How to Invest in Stocks: What You Need to Know

Buying shares is a powerful way to grow your wealth over time. Yet, for those new to the world of the stock market, it can be an intimidating and complex endeavor. A thought-out approach and a well-defined strategy are your best tools to succeed in such a case, and we’re here to help you with both.

Whether you're a novice investor looking to begin your journey or someone seeking to learn more about the field, this guide offers you a grasp on how to start investing in stocks and establish a foundation for long-term financial growth.

How to Invest in Stocks: The Options You Have

When you face a question of how to invest in stocks and make money, you should remember that there are various approaches available to you. Let’s consider the three most common ways to invest in stocks, widely used by all kinds of investors. A well-balanced portfolio should incorporate a combination of these approaches to maximize potential returns while also mitigating risks.

Buying Individual Stocks

Individual stocks, also known as equities or shares, represent you owning a part of a company that entitles you to a portion of its assets and earnings.

Purchasing shares is one of the best ways for beginners to invest in stocks since it allows you to select businesses with strong market presence and potential. By investing in shares of companies that experience significant growth, you can get substantial yield.

On the other hand, investing in individual funds only can be risky, as the success of your portfolio will depend on the performance of a few companies. Should any of them fail, it will have a noticeable impact on your assets. A natural way to mitigate this risk is diversification, hence all the talk about diversified portfolios.

Exchange-Traded Funds (ETFs)

Traded on stock exchanges, ETFs are somewhat similar to individual stocks. However, they rely on tracking the performance of a specific index, commodity, or basket of assets.

• ETFs are an easy way to diversify, as those allow you to invest in a collection of different securities, helping to leverage the potential risks.
• Due to their passive nature, most ETFs entail lower expense ratios compared to actively managed mutual funds, making them more cost-effective.
• You can buy or sell these securities during the trading day at market prices, which ensures high flexibility and liquidity.

Easy access, diversification benefits, and cost-effectiveness make ETFs a helpful tool for those who wonder how to invest money in stocks.

Mutual Funds

With this type of investment, funds from several investors are put into a diverse portfolio of securities. Mutual funds are often managed by professionals. However, you should be aware that this level of management will entail regular fees, which will take a portion of your returns.

Accounts to Invest in Stocks

Another component of what you need to know about investing in stocks is different account types. Here are the most widely used options:

Taxable investment account

This is an account you can open with a financial institution or a broker. Its main peculiarity is that it doesn’t come with any tax benefits. Any proceeds that you get from investing in stocks with this account will be treated just like any other income. The good thing about this account type is that there are no caps on what you can do with it.

Retirement account

IRA and 401(k) are the most popular retirement accounts. You can open the latter via your employer, but an IRA can only be opened with a brokerage firm. The advantage of such accounts is a tax advantage, but you have to be mindful of the yearly contribution restrictions.

Education savings account

Coverdell accounts and 529 plans belong to this category. Just as the name suggests, this account type is aimed at saving money for education. By using the account, you can invest in stocks, usually by opting for mutual funds.

Best Stocks for Beginners

Choosing which stocks to invest in can be tricky, as there are thousands of options to choose from. However, a significant percentage of thriving investors don’t venture out much and stick with the basics.

As a beginner, you can safely follow the advice of Warren Buffett and go for an inexpensive S&P 500 ETF, so that the largest part of your investment portfolio consists of funds. If you are unfamiliar with S&P 500, this is an index that includes 500 of the biggest companies listed on the US stock exchanges.

Once you gain enough experience or find a company you want to invest in, you can go for individual stocks and add them to your portfolio.

Choosing the Best Method for You

When you ask yourself, “How to invest in stocks?” don’t expect to find a one-size-fits-all approach. The choice of method depends on your individual preferences, situation, and financial goals. On top of that, estimate your risk tolerance. How comfortable are you with the potential fluctuations in the value of your investments?

Yet another important factor to take into account when choosing an investment method is time horizon. Before defining your portfolio, you need to decide how long you plan to invest before you’ll need to access your funds. Shorter time horizons favor more conservative approaches, while with longer ones you can opt for a more aggressive investment strategy.

Additionally, selecting the right platform or account to perform your investments is crucial for your success. If you understand the basics of investment, you can open a self-managed brokerage account and be your own captain.

However, if you need guidance and assistance for putting money in stocks, hiring a consultant can be a better option for you. You can choose between a human professional and an AI-powered advisor. While both are payable, a robo-advisor is a more affordable and simple alternative for those looking for how to invest in stocks for beginners.

Final Thoughts

Investing in stocks can be an exciting and rewarding journey. Yet, it requires careful planning and discipline. Only by understanding your risk tolerance, diversifying your investments, staying informed, and maintaining a long-term perspective, you’ll be well-positioned to achieve your financial goals.