How to Invest in Stocks: 4 Easy Steps for a Complete Beginner
Investing in stocks is one of the most lucrative ways to build wealth and yield returns that outperform even the modest of incomes. Thanks to technology, investing in stocks for beginners has become easier and simpler than ever before. It all starts with laying out your investment goals, understanding how the market works, and managing risks.
Investing in stocks is not as complicated as it may seem. You don’t need to have a lot of money either. It’s okay if you just have a few dollars to spare. Your money will grow through the power of compound interest. However, if you’ve never invested in stocks before, the process can be a little intimidating.
In this investing guide, we will provide you with four easy steps for a complete beginner to invest in stocks.
1. Determine Your Stock Investing Approach
The first thing you want to do is to determine how you want to invest in stocks. There are several options when it comes to investing in stocks. You want to make sure that you choose the option that best suits you. Which one of the following statements best describe you?
- I’m analytical individual who has several hours each week that I can dedicate towards research and choosing stocks that I can invest for myself.
- I’m a busy professional with a desire to invest in stocks but I don’t have the time nor the technical knowledge to analyze and invest in stocks.
If you chose the first statement, then that means that you prefer a hands-on approach towards making your investment decisions. You may want to start with opening a brokerage account and then researching on what companies you may want to invest in. This is a more complex approach that requires knowledge, time, and dedication.
On the other hand, if you prefer a passive approach towards stock investing, you may want to consider Robo-advisors. Essentially, a robo-advisor invests money on your behalf in a portfolio of index funds based on your investment goals, risk tolerance, and age. If you prefer the long-term wealth building approach, then a robo-advisor may be for you.
2. Determine a Budget for Your Stock Investment
As a beginner investor, the number one question that will be on your mind is how much money you require to start investing in stocks. To be honest, this entirely depends on how expensive the shares are.
Prices of shares can range from just a few dollars to a few thousand dollars, it all depends on which stock you are buying. The best stock investments are usually low-cost mutual funds such as index funds and ETFs. Index investing allows you to purchase a bigger chunk of the stock market in just one transaction.
For example, S&P 500 investing means that your fund’s performance will mirror that benchmark’s performance. Same goes with Nasdaq investing. If the index fund is up, your investment will be up as well.
3. Choose the Stocks You want to Invest In
Once you’ve figured out what investing approach to take, the next step is to determine which stocks you want to invest in. It doesn’t have to be a complicated process. As Warren Buffet famously put it, “Buy into a company because you want to own it, not because you want the stock to go up.”
Start by picking out companies that you are already familiar with from your experience as a consumer. You can start investing in Apple stocks, investing in Microsoft stocks, or even investing in Tesla stocks. However, you want to stay clear of HYIP (High Yield Investment Programs) companies.
Many of these HYIP companies operate as Ponzi schemes selling unregistered securities. They often promise returns of up to 20-100% per day. This is very unrealistic because even apple investing, tesla investing, or Microsoft investing promises a 10% average return annually.
4. Diversify and Reduce Risk
If you are familiar with the phrase “don’t put all of your eggs in one basket,” then you understand how important it is to diversify your stock investments. This is exactly where the benefit of ETFs (Exchange-Traded Funds) or Mutual Funds is most felt.
Both of these securities have a significant number of shares including a variety of investment instruments all within them. This makes them well diversified than an individual stock which is excellent for risk management.
Investing in a single individual stock is highly risky. If the company goes bankrupt, then you also lose all your investment in the stock. However, if you place all your capital into different kinds of stocks, you have a better chance of not losing all your money.
Thanks to technology, there are many online and app-based investing platforms that have made investing in stocks easy. All you need to do is start. Don’t be intimidated by the idea of investing in stocks.
Even the stock guru Warren Buffet had to start from somewhere. The earlier you start your stock investment journey, the better off you’ll be in the long-term. Just remember that stock investing is an on-going process, just follow the steps we outlined above and you’ll be alright.