Investing in stocks can be a great way to grow your money over time. However, it does require some knowledge and planning to be successful. This beginner’s guide will walk you through the basics of stock market investing, so you can start putting your money to work.
How Does Investing in Stocks Work?
When you purchase shares of a company’s stock, you are buying a small piece of ownership in that company. The value of the stock goes up and down based on how the company performs and how investors perceive its future prospects.
If the company does well and continues to grow over time, the stock price will likely go up. This gives you a return on your investment in the form of capital gains. Stocks also frequently pay dividends, which are payments made to shareholders from the company’s profits.
Overall, investing in high-quality stocks and holding them for the long-term is one of the best ways to achieve solid returns and grow your wealth.
Top Benefits of Investing in Stocks
- Growth potential:Â Stocks have historically returned around 10% per year on average, significantly outpacing inflation. This growth can multiply your money over decades.
- Dividend income:Â Many established companies pay regular dividends to shareholders. This provides income on top of stock appreciation.
- Diversification:Â Adding stocks to your portfolio helps diversify from other assets like bonds and real estate.
- Ability to pick winners:Â Unlike passive index funds, buying individual stocks allows you to choose companies you believe in.
- Hedge against inflation:Â Stocks have tended to hold their value better than fixed income investments during high inflationary periods.
How to Get Started with Stock Investing
If you want to get started investing in stocks, here are some practical steps for beginners:
1. Determine Your Goals and Risk Tolerance
First, think about why you are investing and what you hope to achieve. Are you saving for retirement, a house, education or other goals? Your investing approach should align with your time horizon and risk tolerance.
Younger investors may be able to take on more risk, while those close to retirement have less time to recover from downturns. Make sure you understand your comfort level with potential volatility before investing heavily in stocks.
2. Open a Brokerage Account
To buy stocks you need a brokerage account. Online brokers like Fidelity, Vanguard and Charles Schwab allow you to conveniently open an account online and fund it from your bank. Look for low fees and account minimums. Retirement accounts like IRAs can have tax benefits.
3. Determine Your Investment Budget
Decide how much you can afford to invest on an ongoing basis. Many experts suggest saving at least 10-15% of your income for retirement and investing it partially in stocks. Don’t invest money you’ll need in the next 3-5 years.
4. Select Your Investments
For beginners, mutual funds and ETFs that provide a basket of stocks in one purchase are recommended. Index funds that mimic sectors like the S&P 500 are an easy starting point. Slowly add individual stocks as you gain experience.
5. Make Your First Purchase
Once your brokerage account is funded, place your first trade. Even a small investment will get you started. Consider dollar cost averaging by investing equal amounts monthly rather than a lump sum.
6. Hold a Long-Term Mindset
The stock market will fluctuate, but historically rewards patient investors who hold for long periods. Avoid constantly buying and selling in reaction to market swings. Rebalance your portfolio once or twice a year to keep allocations in line.
7. Continue Adding Funds Over Time
Make investing a habit by depositing funds on an ongoing basis. Even small, consistent contributions can add up thanks to compounding returns. Automate transfers from your bank account if possible.
How to Research and Choose Stocks
Once you have a solid foundations, you can begin selecting individual stocks to add to your portfolio. Here are some tips for researching and picking winning stocks:
- Review a company’s financial statements and reports to understand their business model and financial health. Look for consistent revenue and earnings growth.
- Evaluate the company’s valuation metrics like P/E ratio and price-to-sales ratio. Compare to historical averages and competitor valuations.
- Understand the company’s competitive advantages and economic moat to maintain growth. What sets them apart?
- Learn about the management team’s track record and their strategies for driving future growth. Do they have experience in their industry?
- Analyze a stock’s historical price trends, support/resistance levels and trading volume using stock charts. Technical analysis can identify good buy points.
- Read analyst reports from reputable sources for informed opinions on a stock’s outlook and target price estimates.
- Consider adding stocks with good growth prospects that also pay dividends for extra income potential.
- Diversify your portfolio across market sectors, company sizes, and geographic regions to lower risk.
Stock Investment Strategies for Beginners
Dollar Cost Averaging
Dollar cost averaging means investing equal set amounts at regular intervals over time, such as $200 per month. This helps reduce risk from market volatility by ensuring you buy at both high and low prices.
DRIP Investing
With a dividend reinvestment plan (DRIP) your dividends are automatically reinvested to buy more shares. This allows you to compound your returns over time. Many companies and brokers offer DRIPs.
Value Investing
This tried-and-true approach involves buying shares of strong companies that are undervalued by the market. The goal is to buy low and benefit when valuations eventually rise.
Growth Investing
Growth investors focus on stocks expected to see faster than average growth in revenues, earnings and cash flows. These stocks tend to have higher valuations as a trade-off.
Index Investing
Index funds and ETFs match the performance of market indexes like the S&P 500. They provide instant diversification and consistent market returns at low cost.
Stock Investment Tips for Beginners
- Start small and slow – investing takes time to learn. Consider practicing with a virtual trading account first.
- Reinvest dividends and capital gains to compound your returns. Many brokers offer automatic dividend reinvestment.
- Don’t panic during market downturns. Stay patient and stick to your plan. Add more on dips.
- Avoid high frequency trading which racks up fees. Buy-and-hold investing tends to produce better returns.
- Don’t use money needed for near-term expenses. Invest extra savings with a 5+ year time horizon.
- Maintain a long-term outlook. Historically, stocks have positive returns over decades, despite short-term volatility.
Conclusion
Investing in stocks is one of the best ways for beginners to grow their money over time. By starting with small amounts, focusing on quality stocks, reinvesting dividends and holding long-term, you can steadily build wealth. Avoid get-rich-quick schemes and stick to proven investing methods. Be patient and persistent, and your portfolio can reap the rewards of stock ownership.
Common Investing Questions
What percentage of my portfolio should be in stocks?
A good rule of thumb is to subtract your age from 110. So a 40 year old would allocate 110 – 40 = 70% to stocks. Adjust based on risk tolerance.
How much money do I need to start investing in stocks?
Many online brokers now offer $0 minimum accounts. Even small amounts like $25 per month can be invested into stocks through mutual funds and ETFs that offer fractional shares.
What are blue chip stocks?
Blue chips are stocks of large, established companies that have a strong track record of steady growth and dividend payments. Examples include Microsoft, Apple, Johnson & Johnson and Procter & Gamble.
Are stock trading apps safe for beginners?
Reputable stock trading apps offered by established brokers are generally safe to use. Look for companies that offer SIPC insurance protection on cash balances and securities.
How long should you hold stocks?
Ideally stocks should be held for at least 3-5 years, or longer. Short term trading is risky. Holding stocks for the long run allows your investment to benefit from the market’s long term growth trajectory.
