The first step in learning to invest is to learn how to invest in stocks. In the past, the return on equity investments has been higher than the return on many other assets.
This makes equity investments a powerful tool for people who want to get richer. Learn how to buy stocks with the help of our guide. This is a great way to start investing.
How Do You Get Started Investing in the Stock Market?
You can buy stocks in more than one way. You can choose any one of the three options below, or you can use them all. How you buy stocks depends on what you want to get out of your investments and how involved you want to be in managing your portfolio.
- Invest in individual stocks. Buying individual stocks is a good way to start investing if you like doing research and reading about markets and companies. Even if some companies’ share prices seem high, you can look into buying fractional shares if you’re just starting out and don’t have a lot of money.
- Invest in stock ETFs. Exchange-traded funds (ETFs) track an index by buying a lot of different stocks. When you buy an ETF, it’s like buying stocks from a large number of companies in the same industry or that make up a stock index like the S&P 500. ETF shares trade on stock exchanges just like stocks do, but they give you more options than owning a single stock.
- Put your money into stock mutual funds. ETFs and mutual funds have some things in common, but they are not the same in important ways. Mutual funds that are actively managed have managers who choose different stocks to try to beat a benchmark index. When you buy shares in a stock mutual fund, you make money from dividends, interest income, and capital gains. Index funds with lower fees are more like ETFs in how they work.
Remember that there is no right or wrong way to buy stocks. As you learn how to invest and build your portfolio, it may take some trial and error to find the best mix of individual stocks, ETFs, and mutual funds.
Choose How to Invest in Stocks
You can buy stocks through a number of accounts and platforms. You can use an online brokerage to buy stocks on your own, or you can hire a financial advisor or a robo-advisor to do it for you.
The best way to manage your investments will be the one that fits with how much time and help you want to put into the process.
- Open a brokerage account: You can open an online brokerage account and buy stocks if you know the basics of investing. When it comes to choosing and buying stocks, a brokerage account puts you in charge.
- Get help from a financial expert: Consider hiring a financial advisor if you would like more advice and help with buying stocks and other financial goals. A financial advisor helps you figure out what your financial goals are and then buys and manages your investments, such as buying stocks, on your behalf. The fees that financial advisors charge can be a flat rate per year, a fee per trade, or a percentage of the assets they manage.
- Choose a robo-advisor: Robo-advisors are an easy and very cheap way to buy stocks. Most robo-advisors put your money into different portfolios of ETFs. They buy the assets and take care of the portfolio for you. They are usually cheaper than financial advisors, but you rarely get to talk to a real person who can answer your questions and help you make decisions.
- Use a plan that lets you buy stock directly. If you only want to buy a few stocks, many large, well-known companies have plans that let you buy their stock directly. Many programs let you trade without having to pay a commission, but you may have to pay other fees when you sell or move your shares.
Remember that no matter how you choose to invest in stocks, you’ll probably have to pay fees at some point to buy or sell stocks or to manage your account. Both mutual funds and ETFs have fees and expenses that you should be aware of.
Don’t be afraid to ask for a fee schedule or talk to a customer service rep at an online brokerage or robo-advisor to find out what fees you might have to pay.
Accounts to Invest in Stocks
You can buy stocks through a number of different account types. Some or all of these types of investment accounts are available through the above options. However, some retirement accounts are only available through your employer.
- Retirement accounts: Individual retirement accounts and 401(k)s are the two most common types of retirement accounts (IRAs). The first two can only be gotten through an employer, but anyone can open an IRA through an online brokerage or robo-advisor. These accounts can help you save for retirement by giving you tax breaks, but they also have limits on how much you can put in each year. There are also 401(b)s, SEP-IRAs, and solo 401(k)s, which are other types of retirement accounts.
- Taxable investment accounts: Most investments in the retirement accounts listed above get some kind of tax break, and there are limits on how much you can put into each account. The money made from stock investments in taxable investment accounts is taxed the same way as any other income. Plus, there are no limits on how much you can give.
- Education savings accounts: Education savings plans let you invest in stocks, usually through mutual funds and target-date portfolios, if you are saving money for qualified education costs. There are 529 plans and Coverdell Education Savings Accounts among these accounts.
Depending on how hands-on you want to be with your stock investments, you can set up your investment accounts with a broker (online or through your financial advisor), your bank (for Coverdell ESAs), or your employer (for employer-sponsored plans).
How to Fund Your Account
If you want to use a retirement account like an IRA to buy stocks, you might want to set up a monthly deposit. For example, the most you can put into an IRA in 2020 is $6,000 if you are under 50 and $7,000 if you are 50 or older.
If you want to put in as much as you can for the whole year, you could set up a recurring deposit of $500 per month.
If you’re buying stock through an employer-sponsored retirement plan like a 401(k), you’ll need to say what percentage of your pay or a flat dollar amount you want to be taken out of each paycheck.
Set clear investing goals for all other types of investment accounts, and then decide how much of your monthly budget you want to put into stocks. To stay on track with your stock investment goals, you can move money into your account by hand or set up automatic deposits.
Here are a few things to think about as you decide on an investment budget and put money into your account:
- Minimums for buying mutual funds. There are minimum amounts to buy into many stock mutual funds the first time. Make sure to look into different options—Morningstar is a great place to start—to find ones with zero or low minimums so you can start investing in stocks as soon as possible.
- Commissions for trading. If your brokerage account has a trading commission, you might want to wait to buy shares, especially individual stocks, until your balance is high enough that the commission is only a small part of the money you have invested.
- Mutual fund fees: Before you buy shares in a stock mutual fund, make sure you know what the “load” is. When you buy or sell shares in some mutual funds, you have to pay a fee called a “load” upfront or at the end. Even though not all mutual funds have loads, if you know about them before you buy, you can avoid fees you didn’t expect.
Start Investing in Stocks
Choose the stocks, ETFs, or mutual funds that fit with how you like to invest, and then start investing. If you choose to work with a robo-advisor, the system will put the amount you want into a portfolio that has already been set up and fits your goals.
If you hire a financial advisor, they will buy stocks or funds on your behalf after talking with you about what you want.
After your order is filled, the securities will be in your account, and you’ll be able to start reaping the benefits of the stock market.
And yes, your funds will make money and lose money as the economy changes, but in the long run, you’ll be investing in a sector that has helped people get richer for more than a century.
As you buy your first stocks, you might want to join a dividend reinvestment plan (DRIP). Reinvestment plans use the dividends you get from stocks, mutual funds, or exchange-traded funds (ETFs) to buy more shares of the funds or stocks you already own.
You might end up with a small number of shares, but that means that more of your money will be working and less will be sitting in cash.
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