market typically increases in value, there can be short-term market fluctuations, which can put your money at risk.
How Much Money Should You Start Investing in the Stock Market?
Several online brokers such as Betterment don’t charge fees for a $0 account balance, nor do they require a minimum amount to open a trading account. You can start investing through these brokerages with any amount. Some also offer fractional shares, meaning you don’t have to buy an entire share of a company if you can’t afford it. Whole shares of Amazon.com Inc. (AMZN), for instance, cost more than $3,000 in early 2022, so fractional shares bring that company’s stock to the masses.
Discount brokers are a boon for beginners with little money who are often looking to get stock market exposure with smaller portfolios. But a discount broker typically does not provide advice or analysis. Many of these brokers don’t require a minimum amount to start an account, while some have a low beginning threshold of $1,000.
Have an Investing Strategy, Especially During Market Volatility
It is normal for the stock market to experience bouts of volatility. During those periods, stocks, even ones considered relatively safe, experience price fluctuations. This can happen when there is uncertainty in the markets and tends to be short-lived.
Daniel Beckerman, president of Beckerman Institutional in Oakhurst, New Jersey, says, “Over the long run, we have seen a 10% or greater downturn in the stock market more frequently than once every two years (on average).” You should prepare to be invested during these rough periods, Beckerman says, if you expect to do well throughout your investment time horizon.
Volatility can certainly be concerning, especially if you are a beginner who hasn’t experienced it before. That said, you should put your money in companies that can generate consistently growing revenues and profits over a long period. That way, you have confidence in the company despite the stock’s price swings.
The biggest asset young investors have is time, says Sameer Sawaqed, host of “The More We Know,” a podcast for Generation Z investors. “Gen Z investors can increase their risk exposure because even if we go through a downturn, we still have 40-plus years on our side for the market to recover before retirement. As a result, we can handle more risk,” he says.
When investors have conviction in a company and its stock price falls, they may see this as an opportunity to buy more of the stock at a better price.
How to Choose Which Investments to Make
Beckerman says that by looking at a company’s metrics, you can gain insight into how companies and industries are performing.
“For example, when price-earnings or price-sales ratios are elevated, we can get some sense as to when certain stocks or industries are priced in bubble territory,” he says.
Valuation is an important factor when stock picking. Company profitability, earnings growth prospects, quality of management and industry performance are some factors investors must consider when evaluating a stock’s worth to determine whether it is undervalued or overvalued. Stock valuations, Beckerman says, provide investors with some color around the sentiment regarding various industry groups.
A stock’s price can be different than its intrinsic value. To know how to value a stock, investors must dig into the company’s financial reporting history, understand the company’s role in its industry and how it fares among its competitors, among many other factors.
There are two ways to secure profits from stock investing: selling shares when their market value goes up and dividend payments. Dividends are payments in either cash or stock made by the company to the shareholder on a monthly, quarterly or annual basis. Dividend payments are a way a publicly traded company shares its wealth with its investors. Investors who want a steady stream of income from their stock portfolios invest in companies that share their profits in the form of dividends.
Dividends are known to be a reliable form of income because they can be distributed even if the company doesn’t make a profit. Investors can either secure dividends as income or reinvest them for a greater return in the long run. Many dividend stocks have an established record of strong cash flows, carry low debt and offer competitive yields.
Invest on Your Own or With a Financial Advisor?
Investing in stocks can be done in many ways, but before you start investing, it’s important to determine what type of investor you are. Decide whether you want to take a do-it-yourself approach or work with a professional financial advisor who can advise you through your wealth management.
To take the do-it-yourself approach and manage your own investments, you can open an online brokerage account. If you’re unsure about where to start, consider opening an account with a robo advisor, which will do some of the heavy lifting at a lower cost.
Once you open an online brokerage account, you’re asked questions to determine an investment strategy that will assist in your investment decisions. These questions involve knowing your specific financial goals – such as retirement or a big purchase – and your risk tolerance, which is the degree of market variability you can withstand in your investments.
Stephen Mathai-Davis, co-founder and CEO of Q.ai, an artificial intelligence robo investing platform, says investors should have a core goal before they start investing. This goal will drive investors’ decision-making processes.
“If you are looking to retire early, you are going to skew your investing to high-growth stocks because those are the investment vehicles that generate the highest return,” he says.
The categories that are favored with this strategy are technology and consumer tech stocks, Mathai-Davis says.
Alternatively, to steadily grow your wealth, Mathai-Davis says it may be worth considering “stocks that offer solid cash flows, or dividends, while also limiting your exposure to highly volatile stocks.”
If you’re not sure how to materialize your long-term financial goals and where to start with your investing plan, working with a financial advisor may be right for you.
Financial advisors can protect you from making decisions that may not work to your benefit. If you want to buy individual stocks, you must understand that they can carry much more risk than other securities such as mutual funds or exchange-traded funds. That said, if you are not sure how much of your money you should allocate toward stocks, you can work with a financial advisor to develop a strategy.
Stocks for Beginner Investors
Thinking you can consistently beat the market can be a fool’s errand, but investing in high-quality stocks such as blue chips and dividend-yielding companies is often a good strategy for beginners.
One reason investors opt for blue chips is their track record of stability and because they tend to produce dividends. Famous blue-chip companies include Microsoft, Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Coca-Cola, for example, generates a dividend yield of 2.8% – meaning an investor would earn 2.8% of their investment level in dividends over the next year at the current dividend rate – and the stock is less volatile, as its share price has hovered between $48 and $61 during the past 52 weeks. Dividends can generate much-needed income for investors.
Long-term investors who take advantage of a buy-and-hold strategy by going long on stocks can reap the benefits of long-term growth in market value. For example, if you bought shares of AT&T Inc. (T) at its initial public offering price of $1.25 in 1984, your investment would be worth far more than what you put in, as the stock now trades at about $25 per share and has been paying dividends for decades.
When to Sell a Stock
Knowing when to let a stock go – without deciding in a panic – is a key skill for savvy investors.
“Emotions play one of the biggest roles in our psyche with investing,” Sawaqed says.
Sawaqed suggests that investors shouldn’t fall in love with a stock because businesses change and companies can fail.
“You must do your due diligence extensively. This means creating a fundamental thesis and trusting your stock pick based on that research, and when the business changes materially (sales cut in half, executive team cuts, fraud, et cetera), you have to understand when to cut your losses and leave emotion out of it,” Sawaqed says.
Following the news cycle that surrounds a company’s stock performance can be overwhelming. Instead, experts say to ignore the short-term noise, so you can maintain perspective within your strategy for the long run.
Legendary investor Warren Buffett advises people to buy and hold stocks for several decades instead of selling and repurchasing them constantly. At a minimum, a prospective stock should be one that an investor would own for at least 10 years, according to his philosophy.