How to Invest in Stocks: A Beginner’s Step-by-Step Guide

The modern journey of many investors today begins with a simple search on the internet: How To Invest In Stocks. Perhaps one such search has led you here; perhaps you found your way through some other means. Whatever the case, welcome. This is your go-to, step-by-step guide for how to invest in the stock market. Investing is a way of looking towards, preparing for, and shaping your future: stocks are an option which all individuals should consider as a potential avenue for growing their wealth. Whether you’re looking to invest spare change or your retirement savings, understanding how the stock market works, and how you can invest in stocks, is a vital first step.

To help you understand the stock market, its terminology and rules, investment strategies, what type of investor you are, and how to invest in stocks, here’s a beginner’s guide.

What is the stock market?

The stock market is the marketplace where investors, large and small, individual and institutional, trade securities such as:

• Stocks:

  A share of ownership in a company, which gives you access to the upside or downside of the business. 

• Mutual funds:

  A professionally managed fund that pools money from investors and buys a variety of securities.

• Exchange Traded Funds (ETFs):

  A pooled form of investment that is designed to track an index, sector, or commodity.

• Bonds:

  An instrument that represents a loan from an investor to a borrower, typically a corporation or government. 
  

The stock market operates under a defined set of rules and regulations and is composed of different stock exchanges. 

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Stock market vs. stock exchange 

A stock exchange is a subset of the stock market, where a company’s shares are held. By trading in the stock market, you’re buying or selling shares of companies listed on a particular stock exchange. There are 13 stock exchanges in the United States, including the NASDAQ and the New York Stock Exchange (NYSE). 

How does the stock market work?

The stock market is a vehicle for companies to raise money by selling ownership to investors, and for investors to potentially generate profits. Here’s how it works: 

• Companies sell a batch of shares to a select group of investors to raise money as part of an Initial Public Offering (IPO). 
• Once they go public, shares in the company are publicly traded. That means any investor can purchase shares via a stock-trading platform. These investors can decide to hold their shares for as long as they want or sell them. 
• If the price of shares goes up and investors sell, they’ll make a profit. If the price of a share goes down and investors sell, they’ll incur a loss.
  

A wide variety of factors—including political news, financial performance of large companies, industry trends, and local or global economic developments—influence the stock market, but prices for individual stocks are fundamentally driven by a company's financials and outlook. 

To measure how the market is performing, investors track market indexes: a collection of stocks that represents a segment of the market. 

The S&P 500 (Standard and Poor’s 500) index represents the 500 largest US publicly traded companies across all sectors. The Dow Jones Industrial Average index represents the 30 most prominent blue chip stocks on the NYSE and the NASDAQ, such as Apple, Disney, and Microsoft.  You cannot invest directly in an Index.  

Why invest in the stock market?

Investing in the stock market can be a way to generate income and grow your overall wealth. Here are a few common reasons people invest in the market:

• Earn passive income:

  Smart investments can lead to passive income—that is, income you generate without much day-to-day involvement. Those who want to earn passive income in the stock market can invest in companies or funds that have a strong track record of paying dividends. Note: Dividends and returns on money invested in the market are not guaranteed. Historical average returns should give you a directional sense of what’s possible, but they’re not a promise of future performance. 

• Stay ahead of inflation:

  Annual inflation rates have been between one and three percent over the last 10 years. Investing in the stock market at an annual rate of return higher than the annual inflation rate can protect your money from the rising costs of goods and services. For instance, the average return for the S&P 500 index over the last 10 years was 13.9% annually. ‍

• Ease of buying and selling:

  Brokerage accounts allow you to easily buy and sell investments at any time and withdraw the cash you make from the sale immediately. This is much easier than, say, buying and selling an asset like real estate. You can also invest as little as you can or choose to, making it a much more accessible form of investing.

Different approaches to investing in stocks

There are many different approaches to investing in the stock market, informed by factors such as your age, net worth, risk tolerance, and appetite for involvement in portfolio management. The following factors may influence your investment strategy.

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3 factors that influence your approach to investing

1. Risk tolerance

Investing in the stock market is inherently risky, since there is never a guarantee that a company’s shares will increase in value. Events outside your control—such as political and economic events, natural disasters, or a change in company leadership—can impact the share price in ways you cannot predict. Your risk tolerance is the degree to which you can absorb financial outcomes that are different from what you expect.

If your risk tolerance is low, you’re more likely to invest conservatively, say with government bonds, high-interest cash savings accounts, or certain high-performing index funds. If your tolerance is high, you might be more comfortable making riskier investments in the hopes of netting larger returns, but with a greater chance of larger losses. Higher risk investments can include individual stocks, cryptocurrency, or real estate investment trusts (REITs).

2. Time horizon

Time horizon is how long you plan to hold an investment before selling. A 45-year old investor who plans to recoup profits when he retires may have a 20-year time horizon, while a 30-year old investor who wants to use profits from investments to put a down payment on his/her first home may have a three-year time horizon. 

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3. Involvement level

Some investors like to be highly involved in portfolio management. They stay abreast of company performance, market news, and trends. They often pick their own stocks, and they should know how to navigate market fluctuations, rebalance their portfolio, maximize tax efficiencies, and shift their level of risk as they near the end of their time horizon. An investor who doesn’t want to be actively involved in portfolio management puts their money in the hands of a financial advisor, a robo-advisor, or managed investment solution. They are focused less on day-to-day investment activity and more on the bottom line—how their money is growing—and are willing to pay a management fee to ensure a professional stays on top of trends and keeps an eye out for opportunities.  

Another way to think about this is in terms of passive versus active investing.

• Passive:

  Passive investing requires minimal day-to-day effort. This might mean buying stocks and holding them for years, with a goal of long term growth. A common passive approach is to buy an index fund and allow your money to grow over time. A passive strategy could be less risky than an active strategy depending on the strategy. Passive investors might buy mutual funds or ETFs through a brokerage account, choose a managed investment solution, or use a robo-advisor.

• Active:

  Active investing involves frequently buying and selling stocks in an attempt to beat the market. It can offer better short-term gains, but can be a more volatile approach to investing. Active investors will manage their own portfolios via a brokerage account.

3 common investment strategies

Your investment strategy is your plan to help you achieve your financial goals. Strategies can range from conservative and risk-averse to highly aggressive. An investment strategy is one of the first things an investor will establish, either with a financial planner, robo-advisor, or on their own. Investment strategies should also be reevaluated as your personal and financial situations evolve.

1. Growth investing:

   Growth investing emphasizes the short- and long-term value that a company can provide its investors. If you think a company will grow and its value will increase over time, buying shares would be a long-term growth investing strategy. If you believe a company is about to enter a short-term period of growth, you might sell your shares before the price plateaus or decreases. Successful growth investing often involves investing in smaller companies and emerging markets that have high growth potential.  

2. Dividend growth:

   With this type of strategy, investors look for companies that consistently pay out quarterly or yearly dividends to investors. Investors can reinvest their dividends back into the company in hopes of compounding returns or take their dividends as a cash profit.

3. Value investing:

   Made popular by Warren Buffett, the principle behind value investing is as simple as it gets: Buy stocks that are cheaper than they should be, and then sell them when the price goes up. Companies are often undervalued by investors for any number of reasons, such as the public’s lack of understanding of a company’s core offerings. However, uncovering undervalued stocks takes a combination of analyzing the right data and having strong market experience. If you can find undervalued stocks, you’ll also need a high risk tolerance to endure the possibility that the stock price doesn’t go up and goes down.

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A step-by-step guide to investing in the stock market

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