Investing is one of the best things you can do to prepare for retirement, but if you’re a beginner the whole process is pretty intimidating. It’s also nothing like you see in the movies because it takes much more patience and control to grow your wealth by investing in stocks.
And before you get any further into this article, I want to warn you that investing in individual stocks is going to be one of the last things most professional advisors recommend. Why? They are considerably more risky than other assets.
So, if you are a beginner and just getting started in the stock market, I’m going to walk you through the process of how to get begin investing in stocks.
How to get started in stocks in 7 steps
1. Check your finances to see what you have available for investing
When I said beginner’s guide, I meant it – we are starting at the base and working our way to individual stocks. The current state of your finances is the beginning of your investment journey.
Investing in stocks can be a really great way to increase your net worth, but you’ve got to make sure your house is in order before putting your finances at risk… and let’s be honest, stocks are risky… warning as you read on: you’re going to hear this a few times.
Before you start investing in the stock market, here are a few financial considerations:
- High-interest rate debt. If you aren’t able to pay off your credit card debt in full every month, I highly suggest that you start attacking that debt first.
- Check your budget. Your budget will tell you how much money you have to invest, and it will also tell you if you need to focus on this next one…
- Start earning more. Some people will be able to find money in their budget to invest without increasing their earnings, but finding ways to earn more gives you more flexibility in how you allocate your finances.
- Set a budget for what you can contribute. This amount can start low, and as you reduce your debt and increase your income, it will grow.
2. Start educating yourself
Education is going to be a very important part of your investment strategy, and you can build your knowledge as you go. What you’re doing right now – reading a blog post about how to get started in stocks – is educating yourself… good job young Padawan.
As you start investing more of your money and looking at different strategies and investment vehicles, you’ll want to learn even more. Investopedia is a great online resource that simplifies terms. Then there is the Wall Street Journal and Morningstar, who are legit big dogs with a ton of specific information.
To give you the basics of what you’ll be learning in this beginner’s guide, I’m going to put my teacher hat back on for a minute and define a few things:
- Stocks- These are single shares of a company that entitle the shareholder to the company’s earnings. A stock’s value is dictated by the overall market and can rise and fall throughout the day.
- Bonds- Also known as fixed-income securities, bonds represent loans made by an investor to a lender (corporation or government). Bonds have maturity dates when they must be paid back, and most have fixed rates.
- ETFs- ETF stands for Exchange Traded Fund and is a basket of assets (stocks/bonds/other securities) that track a specific market index, this makes them cost less than more actively managed funds.
- Mutual funds- Like ETFs, these are a collection of securities, but they are actively managed (mutual funds are both a security and company). Being professionally managed means that you pay more in annual fees (called expense ratios).
- IRA- IRA stands for Individual Retirement Account, which is a government-sponsored, tax-deferred account earmarked for retirement. Traditional and Roth IRAs are the most common types. With a traditional IRA, you make tax-deductible contributions (most of the time), and you are then taxed when you withdraw funds. With a Roth IRA, you contribute after-tax dollars that means you withdraw without paying taxes. Roth IRAs are typically better for people whose income continues to increase because you’ll retire at a higher tax rate.
- 401(k)- This is an employer-sponsored retirement fund that allows you to make tax-deferred contributions that come out of your paycheck or wages. Some employers offer matches on the amount of money you contribute.
- Diversification- This is a strategy that limits your risks as you have money invested in a variety of securities and markets.
That’s just the tip of the iceberg. My point is that to be a responsible investor… it’s your money, use it wisely… you need to increase your stock market literacy.
3. Consider starting with a retirement account
Because investing in individual stocks is risky, setting up a retirement account is one of the best ways to build a secure foundation for your future.
If your employer offers a 401(k) you can start there, or look into setting up an IRA, which most online brokerages offer. You will have to make some decisions about how your money is invested, but you can actually start making contributions to your account before deciding.
Finding ways to check on your overall financial health, including how your investments are performing is another important part of investing. I use Personal Capital to track my income and investments, and to see my net worth.
Personal Capital is free to use and it offers a ton of robust tools that show you what you’re spending in fees, how over or underweight you are in different markets, and more. Learn more by clicking on my full Personal Capital review. Interested in signing up for free? We’ll both get $20 when you sign up using my exclusive M$M link.
4. Open an investment account
If you didn’t have to do that in the last step, now is the time to start researching your options, and there are a lot of them. One way to look at this is to think about whether you want a DIY approach to investing in stocks or if you’d like some help.
Full-service online brokerages
If you feel comfortable investing on your own (it’s actually pretty simple), then look at top online brokerages like Fidelity, Vanguard, and Schwab. Each of these brokerages offers resources and tools, but if you want a really stripped down option, Robinhood is another top-rated online brokerage.
Robo-advisors give investors low-cost advice to help develop and work on an investment strategy. You’ll pay around 0.25%-0.50% in fees, and you may also have access to human advisors as well. Some top picks are Betterment, Ally Invest, and Wealthfront.
As you research different brokerages, here are a few other factors to consider:
- Minimum investment
- Withdrawal fees
- Fee structure
- Cost of trades
5. ETFs are one of the best places for newbie investors
This is the last stop before buying individual stocks and bonds. And, the reason I’m suggesting ETFs for anyone wanting to start investing in stocks and bonds is because, individual stocks are risky. I warned you that I was going to repeat myself. ETFs, on the other hand, are inherently diverse.
If you think back to those beginner’s terms, ETFs are a basket or collection of assets that track a market index. You can buy ETFs that track the performance of commodities, currencies, real estate, or even broader equities. There are even highly specialized ETFs that track defense companies, healthcare, green energy, etc.
The value of an ETF isn’t contingent on the fluctuating value of one company, like stocks are. If one asset does lose some value, you won’t see as large of a dip in the overall value of the ETF. Mutual funds reduce your risks as well, but they come with higher fees because they are professionally managed.
6. Ease into stocks and bonds
See, I told you we were almost here – it’s time to start investing in single stocks and bonds.
There is no one “here’s the best stock to start with,” and don’t listen to anyone who tells you otherwise. But, here are the factors you want to think about when picking your first stock:
- Buy what you know. Start by looking at companies or industries that you are familiar with. Having a base understanding will help you research these next few things.
- Think about the price and valuation. This all depends on the overall health of the company, price-to-earnings ratio, the company’s future earnings, etc. A lot to swallow? I know. This is why it’s so important to keep learning more about the stock market.
- The company’s overall financial health. Does the company have debt? Are they growing their revenue? What’s the company’s bottom line (difference in expenses and revenue)? Have their dividends been increasing?
As you keep going, you’re going to want to start diversifying your stocks. Putting all of your money in one stock or one market is a very risky move. Seriously, don’t do that. Spread your money out. If you don’t know about certain companies or industries, it will take a little more research, but it’s worth it in the long run.
If you’re a little nervous about investing in full shares of stocks, micro investing through an app like Stash lets you purchase micro shares of stocks and ETFs. You can automate your investments, do round-ups, and more. And, you can start investing in the stock market for a little as $5.
Micro investing isn’t going to prepare you for retirement… micro investing is micro results… but you can learn a lot of valuable information that will help you with a larger and more effective investment strategy.
7. Be prepared for market volatility
This is possibly going to be one of the most important concepts to understand and be OK with as you invest. That’s because volatility is one of the most terrifying things to deal with if you aren’t mentally prepared for it.
Market volatility means big swings in either direction. Those fluctuations can and will significantly increase or decrease the value of your investments. But, here’s the thing – fluctuations are completely normal.
And for millennial investors, you shouldn’t drop everything and start selling off stocks when the market takes a dip. Some young investors actually do the opposite and start buying more because stocks cost less. They do this because they know that they still have years (likely decades) for those stocks to recover.
Honestly, volatility hurts you the most if you freak out and start selling – that’s one of the best ways for young investors to lose money in the stock market.
The final word on how to get started in stocks
Investing in individual stocks can be a part of a healthy investment strategy, as in one that helps you grow your net worth and prepare for retirement. At the same time, buying individual stocks isn’t the best place for beginners to start, rather it’s something to work towards.
New investors can get a lot of value out of getting their finances in order (paying down debt) and then working on more diversified options like an IRA and ETFs. Once you’ve got a good, diverse foundation, you can start buying single stocks to boost the overall value of your portfolio.