Not sure where to get started investing in stocks, let alone how the investment process works? You’re not alone – but it’s not a complicated process like you may think! Investing in stocks is relatively easy, doesn’t take a lot of time to get started, and doesn’t cost any money (aside from what you’re investing).
To make things easier, we’ve put together this beginner’s guide to investing in stocks, including how investing works, what you need to get started, what to invest in, and where to open your investment account. We’ll even show you a few ways to get free stock for getting started.
How Investing in Stocks Works
Investing in the stock market appears to be an intimidating venture. But, in reality, it’s a straightforward process that takes little to no experience at all – especially with the advanced technology tools we have today.
To grasp how to invest in stocks, it helps to have an idea of what happens to your money when you invest. Here’s how it works, assuming you’ve opened an investment account already.
- You deposit money into your investment account
- Your investment bank allows you to see the available investment options, much like an online marketplace
- You choose what you want to invest in (stocks, mutual funds, exchange-traded-funds)
- Your investment bank takes your money and purchases your chosen investment for you
- Much like your online banking account, your online investment account lets you see your balance, statistics, and growth over time
- When you choose to have access to the money, you then elect to sell your shares and withdraw your money as needed.
In reality, you don’t need to remember that process at all. In short, all you do is open an investment account – much like a bank account – deposit money, and choose what to invest in. That’s it!
What You Need to Start Investing in The Stock Market
Before you get started investing in the stock market, there are a few things you need to know and do so you can follow the process as mentioned above.
Here’s what you need to get started:
- Know your risk tolerance
- Understand the basic types of investments
- Choose an investment strategy
- Open a brokerage account and invest!
Know Your Risk Tolerance
Your risk tolerance refers to how comfortable you are with volatility in your account value. Are you okay with your account potentially losing 1%, 5%, or even 10% per month? If not, you would elect to invest in a more conservative investment approach (which we’ll discuss here shortly).
To determine your risk tolerance, consider the following:
- How comfortable are you with account volatility?
- How long do you intend to have your money invested?
- How much experience do you have investing in stocks?
- What is your overall goal of investing? (Growth, retirement, education, etc.)
Questions like this allow an investor to determine what types of investments they wish to purchase. There are a lot of available risk tolerance calculators on the internet. All you have to do is search for “risk tolerance calculator” or “risk tolerance questionnaire,” and you will find multiple options. Here are two helpful questionnaires you can use:
After answering questions in those questionnaires, it will give you a result to help you know what type of investor you are – and thus how you should invest your money.
Understanding Different Types of Investments
Now that you know how much risk you can reasonably accept, you should have a basic understanding of the different types of investments to choose from. All stock market investments are made up of shares of ownership in a company or entity. From there, investment banks have created multiple vehicles made up of these shares. They include:
- Individual shares of stock – When you buy shares of Apple (for example), those shares represent ownership in Apple, and thus you own a small percentage of that company. Keep in mind that investing in individual stocks can be a much riskier approach to investing and should be used cautiously. For beginners, it is recommended you start with one of the other options listed below.
- Exchange-Traded-Funds (ETFs) – An entity that baskets a group of stocks together and offers ownership in the fund via shares of that fund (much like owning shares of an individual company). When you buy one share of an ETF, you are purchasing ownership in potentially hundreds of companies.
- Mutual Funds – A pool of money given to professional investment managers to invest on their client’s behalf. When you buy into a mutual fund, you contribute to a total pool of money and own a percentage of the fund and its respective growth.
The biggest difference between individual shares of stocks, ETFs, and mutual funds is that the latter two consist of owning potentially hundreds of companies. You’re diversified by nature, and thus if one company performs poorly, other companies are likely performing well.
Choose an Investment Strategy
Don’t let the word “strategy” scare you. It merely means your approach to managing your investment risk and return. It will include characteristics that you follow to ensure the best output over time. After analyzing your risk tolerance and knowing the available stock market investments (both discussed above), you can define your strategy.
There are two types of investors – active investors and passive investors. Active investors usually invest in individual stocks and often participate in day trading (not recommended for beginners due to very high risk). Passive investors take a long-term investment approach and follow sound investment strategies like diversification and “buy and hold” strategies.
For beginners, it’s highly recommended you follow the passive investment approach. Passive investors are long-term investors, diversify their money among many different companies and industries, and they often have their investments set on automatic investing.
Some characteristics and principles to follow as a passive investor include:
- Diversification: Spread your money out among multiple companies. This is done by buying ETFs or Mutual Funds or owning at least 15 individual companies in different markets and industries if you buy individual shares. “Don’t put all your eggs in one basket!”
- Buy and hold: Buy your investments and plan to hold onto them without making any withdrawals for at least five years. The stock market is volatile in the short term but has an indefinite growth trend for the long-term.
- Automatic investing: Set your investment contributions on autopilot and have them transferred and invested every week, two weeks, or month. This is also known as Dollar Cost Averaging. Your average cost per share purchased will be lower if you make multiple regular purchases over time.
- Index investing: An index fund is simply a fund with a list of companies used to measure the growth of either the entire stock market or a specific stock market industry. For example, the S&P 500 comprises 500 of the largest companies in the US and represents approximately 80% of the entire stock market. This index is used to measure how the whole stock market is performing. Investors can choose to invest in an ETF, or Mutual Fund made up of the same 500 companies included in the S&P 500 index. The average return of the stock market as a whole is approximately 8% – 10% per year, and thus an investor can assume a similar return when investing in the S&P 500.
To make investing even more manageable, companies like Atom Finance aggregate all the data, news, analytics, and helpful investing tools in one place. This makes it easier to follow your chosen investment strategy and gain additional access to other investors and what they are doing. If you want extra help investing, then Atom Finance is recommended, and it’s free to use!
Opening Your Investment Bank Account
By now, you should have a good idea of how investing works, your risk tolerance, and the different investment vehicles and characteristics to choose from. Lastly, we need to open your investment bank account – also known as a brokerage account.
A broker is simply a middleman between two people who has access to multiple product offerings. In this case, an investment bank serves as a broker because they are the middleman between you and the investment vehicles you purchase and have access to almost all the available stock market investments. Thus, the term “brokerage account.”
When considering where to open your investment account, keep the following things in mind:
- Do they have fees? If so, how much are they?
- Is there a minimum deposit or investment requirement?
- Do they offer all the investment vehicles you wish to use?
- Are they accessible and easy to use? Do they have a mobile app?
- Do they offer fractional shares? (traditionally, investment banks require that you purchase whole numbers of shares. If you want to invest in Amazon, it’d cost thousands of dollars for one share. Fractional shares allow you to invest any dollar amount and own a fraction of a share).
M1 Finance was made to make investing easy, automatic, and free. They have a unique approach to investing, allowing its users to invest in ETFs or your own fund comprised of your favorite companies, called “pies.” M1 Finance also allows you to invest in fractional shares. (Read our M1 Finance Review.)
They don’t have any fees or minimum balance requirements to open an account, so M1 Finance is a great option for beginners as well as more experienced investors. They offer almost any publicly traded company and hundreds of different ETFs to choose from. Other features of M1 Finance include:
- A free checking account
- A premium checking account with unlimited cashback options
- The ability to borrow against your investment account – up to 35% of your total account balance for accounts with at least $10,000. No credit checks.
When you choose to invest in your own “pie,” you simply create your own portfolio of your chosen companies and select what percentage of your portfolio comprises each company. You may choose to elect 20 companies that each represent 5% of your portfolio. Each time you invest, your money will be spread out among all twenty companies.
Should you wish to have expert help, choose from one of M1 Finance’s expert-created funds, or invest in a popular ETF like an index ETF that matches the S&P 500 index.
They also provide necessary details of each investment vehicle you wish to purchase, as well as the latest stock market news and updates daily.
Overall, M1 Finance is an excellent option and it’s one of our top recommendations.
Robinhood is well known for its simple platform and its commission-free trading. They are one of the first platforms that transitioned to offer investing in the stock market without any charge. They allow you to invest any dollar amount into any company or ETF and offer thousands of investments to choose from. (Read our Robinhood Review.)
Other features offered by Robinhood include:
- A free interest-bearing checking account
- Access to trade options contracts (for more advanced investors)
- Access to investing on margin (also, for more advanced investors)
- Essential news updates and market commentary
- Earn free stock for referring friends and family
- Free stock for opening an account!
You can elect to pay an additional $5 per month for their premium service that gives you added research reports on each company.
Public is another popular investment company that allows its users similar features offered by M1 Finance and Robinhood, but with a social twist. Their unique feature includes the ability to socialize with other investors about different companies, investment strategies, and market updates. (Read our Public Review.)
You can choose to have your portfolio public so others can see what investments you own, and you can see other people’s portfolios to see what others are investing in. Much like social media, you can select who you wish to follow. You can even search for investments from different categories like “wearable technology” or “stay at home,” for example.
Other popular features of Public include:
- Invest in fractional shares
- Invest in ETFs
- Earn free stock for referring friends and family
- Social feeds
- Built-in safeguards for investing in risky stocks
For an added social aspect to investing, Public is second to none!
What Are You Waiting For?!
Investing does not need to be a difficult task and can be done even if you have zero experience. In summary, here’s what you have to do:
- Determine your risk tolerance
- Understand the basic types of stock market investment vehicles
- Choose investment strategies that align with your risk tolerance
- Choose a reputable company to invest with and open an account
Keep a long-term mindset. Always diversify among at least 15 companies or invest in ETFs and mutual funds. Set your investments on automatic and avoid risky strategies like day trading.