Investing in the stock market can be an effective way to grow your money for the future, whether you’re planning for retirement or trying to reach some type of financial freedom at an early age. By purchasing stocks, you’re able to buy a share of a publicly traded company and earn returns on the money you invest. Over time, those earnings act as compound interest, allowing your money to grow exponentially.
Of course, every investment comes with risk. Unlike a savings account or checking account in a bank, there’s no FDIC insurance or any other type of guarantee. But in the long run, some smart planning and patience can lead to a diversified portfolio that serves your financial needs with long-term growth and earnings.
Not sure where to start with your investments? Here’s an overview of how to buy stocks for beginners.
Options for Investing in Stocks
Today’s technology lets you choose from a couple of different ways to actually make your investments, typically either through a broker or an online platform. Know what to expect with a brief explanation of each option.
Broker
The more traditional choice for buying stocks is opening an account with a brokerage firm. You typically have the option of either managing your investments on your own or tapping into the expertise of a financial consultant or fiduciary if you’d like guidance. Pricing is determined by the type of trades you make and whether you choose an automated phone trade or a broker-assisted trade. Some brokers may also charge a fee to open your account or maintain it.
All of these factors should weigh into your decision since all of those fees can eat into your overall investment returns. If you already know the type of stocks you favor, such as ETFs, mutual funds, or options, you can compare those specific costs across brokerages to find the most cost-effective solution.
Another consideration when opting for a broker is that they may have an account minimum. This isn’t always the case, but it’s frequent enough where you want to make sure your opening balance meets any required thresholds.
If you want a very hands-on level of service with your own dedicated team, you can expect a much higher account minimum. You’ll also be charged an annual fee that is a percentage of your total investment. The more money you invest with the brokerage, the lower the rate you’ll typically pay.
Online Platform
The rise of online trading platforms has opened the door to less seasoned investors with lower starting amounts. Similar to the lower levels of a brokerage firm, you get to control your investments by paying a per-trade fee based on the type of trade and your trade volume. You can often pay a lower fee if you make at least 30 trades per quarter.
If you’re just getting started buying stocks, a straightforward online platform can help you pay a la carte while you figure out your preferred investment strategy. These platforms also have lower account minimums, making it easy to get started at any time.
Alternatively, you can also opt for a managed portfolio or robo advisor. You’ll pay the annual fee, just as you would with a traditional brokerage, but since these platforms are almost entirely automated, it’s usually at a much lower fee with a much lower investment minimum.
Online platforms also usually invest quite a bit in educational materials and tools. If you’re new to buying stocks or are more seasoned and like lots of data at your fingertips, compare what kind of educational benefits you receive across platforms.
Determine Your Preferred Types of Investments
When you’re buying stocks and creating your portfolio on your own, there are two main investment types most people choose from. Whether you choose just one to focus on or diversify with multiple types of stocks, you first need to know the differences between them.
Individual Stocks
Investing in individual stocks is the way to pick and choose specific publicly traded companies for your portfolio. To get started, consider creating a stock watchlist, which consists of companies you’ve researched and meet your criteria, even if they’re not on sale just yet.
This process can be faster and more effective in making you money, but there’s also a lot more risk involved since your eggs are spread across fewer baskets. Plus, it’ll likely take some trial and error to get the hang of when to buy and sell individual companies.
Index Investing
If you’re just starting to buy stocks and navigate the process on your own, it may be worth to practice with a smaller amount of money in individual stocks so you can give yourself a learning curve without losing all of your savings. Alternatively, if you’re more risk averse or don’t want to learn everything it takes to choose individual stocks, you can instead consider index investing.
Index investing allows you to invest in a sampling of companies that represent a market or industry, such as the Dow Jones Industrial or the S&P 500. You purchase a percentage of these stocks that are part of either a mutual fund or an ETF.
Most major indexes track the market, which typically yield about 7% a year in the long run. The downside is that your portfolio goes down when the index does. During that period, you won’t make a return on your money and you could even lose money if you have to sell.
The advantage is that investing in an index is completely passive and extremely easy. If you don’t want to perform ongoing research about what’s happening in the market, index investing might be a good choice for you.
Making Money on Stocks
The way you make money on stocks is buying low and selling high. When you’re doing this on your with individual companies, it can take a great deal of patience as you wait for the fluctuations of the market.
If you buy when a popular company’s stock price is high, you’ll be too dependent upon the growth of the market and won’t weather temporary storms as well. But if you buy low, even if there’s a downturn, your portfolio won’t hurt as much. And when things go up, you can sell at a profit.
Another tactic for making money on stocks is to pick an optimal trading account. If you’re saving for retirement, consider using either a traditional IRA or a Roth IRA. Both have maximum contribution limits each year, which is currently set at $6,000 by the IRS. If you currently have a higher income, you can contribute to a traditional IRA and use the funds as a tax deduction.
With a Roth IRA, on the other hand, you can pay income tax on your contribution amount now, and then not pay any taxes when you start taking withdrawals in the future. That means all of your gains in the market over the years can be used completely tax-free.
When to Start Buying Stocks
Investing is definitely a habit that benefits you over the long-term, so the sooner you start buying stocks, the more returns you’ll earn and have returns compound in the market over time. Before you get started, however, make sure you’ve got the other areas of your finances under control first.
First, make sure you’ve got high-interest debt under control. No matter how well you trade on the stock market, it’s easy to spend more than you earn on those interest payments. Get rid of things like large credit card balances before you start putting extra funds into your investment strategy.
Second, give yourself an emergency buffer to take care of any unexpected financial expenses. Usually, this amounts to three to six months of your living costs. That way, in case something major happens, like a sudden job loss, you still have the cash flow to stay afloat.
Once your financial house is in order, then you’re ready to start buying stocks. Determine how much you money you want to invest and what the best course of action is in terms of your upcoming financial needs and the types of investments to make. If you’re decades away from retirement and are hoping to reach financial independence at some point, you may decide to take more risks.
The closer you get to retirement and actually using the funds in your portfolio, the more you may want to pull out of those risky opportunities and place your money in an index with a more modest, but stable, return.
The Bottom Line
Learning how to buy stocks is a process and is definitely one that’s deserving of your attention if you want to do things yourself. Whether you opt to frequent trades or simply choose an index for the long haul, the best path forward is the one you start today.
Time is your ally when it comes to buying stocks. The sooner you get started, the more time you have to grow your earnings and continue to earn more on your original funds.
