How to Invest in Stocks: A Beginner’s Guide to Getting Started

Investing in stocks, when done well, is among the most effective ways to build long-term wealth.

Here is a step-by-step guide to investing money in the stock market to help ensure you do it the right way.

5 steps to start investing
1. Determine your investment approach
The first thing to consider is how to start investing in stocks. Some investors choose to buy individual stocks, while others take a less active approach.

try this. Which of the following statements best describes you?

I am an analytical person and enjoy solving numbers and doing research.
I hate math and don’t want to do a lot of ‘homework’.
I have several hours each week to devote to investing in the stock market.
I like to read about the different companies I can invest in, but I have no desire to dive into anything math related.
I am a busy professional and do not have time to learn how to analyze stocks.
The good news is that no matter which of these statements you agree with, you are still a great candidate to become a stock market investor. The only thing that will change is the “how”.

2. Decide how much to invest in stocks
First, let’s talk about money you should not invest in stocks. The stock market is not a place for money that you may need within the next five years, at least.

Although the stock market will almost certainly rise in the long term, there is a great deal of uncertainty in stock prices in the short term – in fact, a drop of 20% in any given year is not unusual. In 2020, during the COVID-19 pandemic, the market fell more than 40% and rebounded to an all-time high in a few months.

Your emergency fund
The money you’ll need to pay your child’s next education payment
Next year vacation fund
The money you make for a down payment, even if you’re not ready to buy a house for several years
Asset Allocation
Now let’s talk about what to do with your investable money – money you likely won’t need within the next five years. This concept is known as asset allocation, and there are some factors that come into play here. Your age is a major consideration, as is your risk tolerance and investment objectives.

Let’s start with your age. The general idea is that as you get older, stocks gradually become an undesirable place to keep your money. If you’re young, you have decades to go through any market volatility, but that’s not the case if you’re retired and rely on your investment income.

3. Opening an investment account
All the tips on investing in stocks for beginners are of little use to you if you don’t have any way to actually buy stocks. To do this, you will need a specialized type of account called a brokerage account.

These accounts are offered by companies like TD Ameritrade, E*Trade, Charles Schwab and many others. Opening a brokerage account is usually a quick and painless process that takes only minutes. You can easily fund your brokerage account by wire transfer, by mailing a check, or by money transfer.

Opening a brokerage account is generally easy, but a few things to consider before choosing a specific broker:

account type
First, decide what type of brokerage account you need. For most people just trying to learn to invest in the stock market, this means choosing between a standard brokerage account and an Individual Retirement Account (IRA).

Compare costs and features
The majority of online stock brokers have eliminated trading commissions, so most (but not all) are on a level playing field in terms of costs.

However, there are many other big differences. For example, some brokers offer clients a variety of educational tools, access to investment research, and other features that are particularly useful for new investors. Others offer the ability to trade on foreign stock exchanges. And some have physical branch networks, which can be nice if you want head-to-head investment guidance.

4. Choose your stock
Now that we’ve answered the question of how to buy stocks, if you’re looking for some great investment ideas suitable for beginners, here are five great stocks to help you get started.

Of course, in just a few paragraphs, we can’t go over everything to consider when selecting and analyzing stocks, but here are the important concepts to master before getting started:

Diversify your portfolio.
Invest only in the business you understand.
Avoid highly volatile stocks until you get stuck in investing.
Always avoid small stocks.
Learn basic metrics and concepts for stock valuation.
It’s a good idea to learn the concept of diversification, which means you should have a variety of different types of companies in your portfolio. However, I would caution against over-diversifying. Stick with businesses you understand—and if you turn out to be good (or comfortable) at valuing a particular type of stock, there’s nothing wrong with one industry that makes up a relatively large portion of your portfolio.

5. Continue to invest
Here’s one of the biggest investing secrets, courtesy of the Oracle of Omaha himself, Warren Buffett. You don’t need to do extraordinary things to get extraordinary results. (Note: Warren Buffett is not only the most successful long-term investor of all time, but he is also one of the best sources of wisdom for your investment strategy.)

The surest way to make money in the stock market is to buy shares of large companies at reasonable prices and hold the shares for as long as the business remains big (or even needs the money). If you do, you will experience some ups and downs along the way, but over time you will make excellent investment returns.