Investing in stocks is a way to make your money grow over time. By regularly putting money aside to invest, you can see its value multiply over the long term. That’s why it’s important to begin as soon as you have the money to do so—the longer your time horizon, the better. This article takes you through how much you need, what stocks to choose, and the other basics of investing in stocks you need to get started, all in 10 steps. Whether you have thousands set aside or can invest a more modest $25 a week, you have enough to begin.Step 1: Set Clear Investment Goals
Begin by reflecting on what you want to achieve financially. You might have short-term goals like saving for a home or a vacation or have long-term objectives like securing a comfortable retirement or funding a child’s education. Your objectives will depend on your life stage and ambitions. Younger investors tend to focus more on growth and long-term wealth accumulation, while those closer to retirement typically prefer income generation and capital preservation.
The more precise you can be about your goals, the easier it will be to sort out the best means to get you there. Here are some tips:
Be precise about your objectives: Instead of general goals like “save for retirement” or “I don’t want to have to worry about money one day,” set specific objectives like “accumulate $500,000 in my retirement fund by age 60.”
Set your investment horizon: Determine how long you have to achieve each goal you set. You will have longer and shorter timelines for different purposes. In general, the longer you can give yourself, the less risk you’ll need to take on, and the more viable your objectives will be.
Evaluate your finances: Be realistic about how much you can allocate toward your investment goals. This includes looking at your savings, regular income, and any other financial resources you can put to work as you begin. We’ll come back to this.
Rank your goals: Most of us have several goals at once, like saving a down payment for a house, paying for a wedding next year, or preparing for retirement. Prioritize these and balance them according to their importance and urgency.
Review and adapt to changes in your life: The phrase financial planning is best taken as a verb, not a noun since goals aren’t set in stone, and planning your finances is an ongoing project. You might fall in love or out of it, have many children or none of them, or realize your life’s work is best done in a different place in the country. Life changes, and so will your financial objectives. Regularly review and adjust your goals accordingly.The first step in any venture is the biggest, but it’s also when you set your aspirations and imagine yourself in a future that your investments in stocks, a touch of luck, and a prudent investment strategy you’ll begin to learn here make possible.
Step 2: Determine How Much You Can Afford To Invest
Determining how much you can afford to put in stocks involves carefully and honestly assessing your financial situation. Don’t worry if your funds are less than you would wish. Just like you shouldn’t berate yourself for not being ready for a race on your first day of training, so too, you’re just at the beginning of your investment journey. This is a marathon, not a sprint and you’ve got a long way to go. Here are some tips for giving yourself an honest appraisal of how much you can use:
Look at your sources of income: Start with your income. In particular, you’ll want to see if your employer offers ways for you to invest while gaining tax benefits or with matching funds that will amplify your own contributions.
Have an emergency fund: You should have a solid financial foundation before investing, though solid does not mean perfect. Settle on how much you need for emergencies, typically covering major expenses (a few months of mortgage or rental payments, plus your other bills).
Snuff out any high-interest debts: Financial advisors also generally suggest making sure you’ve paid down your debts, especially credit cards and anything else with high interest rates. Any returns you expect from trading stocks are unlikely to make back the cost of the high interest rates accruing each month on your credit card statements. If you still owe on your student loans, look at how much interest you pay. Balance that against the returns you expect by investing in stocks, and choose whether it’s better to pay your loans down or invest.
Set a budget: Based on your financial assessment thus far, decide how much money you can comfortably put into stocks. This shouldn’t dip into any funds you need for expenses now or down the road. Your budget should determine if you are starting with a large lump sum or investing smaller amounts at set times each month or year.
Investing in stocks carries risk, and it’s important to only invest money you can afford to lose. Never put yourself in a financially vulnerable position for the sake of investing. This is what separates investing from some of the worst forms of gambling.
Step 3: Appraise Your Tolerance for Risk
Understanding your risk tolerance is a cornerstone of investing. Gauge your level of comfort with the inherent uncertainties of the stock market. Your risk tolerance will differ depending on your life stage, financial goals, and your financial cushion for potential losses.
Determining your risk tolerance is crucial for crafting an investment strategy that matches your financial goals while keeping your peace of mind. It helps you decide which stocks are suitable for your portfolio and what to do when the market goes up or down. Don’t be goaded into being more adventurous than you need to be, or more cautious than called for. Do you prefer stability, or are you willing to accept higher risks and price swings if that means there’s the potential for more returns? This self-assessment is key to setting a foundation for your investment journey.
Stocks can be organized by the risk they involve. For instance, large-capitalization (large-cap) stocks are generally more stable since they are well-established, major companies well-known in the market. Small-cap stocks usually offer more growth potential but come with increased risk. Similarly, growth stocks are sought for rapid gains, with higher risks, while value stocks focus on long-term, steady growth, usually with lower risks.
Step 4: Determine Your Investing Style
Everyone has a different relationship with money. We’ve seen how this affects your risk tolerance. But investors also have investing styles that best suits them. Some prefer an active role, meticulously pouring over the last cell on the spreadsheets for their portfolios, while others opt for a hands-off, set-it-and-forget-it approach, trusting their investments will grow over time if they just leave them alone. Some just might not have the time to be active traders following the ticker crawls and latest reports on investing platforms. It’s important to recognize that your style might evolve, but you’ll need to start somewhere, even if your choice isn’t set in stone.
Here are general directions for understanding your investing style:
DYI investing: If you have a good grasp of how stocks work and are confident to head out with minimal guidance into the market, managing your stock trades is one option. You can set up an account with well-known and trusted online brokers to access a wide range of investment options, including stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds. This approach gives you full control over your investments, even if certain choices might be stock funds and the like managed by professionals with a fiduciary responsibility to look after your funds.
Working with a financial advisor or broker: For those who prefer the more personal approach and want more, an experienced broker or financial advisor can be invaluable. They offer advice tailored to your life experiences and goals, help you decide among the more promising stock choices for you, monitor your portfolio, and collaborate with you when adjustments need to be made.
Step 5. Choose an Investment Account
You’ve figured out your goals, the risk you can tolerate, and how active an investor you want to be. Now it’s time to choose the type of account you’ll be investing through. Each has its own set of features, benefits, and drawbacks.
Here are the most common:
Retirement accounts
Your employee retirement plan: If your employer offers a retirement plan, this is a convenient way to invest in stocks, including potentially those of the company itself. The plans are known by the sections where they’re described in the U.S. tax code. The most popular are 401(k)’s (tax-deferred, private employer-sponsored retirement savings), but you could also have a 403(b) (used mostly by nonprofit organizations, public schools, and some churches), a 457 (mostly for state and local public employees), or a similar plan. You contribute to your account automatically each pay period, and many employers offer matching contributions, boosting your investment. Your contributions are tax-deductible, and the account balance grows tax-deferred.
Individual retirement account (IRA): You can start investing in stocks by opening an IRA in addition to your workplace retirement plan (if you have one). IRAs provide some tax benefits, and you can choose between a traditional IRA (tax-deductible contributions) or a Roth IRA (tax-free withdrawals in retirement).
Taxable brokerage accounts
If you prefer more flexibility or have maxed out your IRA contributions, a regular taxable brokerage account gives you access to various investment options, including individual stocks, stock mutual funds, ETFs, and stock options. While they don’t have the tax advantages of retirement accounts, they are more flexible and don’t have contribution limits. You can also pick different taxable brokerage accounts as you seek a match for your investment style.
Individual brokerage accounts: These are standard accounts opened by one person. The account holder has full control over the investments and is solely responsible for any tax implications. The most basic type is a cash account, through which you buy securities using only the money available in your account. You can also have a margin account at a brokerage for more experienced investors who borrow money from the brokerage against their account’s value to buy additional stock.
Joint brokerage accounts: These are shared by two or more individuals, typically spouses or partners, and can be cash or margin accounts. These accounts can be structured as joint tenants with rights of survivorship: if someone on the account dies, ownership passes to the survivor(s).
Managed accounts: These are professionally managed, and a portfolio manager makes the decisions on your behalf, personalized to your needs, goals, and investment style.
Accounts for specialized goals
There might be tax advantages to using different kinds of accounts if you’re investing in stocks for specific goals, e.g., for your own or your child’s education or health expenses. If so, it’s to your advantage to consider these alternatives, which have special tax incentives:
Dividend reinvestment plan accounts: Some brokers offer accounts that automatically take your stock dividends and use them to purchase new shares, usually without charging commissions for the additional shares.
Education Savings Accounts: These offer tax advantages when the funds are used for qualified educational expenses.
1
Health savings account: Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
2
Trust and custody accounts: A trustee manages trust accounts for the benefit of a third party according to the terms of a trust agreement. In the case of custody accounts, minors can own stocks and other assets, but a custodian manages the account until the minor is an adult.
Step 6: Learn the Costs of Investing
Commissions and fees
Besides reputation and fit with your investment strategy and goals, broker fees are the most important consideration when you’re choosing a brokerage firm, which comes in the next step.
3
Let’s prepare. Traditionally, brokerages have charged fees through trade commissions, account maintenance fees, and fees for additional services like research or financial advice. However, the landscape of brokerage fees has evolved significantly in recent years.
4
Here’s what you’ll want to look for as you do your research:
Trading commissions: A broker might charge a commission every time you trade a stock, whether you buy or sell. Trading fees range from $2 per trade to $10. Some brokers charge no trade commissions at all, but they make up for it with other fees. Depending on how often you plan to trade, these fees can add up, affect your portfolio’s return, and deplete the money you have available to invest.
Let’s see this in action: Suppose you buy one share of stock in five companies with $1,000. Assuming a transaction fee of $10, you will incur $50 in trading costs which is equivalent to 5% of your $1,000. Should you sell these stocks, the round trip (buying and then selling) would cost you a total of $100, or 10% of your initial deposit amount of $1,000.
Maintenance fees: Some brokerages charge monthly or annual fees to keep your account active. These might be waived, though, if your account balance is above a certain threshold.
Service fees: You might pay additional fees if you haven’t used your account in a while. Brokers also may charge for services like broker-assisted trades, access to their premium research, and trading on margin (by borrowing). Most of these fees and the services linked to them are optional.
Subscription-based models: As Generation Zers and Millennials take up a larger share of the investment space, financial advisors, planners, and brokers are taking on clients used to month-to-month or yearly fees for apps and app-based services. Instead of paying per transaction or for specific services, you pay a flat monthly or annual fee. Your subscription may include commission-free trades, access to research tools, and other premium support.
4
Some platforms offer tiered subscription levels, supplying more features or lower margin rates at higher subscription rates. As you would with Hulu or your favorite online magazine, you’ll want to keep an eye on how much you’re taking advantage of what you’re paying for. If not, you might draw down to a lower tier or seek another broker altogether.
Account minimums
A major change in recent years has resulted from the immense competition among brokerages. Many online brokers have eliminated account minimums, making it easier for a wider range of investors to get started.
3
This means that if you have just a few dollars to invest, you can still open a brokerage account and begin trading stocks. While some brokerages still require you to deposit substantial amounts before you can become a client, this shift away from very low or no minimum requirements has made investing far more accessible to nontraditional investors and beginners. However, you’ll want to assess any minimum a brokerage requires, which is still your money, with transaction fees and maintenance costs that may lead you to decide that keeping a minimum in your account is less costly in the long run.
