How to Invest in Stocks For Beginners

While there are various ways to grow your wealth, stocks are often at the forefront. As such, a stock market is a good place for long-term investments even in times of volatility and uncertainty.

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Author: Edith
Last Updated: June 23, 2021
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How to Invest in Stocks For Beginners

Investing is committing capital or funds to an endeavor in the hope of getting a profit or additional income in the future. 

While there are various ways to grow your wealth, stocks are often at the forefront. As such, a stock market is a good place for long-term investments even in times of volatility and uncertainty. 

It is not unusual for beginners looking to invest in stocks to find it an uphill task. This is because they expect quick returns, but that is not how the stock market works. Be ready to wait for an average of five years before you see tangible results. That is because a stock market downturn hardly goes beyond this period. 

But it’s always recommended to invest in mutual funds as opposed to individual stocks. Ideally, using a single fund to acquire a large selection of different stocks diversifies your investment. 

Setting some cash aside to work for you as you focus on living your life is the best definition of investing. Typically, the money works, and your investment grows over time, and you are left to reap the rewards. 

How Do You Prefer to Invest Your Money?

Before you can invest your cash, determine the kind of investor you are. Do you want to play an active role? Or do you prefer to invest and forget? How much risk is reasonable for you? 

You can either choose to invest in stocks independently or let the experts do it for you. Regardless, you will need a brokerage account to dip into the investment world. If you need a bit of help, use the Robo-advisor whose charges are quite low and it is easy to use. 

Choosing an Investing Account

i) Online Brokers

Online brokers are either full-service or discount—the difference between the two ranges from the minimum deposit, features, and the options available.

  • Typically, full-service online brokers are ideal for investors with a sound capital outlay, and they are not afraid to invest. The account’s range of services includes conventional brokerage services, healthcare, financial advice, and all other matters related to money. 

Full-service online brokers usually have higher charges for their services. It can be a percentage of the asset portfolio they manage or a percentage of the transactions. Yearly membership fees and minimum account sizes of more than $20,000 are pretty standard with these accounts. Full-service brokers provide financial advice tailored to the client’s needs and goals. 

  • On the other hand, discount brokers give you a lot of control over your investments. You have the devices to pick and place transactions at will. Some of them also have Robo-advisory services to set the transactions and forget. 

Some discount brokers may not have any minimum deposit conditions but have other fees. Keep this in mind when searching for a good account. 

ii) Robo Advisors

Robo-advisors came into the scene following the 2008 financial crisis. The main objective was to lower the costs and provide timely investment guidance with the help of technology. 

Since then, several Robo-first companies have been established, and any of them can provide low-cost investment management. For example, Charles Schwab, an established online broker, estimates that up to 58% of investors in America will be using Robo advisors by 2025. 

During the onboarding process, the company will ask about your investment goals and build a portfolio based on this information. It may sound like a process that requires a large capital, but that’s not the case. The charges are less than what a human manager would charge. The cost is typically around 0.25% of your balance. 

A Robo-advisor comes in handy when you want an algorithm to make various investment decisions for you based on your specific goals. Thus, the system is ideal for long-term investments.

 

Buying Individual Shares

As a beginner, you can start with one or two shares and get the feel of the market. Then, go deeper as you gather some confidence and aim for a diversified portfolio. Note that diversifying in shares requires significant capital, which you may not have access to at the moment. 

You can take the route of stock mutual funds if your goal is diversification. These lessen your risks and make it easier to invest. 

The only shortcoming of mutual stock funds is that they are unlikely to shoot and leave you laughing all the way to the bank. On the contrary, the right pick of individual stocks can have a meteoric rise and leave you handsome profits. But the chances of a single stock investment changing your fortunes overnight are slim. 

Mutual Funds

Mutual funds are pools of professionally managed investment funds. It is an investment vehicle that lets you own small pieces of pooled stocks. When you purchase mutual funds, you own a small part of the various companies whose stocks are in the fund. Several funds can be put together to have a diversified portfolio. 

Note that investment in mutual funds or equity mutual funds attracts charges.

The management expense ratio (MER), generally between 0.05% to 0.7%, is charged every year based on how many assets you have in the fund. Therefore, a higher MER affects the final returns. 

Another common charge is the load or the sales charges. Make sure you understand whether the mutual funds you are thinking of investing in have the sales loads. Ideally, go for the no-load funds or those without any transaction fees. 

But in comparison to commissions charged on stocks, the mutual fund fees are not that high. Moreover, the fees remain the same regardless of how much you invest. This is a good thing for beginner investors that want to start with a small amount and grow it gradually. 

Work-based Investment Plans

Your employer may have a retirement plan where you contribute something like 1% of your pay. Such an arrangement is painless, mainly when operating on a budget. 

These retirement deductions are made before taxation, and this makes it even better. You can increase the contributions as time goes, and as you get annual raises. Those with a 401(k) retirement account may already be investing in mutual funds and other stocks that increase their wealth over time. Employer-based plans are the easiest ways for beginner investors to learn the ropes and grow. 

Set a Budget for Your Investment

One of the most common questions by first-time investors is how much they need to invest. Typically, the amount to invest should be based on the cost of the shares, which ranges from a few dollars to thousands. Of course, the price varies based on the company you are buying the stocks from. 

But if you have a small budget and your choice is mutual funds, you can settle for an exchange-traded fund. Mutual funds have higher minimum capital requirements, but EFTs are similar to stocks. 

As to how much you should invest, allocate stock funds a reasonably large percentage of your cash, and have a long time horizon. Give bond funds a smaller portion of your portfolio. 

Invest for the Long Term

The stock market is a bag of surprises and intricacies. Be that as it may, there are tricks and some basics that you will learn along the way to succeed. 

But sticking to the stock trading rule book can only do so much to grow your wealth and secure your future. So instead, pick individual stocks only when you are assured of the company’s long-term growth potential. 

Otherwise, make funds the bulk of your investment portfolio. The most challenging part for first-time investors is to invest and look away. Most are tempted to check the performance of the stocks daily. But this is not the best way to go about it as it can easily lead to rash decisions and incur extra costs. 

Manage the Investment Portfolio

Even though the daily stock price fluctuations should not worry you too much, you will occasionally need to check on your investment portfolio. Ensure the stocks align with your long-term goals and adjust investments based on what you aim to achieve. 

Check on the industry or sector the portfolio leans, and try to balance accordingly. Buy funds or stocks from a different sector to have a more diversified and balanced portfolio. 

Also, don’t overlook international diversification and allocate around 40% of the investment. This will diversify the risks further and secure your earning capability. 

Minimum Deposit

Most investment brokers require a certain amount of deposit before they can activate the account. Some companies will not do anything unless you deposit the minimum cash into the account. 

Shop around and check the reviews of various brokers before you decide. You will come across online brokers without any minimum deposit but be careful. Determine if there is a catch. Does the account have management fees or trading fees for balances beyond a certain threshold?

Commission and Fees

Brokerage firms are in it to make money. The sooner you accept this reality, the better it will be for you as a budding investor. There’s nothing like free lunch in business. 

Lately, the brokerage commissions and fees have been on a free fall, thanks to competition. But this does not contradict the fact that stockbrokers are looking for ways to make money, even as you look to grow your wealth.

Every time you transact or trade stock, your broker is going to make money. Of course, some do not have any trading commissions, but they make up for it in another way. 

Typically, the fees and commissions depend on your activity and can add up to be quite significant. This can eat into your profits and sometimes end up worse off than you started. So don’t be in a rush to hop in and out of positions unless you stand to make something tangible from it. 

Purchasing or selling shares in one company is often treated as one trade. If you leave instructions to buy stocks from three different organizations, they are treated as three orders, and each of them will attract fees. 

For example, if each trade attracts a commission of $5, you will incur $15 for the three. This reduces the amount you intend to invest by $15. If you decide to dispose of the stocks, you will incur an additional $15. That means total charges of $30 for just buying and selling. If your profits cannot cover this, you will end up making a loss from the investment. 

Diversify Your investments

Diversification is one way you spread the risks and cushion your earnings against the poor performance of one asset. 

The only barrier to diversification is usually the investment in stocks. You see, buying stocks from different companies comes with charges and costs, and you may end up buying from as few as two companies. That means a more considerable capital outlay to diversify in stocks. 

On the other hand, mutual funds tend to carry various investments or stocks in a single fund and are therefore more diversified. 

Final Word 

Beginners tend to shy off from investing significant amounts as they look to learn the ropes. If you are just dipping your feet into the investment market, start with a small amount. Have an open mind and don’t invest more than you cannot afford to lose or forget for some time. Be conscious of the restrictions you face as an investor and ride along.

Unlike in the past, there are now various tools beginners can use to invest, such as stock mutual funds. They are among the best and easiest to invest in. Start with an S & P 500 fund and then move to something like the individual stocks. 

Keep an eye on the charges, minimum deposit required, and commissions. Compare these with various brokers and pick the most affordable and convenient for you. More importantly, make sure your investment needs are taken care of. You may not be able to spread your risks effectively with a small investment amount. But you are going to get there. Choose a good broker, and the rest will fall in place. 

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