Investing in the stock market can be intimidating for anyone, even seasoned professionals. However, Stocks for beginners can seem like an uphill battle at times. Differentiating between businesses, determining valuations, and reducing risk are just a few of the tasks traders will be confronted with.
New investors will be forced to tap into several skills to invest with at least some degree of success. Nonetheless, there’s only one tenet new investors need to familiarize themselves with at first: even the most prolific investors of our time were once novices.
While stocks traded on Wall Street have become synonymous with multimillion-dollar conglomerates and successful business people, they are no less accessible to new investors with a little disposable income, patience, and a mind for due diligence. There is absolutely no reason new investors can’t benefit from a bull market like traders who have been building positions in companies for years.
Remember, nobody starts investing in the stock market as a veteran. Developing the slightest working knowledge of how stocks are traded requires time and effort, but it’s never too late to get started. Here’s an introduction to investing in stocks for beginners, and hopefully, the catalyst many people have been waiting for to start investing themselves.
What Is A Stock Investment?
A stock investment is the purchase of a public company’s shares with the intent of capitalizing on growth and/or dividend income. However, to understand exactly what a stock investment is, investors must first familiarize themselves with what a share is.
Shares are the direct result of when a company decides to “go public.” Otherwise known as an initial public offering (IPO), going public is exactly what you would assume: The business in question transitions from a privately-owned enterprise to a publicly-owned business. In doing so, the company will divide itself up into a predetermined number of shares (each representing a piece of the company) and sell them to the public (stock traders).
Each share’s price will be determined by an investment bank that is hired to determine the true value of the company before it’s listed on any of the major indices (Wall Street). Stock investors are literally buying a piece of the company when they buy its respective shares at the price the investment banks set. In return, the company can use the capital it receives from selling shares to increase business operations.
More often than not, businesses go public to raise capital to further their endeavors and grow their valuations. Therein lies the foundation of a stock investment: Investors will invest in individual shares of a company with the hopes the IPO gives them enough momentum to increase in value.
How Do Stocks Make Money?
Stocks make money for investors when they do at least one of two things: they either grow in value or offer a dividend. When the value of a business increases, each of its shares will increase in proportion to the business they represent. The more valuable the company is, the more valuable each of its shares is. Investors buy shares with the intention of the company increasing in value. When the share price increases from the initial purchase price, investors will profit from the difference at the time of a sale.
In addition to growing in value, some stocks reward their shareholders with dividends. As a subsequent income source for investors, dividend payments are distributed to investors who own shares of the stock. Dividends are typically paid out monthly, quarterly, biannually, or yearly and represent a small percentage of the stock’s value. In return for paying dividends to shareholders, companies are granted certain tax benefits.
Common & Preferred Stocks
Stocks may be broken down into two categories: common and preferred stocks. Both common stocks and preferred stocks represent a piece of ownership in a company, and both are investment vehicles that allow investors to profit from the business’s success. The former (common stocks), however, is the most well-known and gives shareholders voting rights in return for buying a piece of the business.
Preferred stocks, on the other hand, do not offer the same voting rights as their common counterparts. There are other slight differences between common and preferred stocks, but for the sake of investing in stocks for beginners, it’s important to note that one gives shareholders a voice and the other doesn’t.
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How To Start Buying Stocks In 7 Steps
The stock market offers the lowest barrier of entry to almost any investment vehicle. Whereas other investments correspond with exorbitant amounts of money or are reserved for only the most experienced of investors, investing in stocks for beginners can be broken down into seven simple steps:
Define your investment goals
Open a brokerage account
Educate yourself on the stock market
Set a budget
Prioritize long-term growth
Build and manage a portfolio
Diversify your holdings
1. Define Your Goals As A Stock Investor
Before investing a single penny, and even before opening a brokerage account, aspiring investors must first determine their own goals. Definitive goals may simultaneously give investors direction and set the bar for what they deem to be a success. Without a goal in place, investors will have nothing to compare their progress to, making improving all the more difficult. Additionally, specific goals will help investors determine their own investing approach, of which there are many.
To be clear, making money is not a good goal for new investors to set. Simply deciding to make money is too broad of a statement. Instead, investors will need to formulate their own goals based on two fundamental concepts: how they want to make money and how long the investing window will be open. These two factors will prove instrumental in setting purposeful goals.
The first thing investors need to do is establish a timetable. The length someone intends to invest for will dictate a lot of their strategies moving forward. If, for example, the new investor is in their twenties, their portfolio may be exposed to slightly riskier stocks with more growth potential. Younger investors typically won’t need access to the capital in their portfolio any time soon, and they’ll have more time to course-correct in the event of a market crash or poor investment decision. Investors on the brink of retirement will most likely need to tap into their portfolio sooner rather than later and want to switch to an investment strategy that reduces their risk exposure. REIT investing for income or bonds are a great example of what older investors may look to prioritize.
Once investors know their timetable and the amount of risk they are comfortable taking on, they may choose to actively invest or take a more passive approach (or even combine the two). Those who have the time and desire to thoroughly research stocks may appreciate actively investing in individual stocks. There’s no reason a new investor can’t generate better returns than the S&P 500 average by investing in stocks they believe to have market-beating potential.
Those interested in learning how to start investing in individual stocks have many options for increasing their profits, but there are three strategies that stand out:
Growth Investors: Growth investors place an emphasis on investing in companies with a lot of upside.
Dividend Investors: Dividend investors trade the growth potential of a stock for the income potential of its respective dividend yield.
Value Investors: Value investors try to find stocks which are undervalued by traders and likely to regress to the norm.
Those who favor a more passive approach may appreciate the following options made available to traders:
Index Funds: Index funds are built to track the broader market, and are one of the simplest ways to balance a portfolio. These securities will typically mimic the returns of the broader market, which has historically trended upwards.
Exchange-Traded Funds: Otherwise known as ETFs, exchange-traded funds award investors with a diversified portfolio comprised of broad market exposure.
Mutual Funds: Mutual funds grant access to “baskets” of stocks all at once, which can increase diversity and reduce the need to actively manage a portfolio.
These three options allow new investors to take a more hands-off approach while simultaneously allowing professionals to diversify their own portfolios. Passive investments tend to be more risk-averse and may trade upside and growth for safety.
However, investors who decide to invest should be based entirely on what they hope to achieve by trading stocks.
2. Open An Investment Account
Once investors are fully aware of their intentions and how long they want to invest, they will need to open an investment account. Otherwise known as a brokerage account, investment accounts are the platforms that grant traders access to the stock market. Not all brokerages are created equal, so aspiring investors will want to research each option before settling on one.
Opening An Online Brokerage Account
There are several online brokers for new investors to consider, and each institution has become synonymous with its own pros and cons. As a result, investors will want to evaluate their own goals before choosing which brokerage to align their services with.
Here’s a list of today’s most popular brokerages and what they are best known for:
Fidelity Investments: Fidelity seems firmly entrenched as the best online broker for both beginners and veterans.
TD Ameritrade: TD Ameritrade has developed a reputation for catering to new investors:
Charles Schwab: Charles Schwab tends to have the best access to ETFs.
Robinhood: Robinhood is the newest player in the game, and aims at making the stock market accessible to anyone and everyone.
Each of these options will give investors access to the stock market in exchange for conducting a brief “interview.” At the very least, the brokers will need to confirm the traders are who they say they are for tax and accountability purposes.
In choosing a brokerage, investors will want to pay special considerations to their own goals and which platforms will help them the most. Take note of each company’s fees, day trading limits, and options. More importantly, pay attention to some institutions’ minimum requirements; some will require a minimum deposit to get started. Many things need to be considered before choosing a broker, so mind due diligence and pick the one that caters to your needs the most.
Opening A Robo-Advisor Account
Many traditional brokerages are starting to offer investors access to robo-advisor accounts. Short for robot advisor accounts, these new features were created in the wake of the Great Recession. After many investors suffered from a significant drop in the S&P 500, some institutions wanted to leave investment decisions up to robots and algorithms. The idea was to lower costs for investors and provide the appropriate technology for making smart trading decisions.
The recent track record shows many investors may do well to align their stocks with a robo-advisor, as the algorithms are specifically designed to aid in several investment strategies. Consequently, these features make investing more passive, which is exactly what many investors are looking for. Those looking to actively manage their money would be better off with a traditional brokerage.
3. Learn About Stock Mutual Funds & Individual Stocks
There are several types of stocks investors may choose to invest in. Each of the companies listed on today’s major indices, in fact, represents an individual stock that may be purchased. That said, investors don’t have to invest in a single stock with each trade. Those intent on diversifying their portfolios and taking a more passive approach to investing may choose to invest in a mutual fund. Individual stocks aren’t better or worse than mutual funds, but rather different. Each one awards investors with its own unique pros and cons.
Stock Mutual Funds
Mutual funds are designed to diversify portfolios and take the pressure of actively investing off of today’s investors. In doing so, mutual funds pool the capital of investors and choose where to put the money. Most mutual funds will take the money they are given and invest in securities like stocks, bonds, money market instruments, and other assets.
When all is said and done, investors will invest in a mutual fund the same way they would invest in a stock; they are traded on the market. However, instead of the money buying shares of a single security (or company), the money is pooled with money from other investors to invest in an array of companies or assets. Investors with less experience may prefer mutual funds because they are run by professional money managers, not the least of which is tasked with producing capital gains for investors. Simply put, mutual funds give investors (even new ones) access to professionally managed portfolios.
4. Set Your Stock Investment Budget
Investing in stocks for beginners comes with an inherent risk. There isn’t a single investment vehicle, for that matter, which isn’t associated with at least some degree of risk. New investors can’t simply put all of their money in the stock market, which leaves many new investors asking themselves the same question: How much should I invest in stocks for the first time?
It is of the utmost importance new investors only invest with disposable income. Do not allocate capital that is necessary for everyday life into a brokerage account. Make sure you are only investing money you won’t need anytime soon.
5. Focus On Long-Term Growth
There are many strategies investors can use to invest in the stock market. Day traders, for example, buy and sell stocks based on volatility; they may buy and sell the same stock multiple times in a single day to take advantage of drops in prices. It is worth noting, however, that day trading is an advanced strategy and should be reserved for seasoned investors. Investing in stocks for beginners should emphasize long-term growth; that means buying shares and holding onto them for years, if not decades.
To be clear, long-term growth is just as dependent on a long-term growth strategy as it is on an immediate strategy. The sooner investors start buying shares, the sooner a long-term strategy will be realized. More importantly, the sooner an investor starts, the longer their investment window will allow them to compound gains. Robert R. Johnson, Professor of Finance at Creighton University in Omaha, Nebraska, is convinced there’s no better way to invest in retirement than the stock market, and no better time than now.
“The surest way to build true long-term wealth for retirement is to invest in the stock market. Starting early is the key to successfully building wealth because of the effect of compound interest,” says Johnson.
History has shown that the stock market rewards patient investors with annual gains. On average, the stock market returns about 10% per year. Of course, returns will vary from year to year, but stocks have proven resilient. The market, as a whole, almost always drops faster than it rises, but it almost always rises more than it drops.
Investors who hold their shares for long periods of time tend to benefit from a historical track record. Perhaps even more importantly, it isn’t easy to know when to sell a stock for a profit. Selling too soon can result in significant losses (if the company goes on to become much more valuable), so it’s typically better to buy and hold companies with a lot of potential. Or, as Warren Buffett once said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
6. Create & Manage Your Stock Investment Portfolio
Investing in stocks for beginners consists of a lot of research and due diligence. Potential returns (or even losses) are too large not to invest a great deal of time into education. Therefore, every step up to this point has played a pivotal role in preparing investors for the actual practice of investing. Consequently, only investors who have completed the previous steps should consider creating and managing positions in a stock investment portfolio.
To create and manage a portfolio, investors will need to transfer funds into their brokerage account (remember, only use disposable income that won’t be needed for several years). Next, research stocks that suit your investment approach. There are many stocks on Wall Street, and not all of them are worth your time, so it’s of the utmost importance to mind due diligence when researching stocks. Only once you are sure you have found a company you are comfortable holding for several years can I even recommend considering opening a position (buying at least one share).
Investors tend to get out of the stock market what they put into it. Those who spend a great deal of time researching trends, earnings reports, and companies’ performances will most likely have a better chance to beat the market. On the other hand, those who throw money into any stock without the slightest bit of research or conviction are simply gambling, not investing.
When managing a portfolio, try writing down the exact reason you buy a stock. Take note of what persuaded you to open a position and use it to help you manage your assets. If you have done your homework, you will most likely hold the stock for a long period of time, so managing a portfolio isn’t technically all that hard. However, if the reason you bought the stock no longer applies, you will need to actively manage your portfolio and perhaps even sell the shares of underperforming stocks.
7. Diversify Your Stock Investment Portfolio
When starting out, it may be a better idea for investors to invest in several companies. The idea is to develop a diversified portfolio that has minimal risk exposure. Investors who buy a single stock, for example, will find that the success or failure of their entire portfolio is based on the performance of one company. If the company faces challenges, the investor’s entire portfolio is at risk. Therefore, instead of investing in a single stock, it is almost always a better idea to buy several stocks.
Ideally, investors will be able to build a portfolio of at least 20 or 30 companies, but there’s no objective number that must be reached. Instead, it is important to know that the more stocks investors buy across different industries, the more diversified their portfolios will be.
When all is said and done, it is important to own a wide variety of companies. Variety is one of the best ways to combat risk, and there’s really no reason not to practice diversification. However, the number of stocks you own will only diversify your portfolio as much as you have allocated capital between them.
Let’s say, for example, you own 20 stocks, but 90% of your cash is in two holdings. If only a few stocks represent the majority of your portfolio, you are still at risk. While owning several stocks is important, it’s equally important that each stock doesn’t make up too large of a percentage of your portfolio. A general rule of thumb is to keep each holding around 5% of your total holdings. New positions can start smaller and build into larger percentages as they grow, but it’s generally a good idea not to be over-allocated into a single stock.
Beginner Tips For Stock Investing
Investing in stocks for beginners can get complicated quickly. Those who are new to Wall Street will come up with questions once they start digging their heels in. Fortunately, there’s no reason to panic. Not even the most prolific investors of our time presume to know everything; that’s why new investors need to start small.
Here are a few tips new investors can use to get their feet wet in the stock market and perhaps even use as a foundation for future growth:
Invest With A Paper Account: A paper account will help investors learn the ropes of the stock market without putting any real money at risk. As their names suggest, paper accounts aren’t real but mimic the market and can serve as great learning material. Using a paper account will give investors experience without having to take risks.
Don’t Confuse Cheap With Opportunity: Investing in stocks for beginners usually starts with cheap stocks. That said, cheap stocks are cheap for a reason. Low valuations suggest risk, which means new investors shouldn’t always focus on cheap stocks. It may be better to buy one stock for $100, than ten stocks for $10.
Don’t Invest Money You Will Need Soon: New investors shouldn’t invest money they will need in the next few years. Since long-term investments are ideal, investors will only want to invest money they won’t need any time soon. That way, they can allow their investments to grow unimpeded.
Don’t Use Leverage: There are a great deal of seasoned investors who are comfortable using leverage (borrowing money) to invest in stocks. However, doing so increases risk dramatically. In the event stock prices drop, losses are magnified. Therefore, new investors should try to avoid using leverage.
Follow Successful Investors On Social Media: Today’s most successful investors are typically the most informed. Fortunately, many of them are willing to share their thoughts and research with the public. New investors should listen to those on social media who have already demonstrated they are successful. Doing so will grab a wealth of knowledge. That said, take what you hear with a grain of salt. Don’t simply believe everything, but use the information you gather to further your own research.
Is Investing In Stocks Beginner Friendly?
Investing in the stock market has become increasingly beginner-friendly. There’s absolutely no reason a new investor can’t sign up with a brokerage and start investing with some degree of success. However, don’t let the low barrier to entry trick you into thinking investing in stocks for beginners is easy; just because the stock market is more friendly to beginners than ever before doesn’t mean it’s easy. New investors will still need to mind due diligence and do their own research to realize success.
Can You Invest In Stocks With Little Money?
It is entirely possible to invest in the stock market with a low budget; some stocks trade for literal pennies. Otherwise known as penny stocks, many securities trade for less than a dollar. However, stock valuations are typically a good representation of how the market views the underlying company. Penny stocks, for example, are cheap because they are risky and almost entirely speculative. That’s not to say penny stocks can’t represent a great investment, but rather that they are much riskier and less likely to pan out than more highly valued stocks.
Stock prices can range from pennies to hundreds of thousands of dollars, and investors may choose to invest their money wherever they like, which means you can spend as little or as much as you like. The only bar investors may need to pass is the minimum investment requirement some brokerages enforce. More than a few institutions require their investors to invest a certain amount of money to open an account (something to consider when brokerage shopping).
What Are The Best Stocks For Beginners?
To be clear, there are no “best stocks for beginners.” The stock market is full of great stocks that offer a lot of potential. However, investors must first determine their own goals to tell whether a stock is really worthy of being in their portfolio. That said, there are certain characteristics new investors should look for when buying their first stocks, not the least of which include:
The Power Of The Network: Companies rely on a network of customers to increase their valuations. However, some companies grow in value as their networks grow, which is great news for new investors. Some of the best stocks are those that increase in value as their networks grow.
Low Cost Advantages: Companies able to simultaneously reduce costs and increase revenue are inherently ahead of the pack. Software companies, for example, tend to have lower costs, but their products can increase in price. Try finding companies whose costs aren’t too much of a burden, and you’ll find what may be a good beginner stock.
Intangible Benefits: In addition to a company’s brand name, the intangible benefits they bring to the table can be invaluable. Whether those benefits are a charismatic owner or several patents, intangible assets can go a long way in increasing a stock’s value. A new investor should look for the companies boasting assets no other companies can replicate.
Industry Leaders: It is never a bad idea to consider stocks which are the leaders in their respective industries. The best companies in a respective industry carry an intrinsic value that their competitors can’t replicate, at least for the time being.
These characteristics are in no way guaranteed to make a stock worthwhile, but they are a good sign for new investors to pay close attention to. Stocks with these factors working in their favor may have an advantage over their counterparts, which begs the question: What are the best stocks to buy for beginners?
The Best Stocks For A Starter Portfolio
The concept of beginner stocks is, at the very least, subjective. In other words, there is no objectively perfect stock for beginners. Instead, some stocks do inherently exhibit the characteristics and fundamentals of equities which would prove beneficial to new investors. Most notably, the best stocks for beginners should build a solid foundation in a portfolio with plenty of tailwinds. The idea is to look for established leaders in their particular fields who show no signs of slowing down. Here are some of today’s best stocks which demonstrate the characteristics beginners need to look for:
Shopify Inc. (SHOP)
Netflix, Inc. (NFLX)
The Trade Desk, Inc. (TTD)
Mastercard Incorporated (MA)
Amazon, Inc. (AMZN)
Stocks for beginners don’t need to be intimidating. While Wall Street is full of complex jargon and foreign concepts, it is important to remember that everyone has to start somewhere. Nobody is a professional stock trader on day one. That said, this guide is designed for new investors to get a feel for how the stock market works and perhaps even to provide some encouragement for anyone considering investing in stocks. All things considered, everyone can invest in the stock market, and there’s no reason anyone who wants to do so shouldn’t. Those who take their first step into Wall Street may be mad they didn’t decide to do so earlier.
Do you know how to invest in the stock market? If not, learning about stocks is a great place to start. Please feel free to leave any questions you have about stocks in the comments below:
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