How to Invest in Stocks: A Complete Beginner's Guide

Investing doesn't just protect your money from inflation; it offers the potential to help you retire sooner.

But some investment vehicles are better than others, depending on what you're trying to achieve.

In most cases, however, stocks are superior to every other option that promises to grow your money. And that is thanks to its flexibility; you can always configure the level of risk you undertake while investing in stocks through your approach.

But it's also because of the performance that money invested in stocks realizes. While other securities can grow your money much faster, none can do it with as much protection from losses as stocks provide.

If you're a complete beginner and you don't know how to invest in stocks, you're in the right place. After you go through this guide, you will:

• Know all of the basic options you can go with to invest in the stock market,
• Be ready to choose the best trading platform for your needs,
• Determine your investment strategy, and
• Know how to handle risk,

Let us get into it right away.

The most basic reason that makes investing necessary for all is that inflation is powerful. Simply put, inflation is the reason that your cash loses its value over time, and your buying power gets diminished with the passing of every year.

It can be quite shocking when you realize how little your net worth can buy you decades from now compared to what the same amount could buy you if you had it right now.

For example, in 1913, a gallon of milk (3.79 liters) cost about $0.36 in the US. One hundred years later, that same gallon of milk had a price of $3.53. In 100 years, because of inflation, the price increased almost 10 times. 

The best remedy for that is investing, as it can more than make up for the inflation cost.

Besides that, there are all sorts of other great reasons why you should invest your money:

• Retiring earlier or more comfortably
• Providing better college options to your children
• Getting a down-payment for a house faster

Whatever it is, everyone should invest to make money work for them while they focus on their income power. If you don't invest your money, you will always depend on your income source(s); for most people, that primary source is their job.

Obviously, you're here because you're looking to invest in stocks. But various investment vehicles can help you do that.

Picking the stocks you want to invest in by yourself is not the only way. For that reason, we will consider all of your options for investing in the stock market, so you can determine what best fits your goals and circumstances.

Stocks

The most obvious way is to select individual stocks to invest in. In that scenario, you open a brokerage account and trade stocks by yourself.

But there are multiple approaches here. You can invest in growth, value, or dividend growth stocks, and you can make transactions based on business and industry fundamentals or technical indicators.

Of course, this is an oversimplification. Many investors who manage their investments on their own may base their investment decisions upon many factors. On top of that, they choose stocks that may have all of the main characteristics to varying degrees (dividend-growth, value, growth).

But here are a few recommendations to help you pick the strategy that will be the best fit for your situation:

• Go with dividend growth stocks if you have a large fund and are approaching your retirement years
• Go with growth stocks if you have a high-risk tolerance and you're younger than 30 years old
• Go with value stocks if you are risk-averse and have a very long investment horizon (multiple decades)

Mutual Funds

A mutual fund is simply an investment vehicle consisting of money that multiple investors have invested in it. This pool of money is managed by professionals who trade stocks and charge you a fee for that service.

You can also think of a mutual fund like a company whose sole purpose is to manage your money by trading securities like stocks.

The biggest benefit to investing in a mutual fund is that you can invest your money across many stocks (sometimes hundreds) that you couldn't do with a very small sum on your own.

The drawback to using such an investment vehicle is that sometimes you need to have a minimum amount to invest in one. Another is that the management fees might be quite high if the managers employ a very active strategy.

You should always look out for the expense ratio a mutual fund charges; this is the management fee expressed as a percentage of your total investment in the fund. In addition, pay attention to the load charge. This is a fee that you have to pay either when you buy or sell the fund.

Some mutual funds also have withdrawal penalties up to a certain period of investment. The penalties make you incur a fee when you withdraw even a partial amount of what you have invested. Keeping an eye out on this is part of learning how to invest in mutual funds if you think you will need the money down the road.

ETFs

An ETF (Exchange-Traded Fund) is basically a fund that professionals manage with the distinct characteristic that it can be publicly traded on a stock exchange just like a stock.

This structural difference with mutual funds allows one to trade ETFs with other investors on the open market. With mutual funds, the fund managers will have to buy and sell the stocks on your behalf; you only do business with them.

The best advantage of ETFs is the cost. The expense ratio can be as low as 0.03% if the fund managers employ a passive strategy. And the only fees you pay upon buying or selling your ETF shares are those your broker charges.

Another benefit is that you can invest as little as the ETF's share price, and there are no minimums imposed by the managers here.

Index Funds

Last, index funds are for those who require a more passive strategy. These can have the structure of either a mutual fund or ETF.

Like with any other type of fund, professionals manage an index fund. But these managers' goal is to track an index.

For context, an index is basically a way to measure the performance of a specific market.

For example, the Dow Jones Industrial Average index is supposed to track the performance of the whole US market, and the Global Dow Realtime is supposed to follow the global market. But other indices are more specific to a certain industry, like the S&P Aerospace & Defense Select Industry Index, which measures the performance of businesses in the aerospace & defense industry.

An index fund is an excellent option if you'd like to invest in a particular market without having to buy each company that's part of that market by yourself.

And if you want to keep your costs as low as possible, an index fund structured like an ETF is the best choice. They have very low expense ratios, and you can sell your shares on the open market and only incur your brokerage/bank transaction fees if any.

Learning how to invest in index funds isn't complicated. Once you determine what market you want to track, then it's a matter of finding the fund with the lowest management fees possible.

Let us now take a look at the options you have in terms of trading platforms.

Traditional Brokers

Traditional brokers are simply those brokerage houses that offer a wide variety of services like:

• Executing your orders
• Giving advice and recommendations
• Providing market information
• Managing your investments

So, if you want someone to give you investment advice or even manage your investments for you, a traditional broker is what you need.

Just bear in mind that these services cost extra and sometimes require a large amount of money to be eligible. But if you have a large lump sum to invest and not the time to figure out how the benefits of a managed brokerage account can outweigh the costs.

Pros

• Great variety of services
• Superior customer support
• Ideal for those who don't want to manage their investments

Cons

• Not ideal if you don't have a lot of money to invest due to the cost
• Managed accounts offered by traditional brokers often require a large lump sum

Online Brokers

Online brokers (or discount brokers) are brokerage houses that mainly operate online.

Opening an account with an online broker is very easy and fast, and that's because these brokers invest more in the online experience.

On top of that, the cost of opening an account and executing trade orders is lower here too. At the same time, however, it's not usual for online brokers to offer extended services like a managed account. However, the more established ones do that too.

Pros

• User-friendly platform
• Fast and easy account opening process
• Low costs

Cons

• Limited services
• May lack on customer support quality

Robo-Advisors

Robo-advisors are platforms that can provide you with investment and portfolio management advice. They are based on trading algorithms that will handle asset allocation and portfolio rebalancing and select investments for you.

They can be viewed as platforms that provide managed accounts, but they're way cheaper.

Keep in mind that you can also get such a service through a brokerage firm. But if you're planning on using just a robo-advisor, it makes sense to choose a platform specializing in that service.

Pros

• Low cost
• Can be accessed through many online brokers too
• No emotion-based investment decisions

Cons

• Not as personalized advice as with a managed account
• Not too much human interaction except for customer support

When it comes to the amount of money, you should allocate towards investing, just examine your goals.

If you want to invest for retirement, then allocating 10-15% of your earnings for investing is a good idea. That's the advice that most financial planners give here. Of course, if you can invest even more, there's no reason not to; especially if you're debt-free.

On the other hand, if you just want to grow enough money to make a purchase in a few years, it's entirely your choice. Just make sure that you also allocate a minimum of 10% towards investing for retirement and concentrate on paying off your debt too.

However, when it comes to speculation, you should only use money that you're ready to lose. The way to differentiate between the two is to examine the risk you are ready to take and how well you can explain the transaction's merits.

With investing, time is a friend. More specifically, the more time you give your money to grow, the better the chances of retiring a millionaire.

That also applies even if you don't have a large sum to invest right from the start. Even small contributions every month in an established market index fund can help you grow great wealth over the years.

To understand how this is possible, we must consider the amazing effect that compounding can have on your investments.

Compounding interest is simply the return that you realize when that interest applies to both your principal amount and the accumulated interest.

An excellent example to illustrate this is when you invest a principal amount of $10,000, and in the first year, you realize a 10% interest. Your return would be $1,000.

But let's assume that the trend continues and you gain another 10% in the second year as well. Your return would be $1,100 because the interest would apply to both your principal amount ($10,000) and the interest you realized in the first year ($1,000).

The interest would apply to $11,000 ($10,000 + $1,000) and not just $10,000 anymore. This interest is often called compounding interest.

You can imagine the impact this can have on your investments over time. At first, it would take you a whole year to get a return of $1,000. But in 30 years from now, a 10% interest applied to your principal amount, and the interest accumulated by then would be equated to a more than $15,000 return in just one year.

Assuming that you can get a consistent 10% return every year and that you will be investing $500 each month for the next 30 years, the power of compounding would turn your investments into almost a million dollars.

Most of the time, you won't have to deposit a certain amount so that you can open a brokerage or robo-advisor account.

With that being said, you might encounter some minimum deposit of $500 all the way up to $25,000 with some platforms. This is more prevalent with traditional and international brokerage houses, though.

Choosing an online broker is probably the best decision when you start investing for the first time. That's because they don't charge high fees for transactions while becoming as established as traditional brokers due to more and more people using them.

But which one should you choose? After all, there are too many online brokers who more or less can cover your needs. Here are some main factors to consider:

• Country of Residence
• Investment Products
• Trading Currency
• Deposit Method

You should also determine some of the most important features for you:

• Low Cost
• Ease of Use
• Advanced Trading Tools
• Educational resources and other support for beginners

To make it easier for you, we have created a broker comparison tool that asks you relevant questions and then finds some of the most fitting online brokers based on your answers. This way, you won't have to search for an online broker from scratch by yourself.

There are two main investment approaches that you can choose from. Let us examine both of them, and you be the judge of which will help you achieve your goals.

Passive Approach

The passive approach is basically the buy and hold strategy, with which you buy stocks or some fund and hold your position for years (usually until you grow your money as much as you expect).

This approach doesn't necessarily exclude periodical contributions. The "passive" bit has to do with identifying where you should invest your money (and adding to it if you like).

To understand this better, consider the active approach.

Active Approach

The active approach refers to a strategy with which you buy and sell different stocks or funds as you uncover additional opportunities.

You can think of it as trading. Traders have more short-term goals regarding when to sell a security that isn't necessarily aligned with the end result (grow their wealth). A good example is when a trader buys a stock, expecting to realize a certain return caused by some short-term factor. Then they sell that stock when they realize that return.

There's no right or wrong approach here. You need to consider how much time you can allocate towards learning the ins and outs of trading. If you have enough time and are passionate about it, being active may make more sense.

On the other hand, if you don't have enough time to spend or would like a more straightforward approach, you should consider passive investment strategies. Buying an index fund over a long period is the best way to be as passive as possible.

How to manage your portfolio

Now, if you have selected the passive approach, there is no need to obsess over the performance of your portfolio. Having decided that you will be investing money every month, quarter, or year, checking your portfolio every time you invest is more than enough.

The reason for this "indifference," if you will, is that there is no point in checking it too frequently if you have decided that you won't sell until years later.

On the other hand, a more active investor, who sets price targets for their holdings and sells when they reach them, ready to find another opportunity, is justified to be more watchful for any price activity.

Let us now take a look at the commissions and fees that brokers and robo-advisors charge.

Since traditional brokers, online brokers, and robo-advisors have similar costs, if you're interested in opening an account with either of them, you should keep an eye out on the following charges:

• Maintenance Fees. A maintenance fee is basically a charge for keeping your account open with a broker. It may only be a small percentage of your overall portfolio, but it's something worth checking before you open an account. This fee is more common with robo-advisors.
• Inactivity Fees. Some brokers charge you a flat fee for not being active for a certain period. They usually define an activity as a single transaction. This won't be an issue if you're considering making periodical contributions to the fund or the stocks you have invested in. If you want to invest a lump sum in something and not make another transaction for years, you might want to take a closer look at this type of fee.
• Commissions. Commissions are the flat fees that you incur when you make a certain transaction, like buying or selling a stock or fund. These are not as prevalent as they once were, but some brokers (usually traditional ones) still charge them.
• Advisory/Management Fees. If you want your broker to manage your portfolio for you, or you'd like to consult some expert before you make a transaction, some brokers (usually established ones) can help you with that for a fee. If you are interested, you should compare these fees across brokers before you choose any of them.

Let's now take a look at the ways you can use to minimize risk while investing.

Diversify your Portfolio

Diversification usually refers to investing across different asset types like stocks, bonds, commodities, certificates of deposit, real estate, etc. But it has also come to mean spreading your money across multiple stocks when it comes to stock market investing.

Both ways of diversification can minimize your risk exposure.

With the first diversification type, if you have invested your money in stocks and bonds and the stock market crashes, bond prices could rise and offset your theoretical losses.

With the second type, if you have invested in dozens of stocks, the prospect of a couple of the underlying businesses falling into bankruptcy doesn't pose the same level of risk as if you had invested in one or two. If you don't diversify and hold two or three stocks in your portfolio, just one company getting out of business could wipe out a good percentage of your portfolio value.

The best way to diversify is to buy a broad-market index fund like the S&P 500, which will allow you to be invested in hundreds of stocks at any time.

If, however, you are even more risk-averse, you could invest in various index funds across the world and avoid significant losses when a certain country's economy crashes.

Some specialists also recommend investing in different stock markets to protect your money. For example, you could purchase 5 stocks from the US, 5 from the UK, 5 from Germany, etc. 

Don't Panic-Sell

Another great way to minimize risk is to stick to your plan and not allow your emotions to drive your investment decisions.

When the market crashes, people often panic and sell their stocks in a hurry to avoid further losses. The issue with this is that when you panic-sell, some profit you could have realized 'till that point will be eaten away by brokerage fees and taxes.

But if you can weather the storm and keep in mind that the market will eventually recover, you minimize the risk of losing real money because of panic-selling. After all, you don't realize any losses until you sell.

Stock market crashes are never here to stay. Eventually, the market gets through the crisis, and prices go back to normal levels.

Consider iRobot, the famous manufacturer of vacuum robots. If you had bought around a year before the stock market crash in 2008 and sold during the crisis, you could have realized a 40% loss. But if you held for another decade, your return would be more than 400%.

If, however, you chose to sell your iRobot shares and invest in bonds, you would hardly be able to break even in 10 years.

Invest Regularly

Investing in increments is the only way to invest when you don't have a large sum of money right from the start. But did you know that it's safer when you do it this way?

Regular investing reduces risk because you will be buying regardless of price, focused on the long-term outcome. During a stock market crash, buying more to increase your position means that you'd be buying something for cheaper than you think will appreciate in value over the long term.

Stated differently, buying regularly regardless of price points can ensure that you will have bought at many low prices over the long run.

Hold Some Cash

The last main way to decrease risk is always to hold cash in your portfolio.

During recessions, that can help you buy even more of what you had invested in.

At the same time, it can help you cover some expenses if something unexpected happens, like losing your income for a couple of months. Cash will ensure that you don't sell your stocks during recessions to cover your expenses until you recover your income.

But recessions are also great periods to buy stocks that are undervalued.

Consider iRobot's stock dive in 2008 again. If you had bought at that time, you could have made a more than 800% return on your investment 10 years later.

Having cash during stock market crises can help you realize such great profits.

As you can see, investing in the stock market doesn't have to take too much of your time and energy.

If you determine the investment vehicles and platforms you will use, selecting the right approach for you, and concentrating on your goal, investing can be very easy.

Finding how to invest in stocks is a matter of taking into account everything we've discussed in this guide. If you do this and stick to your plan, it is unlikely that you will ever need to learn how to invest in stocks again in the future; no matter how things change.

Take the first step today and select the right broker for you. All you have to do is use our investment app comparison tool.