How To Invest in Stocks

When you invest in a stock, you’re hoping the company grows and performs well over time. That's how you end up making money.

One of the best ways for beginners to learn how to invest in stocks is to put money in an online investment account and purchase stocks from there.

You don't have to have a lot of money to start investing. Many brokerages allow you to open an investing account with $0, and then you just have to purchase stock. Some brokers also offer paper trading, which lets you learn how to buy and sell with stock market simulators before you invest any real money.

» Don't have a brokerage account? Learn what it is and how to open one.

How to invest in stocks in 7 steps

To invest in stocks, open an online brokerage account, add money to the account, and purchase stocks or stock-based funds from there. You can also invest in stocks through a robo-advisor or a financial advisor.

» Ready to invest? Check out the best online brokers for stock trading

If you're ready to invest in stocks yourself, this process may help you get started.

1. Decide if you want to invest on your own or with help

There are several ways to approach stock investing. Choose the option below that best describes how hands-on you'd like to be.

A. "I want to practice investing before I use real money."

We get it, investing can be nerve-wracking! If you want to practice before you put your hard-earned cash on the line you can open a paper trading account and invest with fake money until you get the hang of it.

» Check out our roundup of the best paper trading accounts

B. "I'd like to choose stocks and stock funds on my own."

Keep reading. This article breaks down how to choose the right account for your needs and how to pick and manage particular investments.

C. "I don't care about picking investments and I could use some help."

You may be a good candidate for a robo-advisor, a service that invests your money for you for a small fee. Virtually all of the major brokerage firms and many independent advisors offer these services. We'll cover investing through a robo-advisor in the next section.

C. “I’d like to start investing in my workplace 401(k).”

This is one of the most common ways for beginners to start investing.

This may be a great option for most people who have access to an employer-sponsored 401(k) because many plans offer a match. Employer matches are basically free money: If your employer offers a 4% match and you make $100,000 a year, if you contribute $4,000 to your 401(k) so will your employer. That means you get $4,000 for free.

» Learn more about 401(k) plans

2. Choose a broker or robo-advisor

Once you know how you want to invest, you're ready to choose your broker or robo-advisor.

A. You're investing on your own

If you're investing on your own, you'll need to figure out what broker you want to open that account with. Some brokers, like Fidelity, are famous for their many years in business and 24/7 customer support. Others, like Robinhood, are known for their easy-to-use platforms. You'll want to evaluate brokers based on factors such as costs, investment selection, investor research, tools and customer service access. Maybe you'll want to open a brokerage account where you already have a bank account, which can help you see all your finances in one place.

» Ready to invest? Here's the best online brokers

B. You're investing through a robo-advisor

If you're investing through a robo-advisor, you'll have to figure out which one to work with. Similar to shopping for a broker, there are pros and cons to each. Some robo-advisors have very low fees, while others let you talk with a financial advisor for free. It's a good idea to compare robo-advisors to see which ones offer the services you need. Most robo-advisors charge about 0.25% of your account balance.

» View our picks for the best robo-advisors

3. Pick a type of investment account

Whether you're investing on your own or through a robo-advisor, you'll have to choose the type of investment account you want to open. There are several types of investment accounts, and it's a good idea to figure out which account is right for you. For example, a Roth IRA comes with significant tax benefits while a standard brokerage account does not.

You'll have to have some personal information available, including your social security number, and it will probably take around 20 minutes to open the account. With some brokerages and robo-advisors, it can take a few days to connect your bank account, so you may have to wait before you can start buying investments.

If you choose to open an account at a robo-advisor, you probably don't need to read further in this article — the rest is just for those DIY types.

4. Learn the difference between investing in stocks and funds

Going the DIY route? Don't worry. Stock investing doesn't have to be complicated. For most people, stock market investing means choosing among these two investment types:

Stock mutual funds or exchange-traded funds

Mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs are a kind of mutual fund that track an index; for example, a S&P 500 fund replicates that index by buying the stock of the companies in it.

When you invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds.

Individual stocks

If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment and research.

If you go this route, remember that individual stocks will have ups and downs. If you research a company and choose to invest in it, think about why you picked that company in the first place if jitters start to set in on a down day.

» Learn how to research stocks

The upside of stock mutual funds is that they are inherently diversified, which reduces your risk. For the vast majority of investors — particularly those who are investing their retirement savings — a portfolio made up of mostly mutual funds is the clear choice.

But mutual funds are unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim.

5. Set a budget for your stock market investment

New investors often have two questions in this step of the process:

How much money do I need to start investing in stocks?

The amount of money you need to buy an individual stock depends on how expensive the shares are. (Share prices can range from just a few dollars to a few thousand dollars.) Some brokerages allow you to invest with fractional shares. Simply put, you can choose a dollar amount and invest that despite the fact that the share price might be greater than what you have (which means you can owe a fraction of a stock).

If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds often have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price — in some cases, less than $100).

How much money should I invest in stocks?

If you’re investing through funds — have we mentioned this is the preference of most financial advisors? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon.

A 30-year-old investing for retirement might have 80% of their portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. A general rule of thumb is to keep these to a small portion of your investment portfolio.

6. Focus on investing for the long-term

Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that’s just an average across the entire market — some years will be up, some down and individual stocks will vary in their returns.

For long-term investors, the stock market is a good investment no matter what’s happening day-to-day or year-to-year; it’s that long-term average they’re looking for.

The best thing to do after you start investing in stocks or mutual funds may be the hardest: Don’t look at them. Unless you’re trying to beat the odds and succeed at day trading, it’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day.

7. Manage your stock portfolio

While fretting over daily fluctuations won’t do much for your portfolio’s health — or your own — there will of course be times when you’ll need to check in on your stocks or other investments.

If you follow the steps above to buy mutual funds and individual stocks over time, you’ll want to revisit your portfolio a few times a year to make sure it’s still in line with your investment goals.

A few things to consider: If you’re approaching retirement, you may want to move some of your stock investments over to more conservative fixed-income investments. If your portfolio is too heavily weighted in one sector or industry, consider buying stocks or funds in a different sector to build more diversification.

Finally, pay attention to geographic diversification, too. Vanguard recommends international stocks make up as much as 40% of the stocks in your portfolio. You can purchase international stock mutual funds to get this exposure.

Best stocks for beginners

The process of picking stocks can be overwhelming, especially for beginners. After all, there are thousands of stocks listed on the major U.S. exchanges.

Stock investing is filled with intricate strategies and approaches, yet some of the most successful investors have done little more than stick with stock market basics.

That generally means using funds for the bulk of your portfolio — Warren Buffett has famously said a low-cost S&P 500 ETF is the best investment most Americans can make — and choosing individual stocks only if you believe in the company’s potential for long-term growth.

The S&P 500 is an index consisting of about 500 of the largest publicly traded companies in the U.S. Over the last 50 years, its average annual return has been more or less the same as that of the market as a whole — about 10%.

» Learn more: How to invest in the S&P 500

The bottom line on investing in stocks

Learning how to invest in stocks can be daunting for beginners, but it’s really just a matter of figuring out which investment approach you want to use, what kind of account makes sense for you, and how much money you should put into stocks.