Greetings! Before I start with the juicy details of How To Invest In Stock Market For Beginners, let me ask you one thing. Have you ever thought about investing in the stock market but didn’t go through with it for some reason?
How To Invest In Stock Market For Beginners Imagine if you have a choice to gain $10,000 in the next 4 months or so. You can choose to use your credit card or money in your bank. Which one do you choose? If you are like most people, you would choose the credit card because you wont see your money for a long period of time. You are in effect borrowing money from your future self. This is the essence of investing in the stock market for beginners
What Kind of Investor Are You?
Before you commit your money, you need to answer the question: What kind of investor am I? When opening a brokerage account, an online broker like Charles Schwab or Fidelity will ask you about your investment goals and what level of risk you’re willing to take.
Some investors want to take an active hand in managing their money’s growth, and some prefer to “set it and forget it.” More “traditional” online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.
Online Brokers
Brokers are either full-service or discount. Full-service brokers, as the name implies, give the full range of traditional brokerage services, including financial advice for retirement, healthcare, and everything related to money. They usually only deal with higher-net-worth clients, and they can charge substantial fees, including a percentage of your transactions, a percentage of your assets they manage, and sometimes, a yearly membership fee. It’s common to see minimum account sizes of $25,000 and up at full-service brokerages. Still, traditional brokers justify their high fees by giving advice detailed to your needs.
Discount brokers used to be the exception, but now they’re the norm. Discount online brokers give you tools to select and place your own transactions, and many of them also offer a set-it-and-forget-it robo-advisory service too. As the space of financial services has progressed in the 21st century, online brokers have added more features, including educational materials on their sites and mobile apps.
In addition, although there are a number of discount brokers with no (or very low) minimum deposit restrictions, you may be faced with other restrictions, and certain fees are charged to accounts that don’t have a minimum deposit. This is something an investor should take into account if they want to invest in stocks.
Robo-Advisors
After the 2008 financial crisis, a new breed of investment advisor was born: the robo-advisor. Jon Stein and Eli Broverman of Betterment are often credited as the first in the space.2 Their mission was to use technology to lower costs for investors and streamline investment advice.
Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo-advice by 2025.3 If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, a robo-advisor may be for you.4 And as the success of index investing has shown, if your goal is long-term wealth building, you might do better with a robo-advisor.
Investing Through Your Employer
If you’re on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is, you probably won’t even miss a contribution that small.
Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. When you’re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401(k) retirement account at work, you may already be investing in your future with allocations to mutual funds and even your own company’s stock.
Minimums to Open an Account
Many financial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money. Some firms won’t even allow you to open an account with a sum as small as $1,000.
It pays to shop around some and check out our broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often lower costs, like trading fees and account management fees, if you have a balance above a certain threshold. Still, others may offer a certain number of commission-free trades for opening an account.
How to invest in stocks
Decide how you want to invest in the stock market
There are several ways to approach stock investing. Choose the option below that best represents how you want to invest, and how hands-on you’d like to be in picking and choosing the stocks you invest in.
Choose an investing account
Generally speaking, to invest in stocks, you need an investment account. For the hands-on types, this usually means a brokerage account. For those who would like a little help, opening an account through a robo-advisor is a sensible option. We break down both processes below.
An important point: Both brokers and robo-advisors allow you to open an account with very little money.
Learn the difference between investing in stocks and funds
Going the DIY route? Don’t worry. Stock investing doesn’t have to be complicated. For most people, stock market investing means choosing among these two investment types:
Set a budget for your stock market investment
New investors often have two questions in this step of the process:
How much money do I need to start investing in stocks?
How much money should I invest in stocks?
Got a small amount of cash to put to work?
Focus on investing for the long-term
Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that’s just an average across the entire market — some years will be up, some down and individual stocks themselves will vary in their returns. But for long-term investors, the stock market is a good investment no matter what’s happening day-to-day or year-to-year; it’s that long-term average they’re looking for.
Manage your stock portfolio
While fretting over daily fluctuations won’t do much for your portfolio’s health — or your own — there will of course be times when you’ll need to check in on your stocks or other investments.
If you follow the steps above to buy mutual funds and individual stocks over time, you’ll want to revisit your portfolio a few times a year to make sure it’s still in line with your investment goals.
Determine your investing approach
The first thing to consider is how to start investing in stocks. Some investors choose to buy individual stocks, while others take a less active approach.
Try this. Which of the following statements best describes you?
- I’m an analytical person and enjoy crunching numbers and doing research.
- I hate math and don’t want to do a ton of “homework.”
- I have several hours each week to dedicate to stock market investing.
- I like to read about the different companies I can invest in, but don’t have any desire to dive into anything math-related.
- I’m a busy professional and don’t have the time to learn how to analyze stocks.
Decide how much you will invest in stocks
First, let’s talk about the money you shouldn’t invest in stocks. The stock market is no place for money that you might need within the next five years, at a minimum.
While the stock market will almost certainly rise over the long run, there’s simply too much uncertainty in stock prices in the short term — in fact, a drop of 20% in any given year isn’t unusual. In 2020, during the COVID-19 pandemic, the market plunged by more than 40% and rebounded to an all-time high within a few months.
- Your emergency fund
- Money you’ll need to make your child’s next tuition payment
- Next year’s vacation fund
- Money you’re socking away for a down payment, even if you will not be prepared to buy a home for several years
Conclusion
The stock market can be very difficult to understand. There are lots of moving parts and anytime you throw in the word “market” it gets confusing. But if you want to understand how to invest in stock market for beginners, you might as well learn the same way everyone else does.