How To Invest In Stocks: A Quick Guide To Get Started

The stock market allows individual investors to own stakes in some of the world’s best companies, and that can be tremendously lucrative. For example, over time the S&P 500 has generated about a 10% annual return, including a nice cash dividend, too.

While getting started can feel daunting for beginners, investing in stocks is actually simple. One of the easiest ways is to open an online brokerage account and buy stocks or stock funds. If you’re not comfortable with that, you can work with a professional to manage your portfolio. Either way, you can invest in stocks online at little cost.

With this quick-start guide, you can begin buying stock in minutes, even with just a little bit of money to invest.

Investing in stocks: 4 quick steps to get started

Ready to invest in stocks? Here’s a four-step guide to get you going:

1. Choose how you want to invest
2. Open an investment account
3. Decide what to invest in
4. Determine how much you can invest — then buy

1. Choose how you want to invest

You can spend as much or as little time as you want on investing. The smart approach is to match your investing plan to the amount of time and energy you want to spend investing.

Here’s your first big decision point: How do you want your money to be managed?

• A human investment professional: A financial advisor is a great “do-it-for-me” option for those who don’t want to spend too much time worrying about investing, or those who have limited knowledge. The downside is that, of the three options here, it’s the most expensive.
• A robo-advisor: A robo-advisor is another solid “do-it-for-me” solution, where an automated program manages your money using the same decision process a human advisor might — but at a much lower cost. You can set up an investment plan quickly and then all you need to do is deposit money. The robo-advisor does the rest.
• Self-managed: This “do-it-yourself” option is a great choice for those with greater knowledge or those who can devote time to making investing decisions. That said, even inexperienced investors can easily choose a few index funds to invest in.

Your choice here will shape which kind of account you open in the next step.

2. Open an investment account

Here’s how to choose the best advisor or account for you.

If you want a pro to manage your money

• A human financial advisor can design a stock portfolio and help with other wealth-planning moves, such as saving for college. A human advisor typically charges a per-hour fee or around 1% of your assets annually, with a high minimum investment. One big advantage: a good human advisor can help you stick to your financial plan when times get tough. Here are four tips for finding the best advisor — and what you need to watch out for.
• A robo-advisor can design a stock portfolio that matches your time horizon and risk tolerance. They’re typically cheaper than a human advisor, often a quarter of the price or less. Plus, many offer planning services that can help you maximize your wealth. The best robo-advisors can handle most of your investing needs.

Bankrate’s in-depth reviews of robo-advisors can help you find the advisor who meets your requirements.

If you want to manage your own money

Bankrate’s detailed reviews of the best brokers for beginners can help you find a broker that meets your needs.

If you open your own brokerage account or go with a robo-advisor, you can have your account open in minutes and start investing. If you opt for a human financial advisor, you’ll need to interview some candidates to find which one will work best for your needs.

3. Decide what to invest in

The next step is figuring out what you want to invest in. This step can be daunting for many beginners, but it doesn’t have to be. Two easy ways to get started are to go with an advisor (either a robo-advisor or human advisor) or to buy stock index funds.

Using an advisor: If you’re using an advisor — either human or robo — you won’t need to decide what to invest in. That’s part of the value offered by these services. For example, when you open a robo-advisor account, you’ll typically answer questions about your risk tolerance and when you need your money. Then the robo-advisor will create your portfolio and pick the funds to invest in. All you’ll need to do is add money to the account.

DIY investing: If you’re opening your own brokerage account rather than hiring an advisor, you’ll have to select investments and make trading decisions. You can invest in individual stocks, or you can opt for stock mutual funds or ETFs, which typically own hundreds of stocks.

• Buying the right individual stock can be hard. Anyone can see a stock that’s performed well in the past, but anticipating the performance of a stock in the future is much more difficult. If you want to succeed by investing in individual stocks, you have to be prepared to do a lot of work to research a company and manage the investment.

• Buying index mutual funds or ETFs is an easy way to build a diversified portfolio quickly. These funds hold dozens or even hundreds of stocks and each share you purchase owns a fraction of all the companies included in the index. Read more about some of the top index funds.

If you’re managing your own portfolio, you can decide to invest actively or passively. Passive investors generally take a long-term perspective, while active investors often trade more frequently. Research shows that passive investors tend to do much better than active investors.

4. Determine how much you can invest in stocks and then start buying

The key to building wealth is to add money to your account over time and let the power of compounding work its magic. That means you need to budget money for investing regularly in your monthly or weekly plans. The good news is that it’s simple to get started.

How much should you invest?

How much you invest depends on your budget and time frame. While you may invest whatever you can comfortably afford, experts recommend that you leave your money invested for at least three years, and ideally five or more, so that you can ride out bumps in the market.

If you can’t commit to keeping your money invested for at least three years without touching it, consider building an emergency fund first. An emergency fund can keep you from having to get out of an investment early, allowing you to ride out any fluctuations in the value of your stocks.

How much do you need to start?

Most major investment accounts don’t have a minimum (or the account minimums are extremely low), so you can get started with little money. Plus, many brokers allow you to buy fractional shares of stocks and ETFs. If you can’t buy a full share, you can still buy a portion of one, so you really can get started with virtually any amount.

It’s just as easy with robo-advisors, too. Few have an account minimum and all you’ll need to do is deposit the money — the robo-advisor handles everything else.

If you’ve opted for a human advisor, the minimum amount can vary substantially. Many advisors demand a minimum of $100,000 or more to get started.

How to manage your investments

You’ve established a brokerage or advisor account and purchased your investments, so now’s the time to watch your portfolio.

• If you’re using a human advisor or robo-advisor, they’ll do the heavy work, managing your portfolio for the long term and keeping you on track.
• If you’re managing your own portfolio and investing actively, you’ll need to stay on top of the news to make the best decisions. Is it time to sell a stock or fund? Is your investment’s performance a signal to sell or buy more? If the market dips, are you buying more or selling? These are tough decisions for investors, both new and experienced.
• If you’re managing your own portfolio and investing passively, you’ll have fewer decisions to make. With a long-term focus, you may be dollar-cost averaging (that is, buying on a fixed regular schedule) and not worrying much about short-term moves.

The hardest issue for most investors is stomaching a loss. Because the stock market can fluctuate, the value of your portfolio will drop from time to time. If you don’t sell at those times, then the losses are on paper only. Once the market rises again, the value of your portfolio will also go up. You’ll have to steel yourself to handle market volatility, or you’ll be apt to sell low during a panic.

As long as you diversify your portfolio, any single stock that you own shouldn’t have too much of an impact on your overall return. If it does, buying individual stocks might not be the right choice for you. Even index funds will fluctuate, so you can’t eliminate all risk.

Top tips for beginning stock investors

Whether you’ve opened a brokerage account or are working with an advisor, your own behavior is one of the biggest factors in your success, probably as important as what stock or fund you buy.

Here are three important tips on how to invest in stocks for beginners:

• While Hollywood portrays investors as active traders, you can succeed — and even beat most professional investors — by using a passive buy-and-hold approach. One strategy: Regularly buy an S&P 500 index fund containing the U.S.’s largest companies and hold on to that investment.
• It can be valuable to track your portfolio, but try to avoid panicking when the market dips. You may be tempted to sell your stocks and stray from your plan, hurting your long-term gains in order to feel safe today. Think long-term.
• To keep from spooking yourself, look at your portfolio only at specific times (say, the first of the month) or only at tax time.

Best stocks for beginning investors

As a new investor, it can be smart to keep things simple and then expand as your skills develop. Fortunately, investors have a great option that allows them to purchase shares in hundreds of top U.S. companies in one easy-to-buy fund: an S&P 500 index fund. This kind of fund lets you own a tiny share in some of the world’s best companies at a low cost.

An S&P 500 fund is a great option because it provides diversification and reduces your risk from owning individual stocks. And it’s a solid pick for investors who don’t want to spend time thinking about investments and prefer to do something else with their time.

If you’re looking to expand beyond index funds and into individual stocks, then it can be worth investing in large-cap stocks, the biggest and most financially stable companies. Look for companies that have a solid long-term track record of growing sales and profit, that don’t have a lot of debt and that are trading at reasonable valuations (as measured by the price-to-earnings ratio or another valuation yardstick), so that you don’t buy stocks that are overvalued.

Stock investing FAQs

• Do you have to live in the U.S. to open a stock brokerage account?
  

  Caret Down Icon
  

  No, you don’t have to live in the U.S. Non-U.S. investors are able to open brokerage accounts and invest in U.S. companies, but they might face a few additional hurdles in getting started, such as showing additional forms of identification to prove their identity when opening an account and to ensure proper tax reporting. Be sure to check with the broker for guidance if you live outside the U.S.

   

• How much money do I need to start investing in stocks?
  

  Caret Down Icon
  

  You don’t need much money to start investing in stocks. Most online brokers have no minimum investment requirements and many offer fractional share investing, which lets you get started for as little as $1. You’ll want to make sure that the money you’re investing won’t be needed for regular expenses and that you can keep the money invested for at least three years (so you can ride out any potential market dips and wait to sell high).

   

• Do I have to pay taxes on the money I earn from stocks?
  

  Caret Down Icon
  

  If you hold stocks in a taxable brokerage account, dividends and realized stock gains are taxable each year. The tax rate you pay on capital gains will depend on how long you’ve held the investment and your income level. If you hold stocks in tax-advantaged accounts such as a traditional or Roth IRA, you won’t pay taxes on gains or dividends, making these vehicles ideal for retirement savings.

   

• What are the best stocks to invest in?
  

  Caret Down Icon
  

  At any point in time, any stock may be the best to buy, because stocks can fluctuate a lot over the short term. But the stocks that increase in value over time grow their sales and profits year after year. It’s vital to research the stocks you’re investing in and understand them thoroughly. This approach requires a lot of work, and it takes years to build enough expertise to succeed.

  For many investors — beginner and advanced alike — it’s easier to find and buy stock funds with strong long-term returns.

• Are stock funds good for beginning investors?
  

  Caret Down Icon
  

  Stock funds are an excellent choice for new investors because they can deliver strong returns without requiring much legwork. You can buy stock funds as either an exchange-traded fund or mutual fund. A stock fund invests in dozens or even hundreds of stocks, and by buying the fund you effectively own a stake in everything owned by the fund.

  For example, funds based on the S&P 500 Index have a strong track record of growth, averaging about 10% annually over long periods. These funds hold hundreds of stocks in the index, which includes most successful large U.S. companies. You can buy a share of an S&P 500 ETF just like you would buy a share of stock at any brokerage.

   

• Is stock investing safe for beginners?
  

  Caret Down Icon
  

  Stock investing can deliver strong returns over time, but returns can fluctuate tremendously in the short term. Those who buy individual stocks must undertake significant research or they risk losing significant money. Buying individual stocks is much riskier than buying a broadly diversified index fund, which may own hundreds of stocks and tends to go up over time.

  When buying an individual stock, your success relies on only that company. If the firm does not perform well, the stock may decline in value permanently. In the worst case, the company could go bankrupt and you could lose your entire investment. However, when you buy a fund, you’ve reduced your risk by relying on many companies.

  Investors can also reduce their risk by taking a long-term perspective, especially with stock funds. Experts routinely recommend that investors plan to hold an investment for at least three years, though longer is better, so that they can ride out the market’s volatility.

   

• What is the stock market?
  

  Caret Down Icon
  

  Stocks, which are also called equities, are securities that give shareholders an ownership interest in a public company. It’s a real stake in the business, and if you own a majority of the shares of the business, you control how the business operates. The stock market refers to the collection of stocks that can be bought and sold by the general public on a variety of different exchanges.

  Public companies issue stock so that they can fund their businesses. Investors who think the business will prosper in the future buy those stock issues. The shareholders get any dividends plus any appreciation in the price of the shares. They can also watch their investment shrink or disappear entirely if the company runs out of money.

  When news people say, “the market was up today,” typically they are referring to the performance of the Standard & Poor’s 500 or the Dow Jones Industrial Average. The S&P 500 is made up of about 500 large publicly traded companies in the U.S, while the Dow includes 30 large companies. These track the performance of those companies’ stock.

  However, even though people refer to the Dow and the S&P 500 as “the market,” those are really indexes of stocks. These indexes represent some of the largest companies in the U.S., but they are not the total market, which includes thousands of publicly traded companies.

Bottom line

The great thing about investing is that you have so many ways to do it on your own terms, even if you don’t know much at the start. You have the option to do it yourself or have an expert do it for you. You can invest in stocks or stock funds, trade actively or invest passively. Whichever way you choose, pick the investing style that works for you and start building your wealth.

— Bankrate’s Brian Baker, CFA, contributed to an update of this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.