Stocks Investment 101:

A Beginner’s Guide

In a nutshell, stock market investing is a way to put money aside while you are busy with your life and then have that money work for you in the future. In other words, it’s one way to save so you won’t have to worry about your finances once you decide to retire. 

The main goal of investing is to put your money to work in one or more types of investment vehicles hoping that it will grow over time.

Now, the most common question is, “When is the best time to start investing in the stock market?” While some people think that they have a choice, the truth is — you don’t. The best time to begin investing for the future is as soon as possible. Some people start as early as their 20s, while some wait until they’re more stable financially. 

Does it have to be stocks? No, not always. There are lots of options for where you can put your money and invest. Here at Investing Bosses, we’ll be talking about all kinds of investment options, including passive real estate investments and side hustles, and we’ll help you decide which one is best for you. There is no need to invest a large sum of money. Your time, above anything else, is frequently your most valuable asset.

But, for this article, we’ll be focusing on investing in the stock market, how it works, and everything you need to learn about stocks. If you are ready to begin investing in the stock market but are unsure of the first steps to take, you have come to the right place.

Why Choose Stocks? 

Investing in stocks can effectively accumulate wealth over time, especially if you’re a beginner. Learning to invest wisely and patiently over a lifetime can yield returns that far outstrip even the most modest income. Investing in stocks has become more accessible, with newbies able to set up an account with little money through a brokerage’s website or mobile app.

Majority of the Forbes 400 wealthiest Americans made the list in 2021 because they acquired a large block of stock in a public or private corporation.

Stocks can be a significant aspect of your investment portfolio. Investing in various companies can help you build your savings, protect your money from inflation and taxes, and maximize your return on investment.

The first step is to understand how the stock market works, what your investment goals are, and how much risk you can handle. Throughout the rest of this article, we’ll answer all of the most common questions that a person who has never bought stocks before might have.

What are stocks? 

Stocks are equity investments that represent a company’s legal ownership. When you acquire shares in a company, you become a part-owner of it. Those small shares are commonly known as the company’s stock, and by investing in them, you’re hoping that the business will grow and perform well over time.

When this happens, your shares could become more desirable, and other investors may be interested in buying them from you for more than you paid for them. That means you could profit if you decide to sell them.

Stocks are regarded as a risk asset capable of providing both growth and income to an investment portfolio. Meaning, it’s an asset class with a high level of price volatility. When it comes to stocks, new investors will have to consider their risk tolerance. 

Generally, the higher the risk in an investment, the higher the potential reward. However, investors must be willing to risk losing money if high returns do not materialize. Stocks have historically been a reliable asset class for high annual average returns.

There’s a lot you should know before diving in, and so here’s a step-by-step guide to stock market investing to make sure that you’re doing it correctly:

How To Invest in Stock Market: Step-By-Step

Step 1: Determine Your Investment Strategy

Investing your money is the most secure way to build wealth over time, so it’s critical to understand the basics. Investing cash for beginners can be risky and scary since you’re putting it out in the hopes of getting something more significant in return.

Before you put your money into an investment vehicle, you should have a basic understanding of how to invest correctly. 

If you’re planning to invest your money in anything, you’d want to consider three things: 

• Your style
• Your financial situation
• Your risk tolerance

Once you’ve gone through these factors, you can start thinking about your investment strategy. Some investors prefer to buy individual stocks, while others prefer to be the more passive approach.

If you’re unsure which method works best for you, you can check this out: Which of the following statements most accurately describes you?

• I’m an analytical thinker who enjoys crunching numbers and conducting research.
• I hate math and dislike doing a lot of “homework.”
• Every week, I devote several hours to stock market investing.
• I enjoy reading about the various companies in which I can invest, but I have no desire to get involved in anything mathematical.
• I’m a busy professional with limited time to learn how to analyze stocks.

The good news is that you can become a stock market investor regardless of which of these statements you agree with. The only difference will be the “how.”

Different Ways To Invest In Stocks 

There are three ways to invest in stocks: 

1. Individual stocks

Individual stocks can be purchased if and only if you have the time and desire to research and examine stocks on an ongoing basis thoroughly. If this is the case, we strongly advise you to do so. 

A wise and patient investor can easily outperform the market over time. If things like quarterly earnings reports and simple mathematical calculations don’t appeal to you, there’s nothing wrong with taking a more passive approach.

2. Index funds

In addition to purchasing individual stocks, you can invest in index funds, which track a stock index such as the S&P 500. We generally prefer passively managed funds over actively managed funds (although there are certainly exceptions). 

Index funds usually have lower costs and are virtually guaranteed to outperform their underlying indexes over time. The S&P 500 has produced annualized returns of about 10% over time, and such performance can accumulate substantial wealth over time.

Index funds have historically been more passive than active investors. This means they want to maximize long-term returns by not buying and selling securities frequently. Meanwhile, an actively managed fund often seeks to outperform the market (usually as measured by some kind of index) by making more frequent purchases and sales.

3. Robo-advisors

Finally, another popular option in recent years has been the robo-advisor. Robo-advisors are online platforms that offer automated, algorithm-driven planning with little to no human intervention at all. A common robo-advisor uses a digital survey to ask questions about your financial capabilities and future goals — the data is then used to offer advice and automatically does the investment process for you.

The key benefit of robo-advisors is that they are less expensive alternatives to traditional advisors. Online platforms can provide the same services at a fraction of the cost by eliminating human labor. Most robo-advisors charge annual flat fees of less than.5% of the amount managed. It is much lower than the typical 1% to 2% fee charged by a human financial planner (or more for commission-based accounts).

Step 1 Summary Points: 

• If you want to put your money on an investment, you’ll have to consider 3 factors: your style, your budget, and your risk tolerance. 
• You have to think of an effective investment strategy before investing in stocks. 
• Your investment strategy can either be through individual stocks, index funds, or robo-advisors.

Step 2: Determine How Much Money You Will Put Into Stocks

Once you’ve identified your investing strategy, it’s time to determine how much money you’re willing to use. 

Let’s start with the money you shouldn’t invest in stocks. The stock market is not a good place to invest money you will need within the next five years.

Although the stock market will most likely rise in the long run, there is just too much uncertainty in stock pricing in the short term. In fact, a 20% drop in any given year is not uncommon. During the COVID-19 pandemic in 2020, the market dropped by more than 40% before rebounding to an all-time high within a few months.

To determine the amount of money that you should not use to invest, you’ll have to consider the following: 

• Your emergency savings account
• You’ll need money to make your child’s next tuition payment.
• The vacation fund for next year
• Money set aside for a down payment, even if you won’t be able to buy a home for several years.

Asset Distribution

Now, let’s discuss what you can do with your investable money, which is money you won’t need in the next five years. This concept is known as asset allocation, and several factors are involved. Your age is an important consideration, as are your risk tolerance and investment goals.

Let us begin with your age. The general idea is that stocks become a less attractive place to invest your money as you get older. If you’re young, you have decades to ride out market ups and downs, but this isn’t the case if you’re retired and rely on investment income.

Here’s a quick rule of thumb if you want to figure out your asset allocation: Subtract your age from 110. This is the percentage of your investable funds that should be in stocks (this includes mutual funds and ETFs that are stock-based). The remainder should be invested in fixed-income assets such as bonds or high-yield CDs. Then, you can adjust this ratio up or down based on your risk tolerance.

For example, suppose you are 40 years old. According to this rule, you should invest 70% of your investable funds in stocks and 30% in fixed income. If you prefer to take risks or plan to work past the traditional retirement age, you might want to shift this ratio in favor of stocks. If you don’t like significant fluctuations in your portfolio, you might want to change it in the opposite direction.

Step 2 Summary Points: 

• You can’t just put all your money on stocks. 
• Only use the money you’re not planning to spend in the next five years. 
• Never use the money you’ve allocated for emergency funds or your child’s tuition fee for the coming years.
• Always consider your age when allocating your funds for investing in stocks.

Step 3: Establish Your Investment Account

All of the stock investing for beginners’ advice in the world won’t help you if you don’t have a way to buy stocks. To do so, you’ll need a brokerage account, which is a type of specialized account. A brokerage account is a taxable investment account offered by a brokerage firm. Individual investors can use it to buy and sell a wide range of investment securities, including stocks, bonds, ETFs, and mutual funds. Business firms like TD Ameritrade, E*Trade, Charles Schwab, and others provide this type of account.

Most of the time, opening a brokerage account is a quick and painless process that takes only a few minutes. You can easily fund your brokerage account either through EFT transfer, check, or wire transfer.

Opening a brokerage account is generally straightforward, but there are a few things to consider before settling on a broker:

Account Classification

First of all, you’ll have to determine the type of brokerage account you need. For most people just starting in the stock market, this means deciding between a standard brokerage account and an individual retirement account (IRA).

You can buy stocks, mutual funds, and ETFs with either account type. The main factors to consider here are why you’re investing in stocks and how easily you want to have access to your funds.

If you want to have easy access to your money, let’s say you want to invest more than the annual IRA limit, a standard brokerage account is probably for you.

However, if you want to save for retirement, an IRA is a great option. Traditional and Roth IRAs are the two most common examples of IRAs. IRAs are tax-advantaged places to buy stocks, but withdrawing your money can be tricky until you are older.

Costs and Features

Because most online stock brokers have eliminated trading commissions, most (but not all) are on a level playing field in terms of costs.

However, there are several significant differences. Some brokers, for example, provide customers with a variety of educational tools, access to investment research, and other features that are especially beneficial to newer investors.

Others allow you to trade on foreign stock exchanges. Furthermore, some have physical branch networks, which can be helpful if you want face-to-face investment advice.

The user-friendliness and functionality of the broker’s platform are also important considerations. We’ve used a few of them and can tell you that some are far more “clunky” than some. Many would also let you try a demo version before committing any money, which by the way, we highly recommend.

Step 3 Summary Points: 

• After determining your budget and strategy, you’ll have to create your investment account.
• Your investment account can either be a standard brokerage account or an IRA.
• You have to consider why you’re investing and how easily you want to have access to your money.
• Make sure that you check the costs and features for each type before deciding. 

Step 4: Select Your Stocks 

Now that we’ve covered how to buy stock, it’s time to choose the stocks that you want to buy.

Of course, we can’t cover everything you should think about when selecting and analyzing stocks in a few paragraphs, but here are the key concepts to understand before you begin:

• Diversify your holdings.
• Invest only in companies that you know.
• Avoid high-volatility stocks until you’ve mastered investing.
• Avoid penny stocks at all costs.
• Learn the fundamental metrics and concepts for stock analysis.

It’s a good idea to understand the concept of diversification, which means that your portfolio should include various types of companies. However, we certainly do not recommend over-diversification. It’s best to stick to industries that you understand, and if it turns out that you’re good at (or comfortable with) evaluating a specific type of stock, there’s nothing wrong with one industry accounting for a considerable portion of your investment portfolio.

Buying flashy high-growth stocks may appear to be a great way to build wealth (and it certainly can be), but we’d advise you to wait until you’re a little more experienced before doing so. It’s better to build your portfolio’s “base” with solid, established companies.

How to Decide Which Investments to Make

According to experts, looking at a company’s metrics can provide insight into how companies and industries perform.

For example, when price-earnings or price-sales ratios are elevated, we can sense when specific stocks or industries are priced in bubble territory. 

When it comes to stock picking, evaluation is crucial. Company profitability, earnings growth prospects, management quality, and industry performance are some of the factors investors must consider when determining whether a stock is undervalued or overvalued. Stock valuations, according to experts, provide investors with some context for the sentiment toward various industry groups.

The price of a stock may differ from its intrinsic value. To understand how to value a stock, investors would have to investigate the company’s financial reporting history, as well as its role in its industry and how it compares to its competitors, among many other factors.

Profits from stock investing can be realized in two ways: selling shares when their market value rises and receiving dividend payments. 

What are dividends? Dividends are payments made by the company to shareholders in cash or stock on a monthly, quarterly, or annual basis. Dividend payments are one way for a publicly-traded company to distribute its wealth to its shareholders. Investors seeking a consistent stream of income from their stock portfolios should invest in companies that distribute profits in dividends.

Dividends are regarded as a dependable source of income because they can be paid even if the company does not make a profit. Dividends can be collected as income or re-invested for a higher long-term return. Many dividend stocks have a track record of solid cash flows, low debt, and competitive yields.

Step 4 Summary Points: 

• You’ll have to choose the stocks that you want to invest in and not just push through with whatever is available in the market. 
• Make sure not to make a portfolio that’s too diversified. It’s better to stick with what you’re familiar with and comfortable with. 
• It’s best to check a company’s history and metrics to determine if it’s a good option for buying your stocks. 

Step 5: Keep Investing

Here’s one of the most important investing secrets from the Oracle of Omaha himself, Warren Buffett. You don’t have to do anything different to get exceptional results. In case you don’t know, Warren Buffett is not only the most popular long-term investor of all time, but he is also one of the best sources of investment wisdom.)

The surest way to make money in the stock market is to buy shares of significant firms at reasonable prices and hold them for as long as they are great (or until you need the money). You will experience some volatility from time to time, but you will produce excellent investment returns over time if you do this.

By this time, we’re assuming that you’re already decided about investing in stocks, but hold your horses! It’s important that you look at the benefits and possible drawbacks before making your big decision, so we made sure that we got that covered here as well. 

PROs of Investing in Stocks 

You can rack up massive wealth.

Stocks can really help you build wealth because, over long periods of time, the stock market has averaged annual gains of close to 10%.

You do not have to be a genius.

Another advantage of stock investing is that you don’t need a finance degree to succeed. You could devote a lot of time to becoming a stock market expert and an excellent stock analyst, but you could also choose simple, low-fee broad-market index funds, such as those that track the S&P 500. This will yield roughly the same returns as the overall stock market, and you may be able to match the growth shown in the table above.

There are stocks for everyone.

Another advantage of stocks is that they can be linked to a wide variety of companies. It’s not advised, but if you want to invest solely in exciting new, small businesses, you can. There are plenty of large, established dividend payers to choose from as well. 

You can also specialize in a variety of industries, from financial firms to software specialists to energy companies. To avoid having too many eggs in one basket, it’s best to diversify across a variety of companies and industries.

You can begin with very little money.

You also don’t have to be wealthy to make money from stocks. You can begin by simply putting money aside for a few months and then investing in a few shares of stock – or a few shares of an index exchange-traded fund (ETF), such as the SPDR S&P 500 ETF (SPY). Continue to do so over time, increasing the size of your investments as you can, and your assets should ideally grow. If your resources are limited right now, consider purchasing fractions of shares.

You have quick access to your funds.

Another advantage of stocks is their liquidity. Some investments, such as real estate, do not allow you to withdraw some or all of your value immediately or quickly. You’d have to list and sell a house, which can take weeks or months, or you could apply for a loan using the property as collateral. 

However, the stock market is open every weekday, and you can buy and sell stocks at that time. It is important to note, however, that just because you can sell shares quickly does not mean you should. After all, a stock may have temporarily crashed just before you sell shares, implying that you lost money. (More on this soon, among the negative aspects of stocks.)

How about the possible downsides of investing in stocks? Yes — You need to review that too. That’s the best way to come up with a smart decision. 

CONs of Investing in Stocks 

Returns cannot be guaranteed.

For starters, while stocks tend to outperform many alternative investments over long periods of time, they may not perform well during your specific investing period. The longer your investment horizon, the more time your investments will have to recover from downturns.

It takes some time.

This brings us to our next warning: You can become wealthy through stock investing, but it usually takes decades, not weeks or months. Return to the table at the top to see the power of compounded growth and time. Your money may grow by tens of thousands of dollars per year after a few years, but it may grow by hundreds of thousands of dollars per year over decades. To be a great investor, you must be patient.

The stock market is highly volatile.

Understand that the stock market is also volatile. It has always risen over time, but not in a straight line. There will be plenty of corrections and crashes along the way, and you must maintain your composure not to panic and sell.

Because of market volatility, you should only invest in stocks money you won’t need in five, if not ten, years. You don’t want to be forced to sell when the market or your holding has recently crashed.

If you don’t know what you’re doing, you could lose your shirt.

Another disadvantage of investing in stocks is that you can lose a lot of money, or even all of it, if you don’t know what you’re doing. There are numerous ways to lose money in stocks, as well as numerous common investing mistakes.

If you don’t know what you’re doing, you could lose a lot of money.

Given the volatile nature of the market, the fact that we all make mistakes, and the fact that even well-researched investments do not always work out as planned, you should expect to lose money from time to time. Prepare for it, or don’t invest in stocks at all. Savings accounts, certificates of deposit, and other less risky investments can provide guaranteed returns, but they are unlikely to grow quickly, and not having your money grow as needed is also risky.

Let’s take a look at some of the most commonly asked questions regarding how to invest in stocks (especially for beginners with little money):

Is it safe for beginners to invest in stocks?

YES, as long as you approach it responsibly. As it turns out, investing isn’t as complicated as it may appear.

This is because there are numerous tools available to assist you. Stock mutual funds, for example, are a low-cost and straightforward way for beginners to invest in the stock market. These funds can be accessed through your 401(k), IRA, or any taxable brokerage account. An S&P 500 fund, which effectively buys you small pieces of ownership in about 500 of the biggest firms in the US, is an excellent place to start.

Can I invest in stocks with small amounts of money?

Straight answer – YES! Most brokerages now have $0 account minimums (meaning you can open an account without first funding it), and some even offer fractional trading, which allows you to invest small amounts — say, $5 or $10 — rather than the full price of a share.

However, investing small amounts presents a challenge: diversifying your portfolio. Diversification, by definition, entails spreading your money around. When you don’t have much money, it’s hard to spread.

Investing in stock index funds and ETFs is one solution. These frequently have low investment minimums (and ETFs are purchased for a share price that could be even lower), and some brokers, such as Fidelity and Charles Schwab, offer index funds with no minimum at all. Also, index funds and ETFs solve the diversification problem because they hold many different stocks within a single fund.

Is stock trading suitable for beginners?

While stocks are ideal for many new investors, this proposition’s “trading” component is unlikely. For beginners, a buy-and-hold strategy utilizing stock mutual funds, index funds, and ETFs is generally a better option.

That is the polar opposite of trading, which needs dedication and extensive stock research. Stock traders attempt to time the market to buy low and sell high.

To be clear, any investor’s goal is to buy low and sell high. However, history shows that you are more likely to do so if you hold a diversified investment, such as a mutual fund, for the long term. Active trading is not required.

The Bottomline

Stock investment is an excellent way to build your wealth, but it’s more complicated than simply choosing the suitable investment (a difficult task in and of itself), and you must be aware of the restrictions and limitations that you might face as a new investor.

You’ll need to do your research if you want to know how to invest in stocks to find out the minimum deposit and then compare the commissions to those of other brokers. With a small amount of money, you probably won’t be able to buy individual low-cost stocks and spread your money around. You must also select the broker you wish to open an account with.