Investing is a time-tested way of putting your money to work for you, as you work to earn more of it. Legendary investor Warren Buffett defined investing as “forgoing consumption now in order to have the ability to consume more at a later date.”
By investing your money regularly, you may be able to increase it many times over with time. That’s why it’s important to begin investing as early as possible and as soon as you have some money saved for that purpose. Furthermore, the stock market is a good place to start.
Whether you have $1,000 set aside or can manage only an extra $25 a week, you can get started. Bear in mind that there’s a lot that you can and should learn about investing in stocks to achieve financial success. However, right now, read on for the steps to begin the process.
- Investing is the act of committing money or capital to an endeavor with the expectation of obtaining additional income or profit.
- Unlike consuming, investing puts money to work so it can grow over time.
- However, investing also comes with the risk of losses.
- The stock market is a common way for investors, no matter their experience, to invest for a lifetime.
- Beginning investors can get help from expert advisors, leave their portfolio selection and management to robo-advisors, or take a DIY approach to investing in stocks,
Click Play to Learn How to Start Investing in Stocks
Steps to Get Started
1. Define Your Tolerance for Risk
What’s your tolerance for risk (the chance that you may lose money while investing)? Stocks are categorized in various ways, such as large capitalization stocks, small cap stocks, aggressive growth stocks, and value stocks. They all have different levels of risk. Once you determine your risk tolerance, you can set your investment sights on the stocks that complement it.
2. Decide on Your Investment Goals
You should also determine your investment goals. When opening a brokerage account, an online broker such as Charles Schwab or Fidelity will ask you about your investment goals (and the aforementioned level of risk that you’re willing to take).
- If you’re just beginning your career, an investment goal could be to increase the amount of money in your account. If you’re older, you may want to generate income as well as grow and protect your wealth.
- Your investment goals might include buying a house, funding your retirement, or saving for tuition. Goals can change over time. Just make sure that you define and review them periodically so that you can keep your focus on achieving them.
3. Determine Your Investing Style
Some investors want to take an active hand in managing their investments, while others prefer to set it and forget it. Your preference may change, but decide on an approach to get started.
- If you’re confident about your investing knowledge and capability, you could manage your investing and portfolio on your own. Traditional online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.
- An experienced broker or financial advisor can help you make your investment decisions, monitor your portfolio, and make changes to it. This is a good option for beginners who understand the importance of investing but may want an expert to help them do it.
- A robo-advisor is an automated, hands-off option that typically costs less than working with a broker or financial advisor. Once a robo-advisor program has your goals, risk tolerance level, and other details, it automatically invests for you.
4. Choose Your Investment Account
Retirement plan at work: You can invest in various stock and bond mutual funds and target-date funds through a retirement plan at work, such as a 401(k), if your employer offers one. It may also offer the option of investing in the employer’s company stock.
Once you enroll in a plan, contributions are made automatically at a level you set. Employers may make matching contributions on your behalf. Your contributions are tax deductible and your account balance grows tax deferred. This is a great way to maximize your investing dollars with little effort. It can also instill in investors the discipline of regular investing.
An IRA or taxable account at a brokerage: You can also start investing in stocks by opening an individual retirement account (even in addition to having a workplace plan). Or, you can go with a regular, taxable brokerage account. Normally, you’ll have lots of options for investing in stocks. These could include individual stocks, stock mutual funds and exchange traded funds (ETFs), stock options.
A robo-advisor account: As referenced above, this type of account takes your investment goals and creates a stock portfolio for you.
5. Learn to Diversify and Reduce Risk
Diversification is an important investment concept to understand. In a nutshell, by investing in a range of assets, or diversifying, you reduce the risk that one investment’s performance can severely hurt the return of your overall investment portfolio. You could think of it as financial jargon for not putting all of your eggs in one basket.
It can be difficult to diversify when investing in individual stocks if your budget is limited. For example, with just $1,000, you may only be able to invest in one or two companies. This results in greater risk.
This is where mutual funds and ETFs can help. Both types of funds tend to own a large number of stocks and other investments. This makes them a more diversified option than a single stock.
Minimums to Open an Account
Many financial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money.
It pays to shop around, and not just to find out minimum deposits. Check out our broker reviews (see below). Some firms don’t require minimum deposits. Others may reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.
The Costs to Invest in Stocks
Commissions and Fees
As economists like to say, there’s no free lunch. All brokers have to make money from their customers in one way or another.
In most cases, your broker will charge a commission every time that you trade stocks, whether you buy or sell. Trading fees range from $2 per trade to as high as $10. Some brokers charge no trade commissions at all, but they make up for it with other fees.
Depending on how often you trade, these fees can add up, affect your portfolio’s return, and deplete the amount of money you have to invest.
Here’s an example:
Imagine that you decide to buy one share of stock in each of five companies with your $1,000. Assuming a transaction fee of $10, you will incur $50 in trading costs which is equivalent to five percent of your $1,000.
Should you sell these stocks, the round trip (the act of buying and then selling) would cost you a total of $100, or 10 percent of your initial deposit amount of $1,000. These costs alone can eat into your account balance before your investments even have a chance to earn a positive return.
Mutual Fund Loads
Mutual funds are professionally managed pools of investor funds that focus their investments in different markets.
They have various fees that you should be aware of. One of these is the management expense ratio (MER). The MER is the fee paid by shareholders of a mutual fund (or ETF) and goes toward the expenses of running a fund.
It’s based on the total of a fund’s assets under management. The MER can range from 0.05 percent to 2 percent annually. Bear in mind that, the higher the MER, the more it impacts the fund’s overall return.
You may also see sales charges called loads. These include front-end loads and back-end loads. Be sure you understand whether a fund carries a sales load prior to buying it. Check out your broker’s list of no-load funds and no-transaction-fee funds to avoid these charges.
For the beginning investor, mutual fund fees may be more palatable compared to the commissions charged when you buy individual stocks. Plus, you can invest less to get started with a fund than you’d probably pay to invest in individual stocks.
By the way, investing small amounts consistently over time in a mutual fund can give you the benefits of dollar cost averaging (DCA) by reducing the impact of volatility.
Brokers are either full-service or discount.
Full-service brokers, as the name implies, offer a full range of traditional brokerage services, including financial advice for college planning, retirement planning, estate planning, and for other life events and opportunities. This custom-tailored advice justifies the higher fees that they typically charge, compared to other brokers. These can include a percentage of your transactions, a percentage of your assets under management, and sometimes, a yearly membership fee. Minimum account sizes can start at $25,000.
Discount brokers used to be the exception but are now the norm. They offer you tools to select your investments and place your orders. Some also offer a set-it-and-forget-it robo-advisory service (more below). Many provide educational materials on their sites and mobile apps, which can be helpful for beginning investors.
Some brokers have no (or very low) minimum deposit restrictions. However, they may have other requirements and fees. Be sure to check on both of these as you look for a brokerage account that meets your stock investing needs.
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|Compare the Best Online Brokers|
|Company||Category||Investopedia Rating||Account Minimum||Basic Fee|
|Fidelity Investments||Best Overall, Best for Low Costs, Best for ETFs||4.8||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
|TD Ameritrade||Best for Beginners and Best Mobile App||4.5||$0||$0 for stock/ETF trades, $0 plus $0.65/contract for options trade|
|Tastyworks||Best for Options||3.9||$0||$0 stock/ETF trades, $1.00 to open options trades and $0 to close|
|Interactive Brokers||Best for Advanced Traders and Best for International Trading||4.2||$0||$0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value|
After the 2008 financial crisis, a new breed of investment advisor was born: the robo-advisor. Jon Stein and Eli Broverman of Betterment are often credited as the first in the space. Their mission was to use technology to lower costs for investors and streamline investment advice.
Since Betterment launched, other robo-first companies have been founded. Established online brokers such as Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo-advice by 2025.
If you want an algorithm to make investment decisions for you, including for tax-loss harvesting and rebalancing, a robo-advisor may be for you. What’s more, the success of index investing has shown that if your goal is long-term wealth building, a robo-advisor may fit your style.
|Compare the Best Robo Advisors|
|Company||Category||Investopedia Rating||Account Minimum||Fees|
|Wealthfront||Best Overall / Best Goal Planning||4.8||$500||0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans|
|Betterment||Best Beginners / Best Cash Management||4.5||$0||0.25% (annual) for digital plan, 0.40% (annual) for the premium plan|
|Interactive Advisors||Best SRI / Best Portfolio Construction||4.2||$100 to $50,000||0.08-1.5% per year, depending on advisor and portfolio chosen|
|M1 Finance||Best Low Costs / Best Sophisticated Investors||4.2||$100 ($500 minimum for retirement accounts)||0%|
|Personal Capital||Best Portfolio Management||4.2||$100,000||0.89% to 0.49%|
|Merrill Guided Investing||Best Education||4.4||$1000||0.45% annually, of assets under management, assessed monthly. With advisor – 0.85% Discounts available for Bank of America Preferred Rewards participants|
If you plan to trade frequently, check out our list of brokers for cost-conscious traders.
Stock Market Simulators
People new to investing who wish to gain experience investing without risking their money in the process may find that a stock market simulator is a valuable tool. There are a wide variety of trading simulators available, including those with and without fees. Investopedia’s simulator is entirely free to use.
Stock market simulators offer users imaginary, virtual money to invest in a portfolio of stocks, options, ETFs, or other securities. These simulators typically track price movements of investments and, depending on the simulator, other notable considerations such as trading fees or dividend payouts.
Investors make virtual trades as if they were investing with real money. Through this process, simulator users have the opportunity to learn about investing—and to experience the consequences of their virtual investment decisions—without putting their own money on the line. Some simulators even allow users to compete against other participants, providing an additional incentive to invest thoughtfully.
What Is the Difference Between a Full-Service and a Discount Broker?
Full-service brokers provide a broad array of financial services, including financial advice for retirement, healthcare, education, and more. They can also offer a host of investment products and educational resources. They have traditionally catered to high-net-worth individuals and often require significant investments. Discount brokers have much lower thresholds for access, but tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades. They also offer educational tools.
What Are the Risks of Investing?
Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. All investing comes with some degree of risk. It is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether these goals are short- or long-term.
How Do Commissions and Fees Work?
Most brokers charge customers a commission for every trade. These fees can go up to about $10 per trade. Due to commission costs, investors generally find it prudent to limit the total number of trades that they make to avoid spending extra money on fees. Certain other types of investments, such as exchange-traded funds, carry fees in order to cover the costs of fund management.
The Bottom Line
If you’re just starting out as an investor, it’s possible to invest in stocks with a relatively small amount of money. You’ll have to do your homework to determine your investment goals, your risk tolerance, and the costs associated with investing in stocks and mutual funds. You should also investigate various brokers to clarify the particular requirements of each and which may best fit your needs.
Once you do, you’ll be well positioned to take advantage of the substantial potential that stocks have to reward you financially throughout the years.