How to Invest in Stocks for Beginners
Stock represents an ownership stake in a company as a common shareholder. Common stocks allow shareholders to vote on company issues, with most companies granting one vote per share. Some companies also offer stockholders dividend payouts, giving investors a stream of income on top of the market value of the stock. These payouts typically change based on the company’s profitability.
Stocks are considered a risk asset that can provide growth and income to an investment portfolio. This means it’s an asset class that carries a high degree of price volatility. With stocks, beginner investors must consider the degree of risk that they can take. Typically, the more risk in an investment, the greater the potential reward. But you need to be willing to take the risk of losing money in case high returns don’t come. History shows that stocks have been a reliable asset class for strong annual average returns over time.
Stocks took a dive in 2022 as the highest inflation in 40 years has driven steep interest rate increases and stoked fears of an economic downturn. The gloom has ensnared some of the market’s biggest names, particularly tech stocks, which have been pummeled. Facebook parent Meta Platforms Inc. (ticker: META) is down 50% from this time last year, Microsoft Corp. (MSFT) has dropped 16.5%, and while Apple Inc. (AAPL) stock is only down a comparatively light 9.3%, it had the bumpiest ride of them all last year.
But one need only glance at the market performance in 2021 for evidence of how quickly things can change in the stock market. The S&P 500, an index of some of the biggest U.S. stocks, climbed 27%, driven by gains in some of the very same companies recording steep losses last year, including Meta Platforms, Apple, Microsoft and Alphabet Inc. (GOOG, GOOGL). If you had invested in these companies or the index as a whole through an index fund, your investments would have increased in value considerably in 2021. Despite a rocky 2022, many stocks appear to be on the rebound thus far in 2023, so there is hope for a stronger year ahead.
If you’re a beginning investor, the best time to enter the market is when stocks prices are down. Here’s what else you need to know about investing in stocks:
How to Invest in Stocks for Beginners
Where to start investing in stocks.
How much money should you start investing in the stock market?
How to choose which investments to make.
Have an investing strategy, especially during market volatility.
Invest on your own or with a financial advisor?
Stocks for beginner investors.
Use dollar-cost averaging.
When to sell a stock.
Where to Start Investing in Stocks
The first step is for you to open a brokerage account. You need this account to access investments in the stock market. You can open a brokerage account for free online through many of the major brokerage firms, including Fidelity, Vanguard and Charles Schwab.
The next step is to fund your brokerage account by transferring money from your bank account to fill trades of stocks you want to buy. The amount of money you choose to invest is a highly personal decision that depends on a number of factors, says Ryan Burke, general manager of Invest at M1 Finance. For instance, how much money you can afford to save, your near and long-term financial goals and your risk tolerance, or how much you’re comfortable potentially losing.
Remember that while, over time, the stock market typically increases in value, there can be short-term market fluctuations, which can put your money at risk.
“A common adage is to save and invest as much as possible to maximize time in the market and potential upside appreciation,” Burke says. But this comes with a caveat: “If you have high-interest debt, paying that down first may be a better financial move.”
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How Much Money Should You Start Investing in the Stock Market?
Several online brokers such as Betterment don’t charge fees for a $0 account balance, nor do they require a minimum amount to open a trading account. You can start investing through these brokerages with any amount. Some also offer fractional shares, meaning you don’t have to buy an entire share of a company if you can’t afford it.
Discount brokers are a boon for beginners with little money who are often looking to get stock market exposure with smaller portfolios. But a discount broker typically does not provide advice or analysis. Many of these brokers don’t require a minimum amount to start an account, while some have a low beginning threshold of $1,000.
How to Choose Which Investments to Make
Daniel Beckerman, president of Beckerman Institutional in Ocean Grove, New Jersey, says that by looking at a company’s metrics, you can gain insight into how companies and industries are performing.
“For example, when price-earnings or price-sales ratios are elevated, we can get some sense as to when certain stocks or industries are priced in bubble territory,” he says. “This was the case in 2021, when many unprofitable technology stocks were trading in what I would think of as overvalued territory.”
Valuation is an important factor when stock picking. Company profitability, earnings growth prospects, quality of management and industry performance are some factors investors must consider when evaluating a stock’s worth to determine whether it is undervalued or overvalued. Stock valuations, Beckerman says, provide investors with some color around the sentiment regarding various industry groups.
A stock’s price can be different from its intrinsic value. To know how to value a stock, investors must dig into the company’s financial reporting history, understand the company’s role in its industry and how it fares among its competitors, as well as other factors.
“Avoid stocks that are speculative in nature with no historical performance on growth and management expertise,” says Alex Vela, a portfolio manager at FBB Capital Partners. He says to target companies with at least a five-year track record and a management team that has clear goals and objectives.
“Equally important is if management is implementing any ESG policies that lead to socially sustainable business practices,” he says, referring to environmental, social and governance initiatives.
If all this research sounds daunting, there is another way to invest in stocks without having to pick them all yourself: stock index funds.
Low-cost index funds that track the overall market are often the best choice for investors without the time or inclination to do their own research, Burke says. For example, S&P 500 index funds are popular choices as they give you exposure to five hundred of the largest companies on the U.S. stock exchange without you needing to buy each one yourself.
That’s the other benefit to index funds: diversification. A single share of an index fund gives you exposure to hundreds or even thousands of companies. It would take a huge amount of capital to create such a portfolio from scratch.
“Similarly, if investors want to invest in specific types or sectors of U.S. or global companies, such as energy or financials or health care, they can find funds that focus on those areas,” Burke says.
There are two ways to profit from stock investing: selling shares when their market value goes up and dividend payments. Dividends are payments in either cash or stock made by the company to the shareholder on a monthly, quarterly or annual basis. Dividend payments are a way a publicly traded company shares its wealth with its investors, like the company bonuses employees receive. Investors who want a steady stream of income from their stock portfolios often target dividend-paying companies. But it’s important to note that dividends are not guaranteed: A company can reduce or eliminate its dividend at any time.
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Have an Investing Strategy, Especially During Market Volatility
It is normal for the stock market to experience bouts of volatility. During those periods, stocks, even ones considered relatively safe, experience price fluctuations. This can happen when there is uncertainty in the markets, and it tends to be short-lived.
“Over the long run, we have seen a 10% or greater downturn in the stock market more frequently than once every two years (on average),” Beckerman says. You should prepare to stay the course during these rough periods, such as the one experienced in 2022, Beckerman says, if you expect to do well throughout your investment time horizon.
How to Invest in Stocks for Beginners
Volatility can certainly be concerning, especially if you are a beginner who hasn’t experienced it before. That said, you should put your money in companies that can generate growing revenue and profit over a long period. That way, you have confidence in the company despite the stock’s price swings.
“We consider a company’s ability to fend off competition,” Beckerman says. “If a company is hard to compete with, they will be less likely to run into trouble with falling revenue and profits in the future. They are also more likely to be in a position to be able to raise their prices in an inflationary environment, as we have experienced.”
He also notes that volatility can be your friend. Bear markets, like the one that plagued the markets in 2022, can be great buying opportunities.
“The tricky part is that we don’t know the date that a bear market is going to end,” Beckerman says. “However, if we take an average of the previous 10 bear markets, the stock market tends to provide positive returns of over 14% a year after having entered the bear market.”
When investors have conviction in a company and its stock price falls, they may see this as an opportunity to buy more of the stock at a better price.
Once you open an online brokerage account, you’re asked questions to determine an investment strategy that will assist in your investment decisions. These questions involve knowing your specific financial goals, such as retirement or a big purchase, and your risk tolerance, which is the degree of market variability you can withstand in your investments.
Define your goals before you start investing. These will drive your decision-making processes.
For example, if early retirement is your goal, you may want to skew your portfolio toward more growth-oriented investments in an effort to generate the highest return possible. But if you’re working toward a goal that’s closer at hand, such as buying your first house, you’d be better off with a more moderate portfolio so you don’t run the risk of your investments losing value when it’s time to make the purchase.
If you’re not sure how to materialize your long-term financial goals and where to start with your investing plan, working with a financial advisor may be right for you.
Invest on Your Own or With a Financial Advisor?
Investing in stocks can be done in many ways, but before you start investing, it’s important to determine what type of investor you are. Decide whether you want to take a do-it-yourself approach or work with a professional financial advisor who can advise you through your wealth management.
“Many people choose to hire someone who specializes in the field so they can take advantage of their expertise and so they don’t need to worry about the things they may miss or that they don’t know,” says Jeffrey Wood, an investment advisor and partner at Lift Financial. “It also helps to have a trusted advisor that you can call with questions and concerns.”
Financial advisors can protect you from making decisions that may not work to your benefit. If you want to buy individual stocks, you must understand that they can carry much more risk than other securities such as mutual funds or exchange-traded funds. That said, if you are not sure how much of your money you should allocate toward stocks, you can work with a financial advisor to develop a strategy.
“As with most things, it’s a cost-benefit analysis,” Burke says. “While there are real benefits to engaging a financial advisor or financial planner, particularly if you have complex or bespoke needs and requirements, there are significant costs.”
Financial advisors often charge a fee that’s a percentage of the total assets you have with the advisor, called an assets under management (AUM) fee.
“Over the long term, this constitutes a material drag on overall investment performance,” Burke says. “If you are like most Americans or are just starting out, simpler passive investing strategies and/or basic modern portfolio theory strategies don’t require a dedicated (financial advisor), and the savings accrued as a result are significant.”
One way to leverage a professional’s expertise through passive investing is the aforementioned index funds, which have a professional fund manager at their helm. For even more professional direction, you can use actively managed funds which aim to beat the stock market rather than just go along for the ride. The challenge here is that actively managed funds will come at a higher cost and have not been demonstrated to outperform their passive peers over the long run. A general rule of thumb is to use active funds for specialized areas of the stock market, such as when investing in emerging markets.
There is another cost to consider when choosing whether to work with a financial advisor: the cost of your time. How much time are you willing to put into managing your investments? If the answer is slim to none, then you should seriously consider working with a professional, be it through an individual financial advisor or using funds.
If you’re unsure where to start, consider opening an account with a robo advisor, which will do some of the heavy lifting at a lower cost. You won’t get the individualized guidance of a financial advisor, but you also won’t be on your own when choosing funds. And robo advisors are considerably cheaper than financial advisors, on average.
Financial advisors can help with other areas of financial planning, too. “If you do need a specialist, whether it’s for estate planning, tax, trust, wills or special circumstances, you can engage a specialist in those areas or consult with a fee-based planner,” Burke says.
2023 Investment Outlook
Investment managers and strategists give their predictions for the upcoming year.
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Use Dollar-Cost Averaging
After choosing what stocks to buy, the question becomes when to buy them. The old adage “buy low, sell high,” is a good one to follow, but it’s hard to know when a stock is at a low.
How to Invest in Stocks for Beginners
To alleviate the feeling that you must time the market just right, many beginning investors benefit from a dollar-cost averaging strategy whereby they invest a fixed amount on a regular schedule, regardless of the stock’s current price.
“Many beginning investors may get frustrated with the day-to-day fluctuations and highs-and-lows of the stock market, but dollar-cost averaging over time in a fluctuating, but overall uptrending, market allows an investor to continually invest and buy more shares when the market dips, causing their overall cost basis to average lower in general than their sell value,” Wood says. “Markets are difficult to time, but dollar-cost averaging helps to create savings habits that, over time, have shown to bring about positive results historically.”
That said, some investors do better investing a lump sum all at once. This can work in your favor because it’s generally better to invest money sooner rather than sitting on cash.
“Either dollar-cost averaging or chunk investing when used in longer, multiyear investing strategies tends to give an investor a better chance of positive investment returns than when used during short-term time frames,” Wood says.
When to Sell a Stock
Knowing when to let a stock go, without deciding in a panic, is a key skill for savvy investors.
How to Invest in Stocks for Beginners
It’s often a good idea to have an exit plan before you buy a stock. For example, you might decide to reevaluate your position when the stock is up 20% or down 10%. At this point, ask yourself if it’s still a good investment. Doing so forces you to look at the stock’s fair market value and the company’s current standing.
Having an exit plan in place will help you keep emotions out of the decision of when to sell. It’s important not to fall in love with a stock because businesses change and companies can fail.
That said, if you’re a long-term investor, Burke says the answer is almost always not to sell unless your situation warrants it, such as if you need the money for a financial obligation or want to leverage tax-loss harvesting. Tax-loss harvesting is the practice of selling some investments at a loss to offset any gains taken throughout the year.
When it comes time to sell, don’t forget to consider the tax implications. “If you retain an investment for more than a one-year period before selling, taxes on the appreciation of that stock will be taxed at a lower long-term capital gains rate rather than a higher short-term capital gains tax rate for investments held less than one year,” Wood says.
Legendary investor Warren Buffett advises people to buy and hold stocks for several decades instead of selling and repurchasing them constantly. At a minimum, a prospective stock should be one that an investor would own for at least 10 years, according to his philosophy.
“While sell-offs, like what we experienced in 2022 with the S&P down 20%, are scary, history and the long-term trajectory of capital markets provide a compelling justification to hold the course,” Burke says. “The branch of behavioral psychology as it relates to investing explores the triggers that we have in great detail, particularly loss aversion and fear of missing out, but as a general rule, the long-term investor should not drive decision-making based on short-term volatility.”
Disclaimer: The news shared in this article is based on some estimates and data,please invest in share market or mutual funds at your own risk. We are not a SEBI registered financial advisor,we will not be responsible for any profit or loss incurred by you.