Investing Basics: How to Invest in Stocks

Learning to invest starts with learning to invest in stocks. Historically, return on equity investments has outperformed many other assets, making them a powerful tool for those looking to grow their wealth. Our guide will help you understand how to start your investing journey by learning how to buy stocks. With this basic knowledge in hand, you can continue the journey by moving on to other forms of investing.

What type of stocks should you buy?

There is more than one way to invest in stocks. You can choose one of the following approaches or use all three. How you buy stocks depends on your investment goals and how actively you want to be involved in managing your portfolio.

Invest in individual stocks. If you enjoy researching and reading about the markets and companies, investing in individual stocks would be a good way to start investing in stocks. Even if the share prices of some companies seem very high, you may consider buying fractional shares if you are just starting out and have only a modest amount.

Invest in stock ETFs. Exchange-traded funds (ETFs) buy a number of individual stocks to track an underlying index. When you invest in an ETF, it's like buying stocks from a much wider selection of companies that are in the same sector or include stock indexes, such as the S&P 500. ETFs trade on stocks like stocks, but they offer more diversification than owning an individual stock.

Invest in stock mutual funds. Mutual funds share some similarities with ETFs, but there are important differences. Actively managed mutual funds have managers who choose different stocks in an attempt to outperform the benchmark index. When you buy shares of a stock mutual fund, your profits come from dividends, interest income and capital gains. Low-cost index funds are mutual funds that work like ETFs.

Keep in mind that there is no right or wrong way to invest in stocks. When you're learning how to invest and build your portfolio, it can take some trial and error to find the best combination of individual stocks, ETFs and mutual funds.

how to invest in stocks

There are a variety of accounts and platforms you can use to buy stocks. You can buy the stock yourself through an online brokerage, or you can hire a financial advisor or robo-advisor to buy it for you. The best approach would be the one that matches how much effort and guidance you want to put into the process of managing your investments.

Open a brokerage account. If you have a basic understanding of investing, you can open an online brokerage account and buy stocks. A brokerage account puts you in the driver's seat when it comes to choosing and buying stocks.

Hire a financial advisor. If you want more advice and guidance for buying stocks and other financial goals, consider hiring a financial advisor. A financial advisor helps you specify your financial goals and then purchases and manages your investments for you, including stock buying. Financial advisors charge fees, which can be a flat annual fee, a per-trade fee, or a percentage of the assets they manage.

Choose a robo-advisor. Robo-advisors are a simple, very cheap way to invest in stocks. Most robo-advisors invest your money in various portfolios of ETFs, and they buy assets and manage the portfolio for you. They are generally less expensive than financial advisors, but you rarely get the benefit of a live human being to answer questions and guide your choices.

Use a direct stock purchase plan. If you prefer to invest in only a few stocks, many blue-chip companies offer plans that make it possible to buy their stock outright. Many programs offer commission-free trades, but they may require other fees when you sell or transfer your shares.

Keep in mind that whatever method you choose to invest in the stock, you are likely to pay a fee at some point to buy or sell the stock, or to manage the account. Pay attention to the fee and expense ratios on both mutual funds and ETFs. Don't hesitate to ask about the fee schedule or chat with a customer service representative at an online brokerage or robo-advisor, who can advise you about the fees you will incur as a client.

how to buy stocks with investment accounts

There are different types of accounts that let you buy stocks. The options mentioned above offer some or all of these various investment accounts, although some retirement accounts are only available through your employer.

Retirement Accounts: The Two Most Common Types of Retirement 401(k)s

There are S and Individual Retirement Accounts (IRAs). The former are only available from an employer, while anyone can open an IRA at an online brokerage or robo-advisor. These accounts often offer tax benefits that encourage you to save for retirement, but they also come with annual contribution limits. Other retirement account types include 401(b)s, SEP-IRAs and solo 401(k)s.

Taxable investment accounts. The retirement accounts mentioned above generally get some special tax treatment for your investments and have contribution limits. Income from stock investments made in taxable investment accounts is treated as regular income, with no special tax treatment. Also, there is no contribution limit.

Education Savings Accounts: If you are saving money for qualified education purposes, education savings plans allow you to invest in stocks, typically through mutual funds and target-date portfolios. These accounts include 529 plans and Coverdell Education Savings Accounts.

Depending on how practical you choose to invest in stocks, you can either go through a broker (online or through your financial advisor), through your bank (for Coverdell ESAs). , or set up your investment account through yourself. Employer (for employer sponsored plans).

how to fund your account

If you plan to buy stocks through a retirement account, such as an IRA, you'll want to set up a monthly recurring deposit. For example, the 2020 contribution limit for an IRA is $6,000 for someone under age 50, and $7,000 for someone who's 50 or older. If your goal is to maximize your contributions for the year, you can set up a recurring deposit of $500 per month to meet that maximum.

If you're buying stock through an employer-sponsored retirement plan such as a 401(k), you'll need to indicate what percentage of your salary or a flat dollar amount you want to deduct from each paycheck.

For all other types of investment accounts, set clear investment goals and then decide how much of your monthly budget you want to invest in stocks. You can choose to manually transfer funds to your account or set up a recurring deposit to keep your stock investment goals on track.

Here are a few things to keep in mind when setting your investment budget and adding funds to your account:

Mutual fund purchase minimum. Many stock mutual funds have a minimum initial purchase amount. Be sure to research the different options—Morningstar is a great resource—to find ones with zero or low minimums to start investing in stocks as soon as possible.

Trading Commission. If your brokerage account charges a trading commission, you may want to consider building up your balance to purchase stocks -- especially individual stocks -- as long as the commission is only a small fraction of the dollar you invest. does not represent.

Mutual Fund Fees: When buying stock mutual funds, be sure to review what the "load" is on the shares you are buying. Some mutual funds have an upfront or back-end sales fee -- the so-called load -- that is assessed when you buy or sell shares. While not all mutual funds have loads, knowing before you buy can help you avoid unexpected fees.

start investing in stocks

Choose individual stocks, ETFs or mutual funds that align with your investment preferences and start investing. If you have chosen to work with a robo-advisor, the system will invest your desired amount in a pre-planned portfolio matching your goals. If you go with a financial advisor, they will buy stocks or funds for you after discussing them with you.

On successful execution of your order, the securities will be in your account and you will start enjoying the rewards of the stock market. And yes, your funds will experience dividends and losses as the economy changes, but over the long term, you will participate in the investment sector that has helped investors grow their wealth for more than a century. .

Consider enrolling in a dividend reinvestment plan (DRIP) as soon as you make your initial stock purchases. Reinvestment plans take dividends earned from individual stocks, mutual funds, or ETFs, and automatically buy more shares of the fund or stock you own. You can own fractional shares, but that will put more of your money into work and less sitting in cash.

Set up a Portfolio Review Schedule

Once you start building a portfolio of stocks, you'll want to establish a schedule to check your investments and rebalance them as needed.

Rebalancing helps ensure that your portfolio remains balanced with a mix of stocks best suited to your risk tolerance and financial goals. Market volatility can unbalance your asset mix, so regular check-ins can help you make incremental trades to keep your portfolio in order.

There's no need to check your portfolio daily, so a monthly or quarterly schedule is a good fit. When you review your portfolio, remember that the goal is to buy low and sell high. Investing in stocks is a long term endeavor. You will experience inevitable swings as the economy goes through its normal cycles.