Stocks are one of the most popular assets that you can invest in to grow your wealth over time. While stocks aren’t the least risky asset available, the stock market’s historically high returns make stocks a great choice for both short-term and long-term investors. In this guide, we’ll cover everything you need to know about how to get started with investing in stocks, the types of stocks available to invest in, and how to pick which stocks are good to buy.
What are Stocks?
Stocks are simply shares of ownership in a company. When you own a single share of Apple stock, for example, you own a small fraction of Apple. That doesn’t mean you’ll get your hands on the newest iPhone or have a meeting with Tim Cook, but it does mean that you have a stake in the company’s profits and growth over time.
Why Invest in Stocks?
The point of investing in stocks is to grow your money over time. Investing in stocks entails more risk than simply putting your money in a bank account. But, your potential for return is also much higher. For example, if you have $1,000 to invest, you might get a 1.5% return on that money over the course of a year in a high-interest savings account or investing in safer bonds. In the stock market, you could potentially get an 8% or even higher return annually.
Importantly, the price of stocks goes up and down over time in response to demand from other investors. In most cases, you will buy a stock because you believe that the value of that stock – the demand on the part of investors to own a piece of the company it represents – will go up. We’ll cover some other ways you can make money from stocks, but most of the time the return you see is derived from this increase in share price over time.
How Do You Invest in Stocks?
Investing in stocks isn’t overly difficult. But, it’s important to have a plan for how you’re going to go about it before you start investing.
If you jump right into trading under the assumption that you’ll learn as you go, you’re going to be in for a rude awakening. Investing in stocks without knowing what you’re doing is a good way to lose money quickly.
It’s essential that you take the time to understand what types of stocks are out there, why individual stocks are priced the way they are, and what might influence the price of individual stocks in the future. The more time you spend learning the ropes of investing now, the better poised you’ll be to see returns rather than losses when you start putting real money on the line.
A big part of stock investing is defining a set of goals and a strategy to meet them, and then sticking to those guidelines.
To start off, you need to decide why you’re investing in the first place. Are you looking to build wealth for retirement, create a steady side income, or simply achieve better returns than you would get with a savings account? The answer to this question will go a long way in determining the timeframe of your investments and your desired returns, which in turn impact your trading strategy.
It’s also important to consider your own risk tolerance. If you put $1,000 into stocks, how much of it are you willing to lose if a trade goes sideways? Determining how much risk you’re willing to take will play a big role in developing your trading strategy, which stocks you’re willing to invest in, and how you set stop losses on your trades.
Open a Brokerage Account
Once you’ve spent a sufficient amount of time learning about stock investing and thinking about your own goals, it’s time to open a brokerage account. A brokerage is essentially a middleman – you place an order for a stock, and the broker will find someone else who’s trying to sell that same stock. Your brokerage will also hold your stocks for you, so you don’t have to worry about handling certificates, proof of purchases, or anything else. All you need to do is fund your brokerage account with the money that you want to use for stock investing.
There are a ton of brokerages available, all of which differ in the tools and services they offer and the fees they charge. If you’re just getting started, check out Webull and E-Trade. Webull is a mobile-only brokerage that’s very simple and doesn’t charge any fees or trade commissions. E-Trade has also done away with commissions, but provides a number of more advanced tools that you can put to work as you learn more about investing strategies.
Once your brokerage account is funded, you’re ready to start buying stocks. So, what are you going to buy? That’s the focus of the remainder of this guide.
Types of Stocks You Can Invest In
While all stocks are fundamentally the same, they can be classified into a few different categories. Here, we’ll cover some of the most common types of stocks that are particularly well-suited for beginners.
Dividend stocks are stocks that pay a dividend. The form a dividend takes can vary, but it’s usually a cash payout made to shareholders of a company once per quarter or once per year. That’s money that you earn regardless of what the stock price is doing. Dividend stocks are usually the stocks of well-known and well-established companies – think companies like General Motors, Johnson & Johnson, and ExxonMobil.
Broad Market ETFs
Exchange-traded funds, or ETFs, are traded on the stock market just like stocks for individual companies. But, ETFs are essentially baskets of multiple stocks. When you invest in an ETF, you may be investing in dozens or hundreds of stocks at a single time. The performance of the ETF itself will reflect the performance of all the individual stocks it represents.
Broad market ETFs are extremely popular because they track the movements of the market as a whole. There are ETFs that mimic the performance of the S&P 500 or NASDAQ indices, for example. That means that you’re not exposed to risk from any one company having a bad year, but rather that your investment is tied to the performance of a broad swath of the overall stock market.
Sector ETFs are just like broad market ETFs, except the stocks contained in the fund are focused in a specific market sector. For example, an energy ETF may allow you to hold portions of ExxonMobil, Chevron, and Valero. But, it wouldn’t contain Google or Microsoft stock, even though those are part of the S&P 500. There are sector ETFs for just about every major market sector, as well as numerous sub-sectors such as biotechnology or gold mining.
Of course, you can also invest in individual stocks. That is, a stock that represents a share of a single company. Individual stocks are often more volatile than ETFs, meaning that the price goes up and down more wildly, because so much rests on the fortunes of a single company. But, while volatility brings more risk, it also brings the prospect of higher returns if you find a promising company or time the stock price correctly.
How to Choose Which Stocks to Buy
Now that you know what types of stocks are out there, it’s time to decide which options are right for you. Here, we’ll explain how to figure out which stocks are right for you and how to find potential matches.
Choosing which stocks to buy can be simple if you have a defined investing strategy and clear goals. If a particular stock meshes with your strategy, then you can consider it as an option for purchase. If it doesn’t fit your strategy or stretches beyond your defined goals, then it’s best to leave that stock and look for something else.
Part of this comes down to understanding what you’re investing in. You need to conduct research to see whether a stock is a volatile small-cap investment, a dividend-paying blue-chip stock, or something else entirely. That dividend stock might be the perfect fit for your portfolio if you’re saving for retirement, but a small-cap company that might not be around by the time you reach retirement probably wouldn’t be a good investment for achieving that goal.
Generating new ideas for what stocks are worth a closer look can be challenging. But, a good place to start is to think about what you already know. If you work in the tech sector, for instance, you might have an edge at analyzing tech stocks over the average stock investor. At the same time, if you have a strong interest in renewable energy, you might be able to find an advantage in evaluating renewable energy companies.
Of course, you don’t have to rely entirely on your own imagination to come up with ideas. There are tons of free and paid streaming news services, finance websites, and business forums where you can find suggestions for hot companies or exciting new trends. Whenever you approach a suggestion from a third-party service, make sure to think about broader market and social trends. Growing industries in particular, such as streaming or cloud computing at the moment, can be ripe areas to explore for underappreciated stocks.
Finally, there are plenty of paid services that will pick stocks for you. The Motley Fool’s Stock Advisor service, for example, has an extremely strong track record of picking stocks that have beaten the broader market. They also have specialized services like Motley Fool Augmented Reality which specializes in disruptive technology stocks.
The Investor’s Business Daily Leaderboard service, too, offers hand-picked stocks and easy-to-follow trading plans for beginning investors. However, it’s important to take these stock picks with a grain of salt and to do your own research – after all, it’s your money on the line at the end of the day.
Investing in stocks is a powerful way to grow your wealth over time and save for long-term financial goals like retirement. A lot of the work in stock investing comes before you ever purchase a stock – you have to put in the time to understand how stocks work and develop a trading strategy that works with your goals. Once you’re ready to start investing, it’s essential that you understand what it is that you’re investing in and do your research to find stocks that fit with the strategy you created.