It can be hard to get started with stock investing. I remember looking at my computer screen years ago and being completely lost by all the numbers and financial terms. But here’s the thing: buying stocks doesn’t have to be hard or scary. Anyone can learn how to make money in the stock market if they have the right tools and mindset.
This guide will teach you everything you need to know, from what stocks are to how to take care of your investments so they do well in the long run. We’ll explain everything in plain English, whether you’re new to investing or just want to make sure you know what you’re doing.
Before you start, you need to know the basics of the stock market.
What stocks are and how they work
Let’s begin with the basics. Buying a stock means buying a small part of a company. It’s like buying a piece of your favorite pizza, but instead of pizza, you own a small part of Apple, Microsoft, or any other company that is publicly traded.
Stocks are shares of ownership in businesses.
Each share gives you a right to the company’s assets and profits. You own 0.01% of a business if you own 100 shares of it and there are 1 million shares outstanding. It may seem small, but you really own it and have certain rights, like the right to vote on important company decisions.
How supply and demand affect stock prices
The price of stocks goes up and down based on a simple idea: supply and demand. The price goes up when more people want to buy a stock than sell it. The price goes down when more people want to sell than buy. It feels like an auction that never ends.
I’ve seen this happen a lot before. A lot of people wanted to buy Zoom stock at the start of the pandemic because everyone was working from home. The price went up a lot because there was a lot of demand. Later, when people went back to work, demand dropped and the price went back down.
How well a company does affects the value of its stock.
The price of a company’s stock usually goes up over time if the company is doing well, which means it is making more money, selling more products, and growing. But this connection isn’t always clear or easy to see right away. Market conditions can cause stock prices to go down for great companies, and speculation can cause prices to go up for struggling companies.
There are different kinds of stocks and ways to invest.
Not all stocks are the same. Knowing the different kinds can help you make better choices about where to put your money.
What are the differences between common stocks and preferred stocks?
Most people who invest buy common stocks, which give them the right to vote and the chance for the price to go up. Preferred stocks are more like bonds because they usually pay fixed dividends and don’t have a lot of room to grow. Common stocks are usually the best choice for beginners.
A look at growth stocks, dividend stocks, and value stocks
Growth stocks are companies that are expected to grow faster than most. Think of Tesla or Amazon when they were new. These stocks don’t pay dividends very often because they put their profits back into the business.
Dividend stocks are stocks of well-established companies that regularly pay cash to shareholders. For decades, companies like Coca-Cola and Johnson & Johnson have paid dividends.
Based on financial metrics, value stocks seem to be trading for less than what they are worth. These are usually well-known businesses that are having some problems right now.
Stocks, mutual funds, and exchange-traded funds (ETFs) are all different.
You don’t have to choose stocks one at a time. Many people put their money into mutual funds, which then buy a wide range of stocks. ETFs work in a similar way, but they trade like stocks do all day long. I often tell beginners to start with broad market ETFs before they try to pick individual stocks.
How the Stock Market Works
Big stock exchanges and their hours of operation
The New York Stock Exchange (NYSE) and NASDAQ are the two biggest stock exchanges in the U.S. Both are open Monday through Friday from 9:30 AM to 4:00 PM Eastern Time. There is also trading outside of regular market hours, but beginners should stick to regular hours at first.
The roles of brokers, market makers, and government agencies
Brokers are the people who connect you to the market. Market makers make sure that there is always someone to buy from or sell to, which keeps things running smoothly. The SEC is in charge of everything to keep investors safe from fraud and manipulation.
Getting to know market orders, limit orders, and how trading works in general
A market order buys or sells right away at the price that is currently on the market.
A limit order only goes through if the price you set is met or better.
At first, I only used market orders when I invested, and sometimes I was surprised by how much I paid. I usually use limit orders now to have more control over my trades.
Setting the foundation for your investments and your financial goals
Taking a look at your finances
You need to be honest with yourself about your finances before you buy your first stock.
Looking at your current income, expenses, and debts
Write down how much money you make and spend each month. Put down everything, like rent, groceries, entertainment, and debt payments. This tells you exactly how much money you have to spend each month.
Figuring out how much money you can put into an investment
If you need the money in less than five years, don’t invest it. I learned this lesson the hard way when the market went down for the first time and I had to sell stocks at a loss to pay for unexpected bills.
Putting money into stocks after making an emergency fund
Before you invest any money in stocks, you should set up an emergency fund with enough money to cover 3 to 6 months’ worth of expenses in a high-yield savings account. This means you won’t have to sell your investments when the market goes down to pay for unexpected costs.
Setting Your Investment Goals and Timeline
Strategies for investing in the short term and the long term
Stocks are probably not the best choice if you need money in the next few years because they can change quickly. The stock market can be hard to predict in the short term, but it has always gone up over the long term.
Based on how the market has done in the past, setting realistic return expectations
The S&P 500 has made about 10% a year over the past 100 years, but you shouldn’t expect this every year. You might gain 30% in some years and lose 20% in others. Setting realistic goals keeps you from being disappointed and making bad choices.
Making sure that your investment goals match up with big life events and your financial needs
Are you putting money away for a house down payment in five years or retirement in thirty years? Your strategy is based on your timeline. Longer timelines let you use more aggressive growth-focused strategies, but shorter timelines force you to use more cautious ones.
Knowing how much risk you can handle
Finding out how much you’re willing to lose
If your portfolio lost 20% in a month, how would you feel? If that thought keeps you up at night, you might not be willing to take as many risks and should look into safer investments.
Risk assessment and investment allocation based on age
One common rule of thumb is to take 100 and subtract your age from it to find out how much of your portfolio should be in stocks. A 30-year-old might put 70% of their money in stocks and 30% in bonds. It’s not perfect, but it’s a good place to start.
Finding the right balance between risk and reward in your investments
More risk means more chance of getting a higher return. Investing doesn’t come with a free lunch. The most important thing is to find the right balance for your needs and goals.
Picking the Best Broker and Investment Account
Different kinds of investment accounts you can open
Taxable brokerage accounts and how flexible they are
You can take money out of these accounts whenever you want and invest in almost anything. But you will have to pay taxes on dividends and capital gains.
401(k), IRA, and Roth IRA: retirement accounts that are good for taxes
These accounts are good for taxes, but they have some rules. Traditional 401(k)s and IRAs let you deduct taxes right away, but Roth accounts let your money grow tax-free, and you can take it out tax-free when you retire.
Special accounts for saving for school and other goals
529 plans for school expenses and Health Savings Accounts (HSAs) for medical costs give you more tax breaks for certain things.
Comparing Services and Platforms for Brokerage
Full-service brokers, discount brokers, and robo-advisors
Full-service brokers charge more, but they give you personalized advice. Discount brokers allow you to trade at low costs while providing minimal assistance. Robo-advisors use algorithms to automatically manage portfolios for a small fee.
Most beginners will find that discount brokers like Fidelity, Schwab, or Vanguard offer the best mix of low costs and excellent resources.
Fees for trading, minimum account balances, and ongoing costs
Most big brokers now let you buy and sell stocks and ETFs without paying a commission. But be careful of account minimums, mutual fund fees, and other hidden costs that can lower your returns.
Tools for research, resources for learning, and ways to get help from customers
Look for brokers who offer research reports, educational materials, and customer service that is quick to respond. These resources are very helpful for learning and making smart choices when you’re just starting out.
Setting up an account and putting money in it for the first time
Required paperwork and steps to check it
You’ll need to give personal information and work history and answer questions about your investment goals and experience. It usually takes a few business days for this to happen.
Ways to put money into your investment account
Most brokers let you send money through bank transfers, check deposits, and wire transfers. Bank transfers usually don’t cost anything, but they take a few days. Wire transfers, on the other hand, are faster but cost money.
Learning about SIPC protection and the security features of your account
If your broker goes out of business, the Securities Investor Protection Corporation (SIPC) will protect your account up to $500,000. To keep people who shouldn’t be able to get into your account from doing so, turn on two-factor authentication and other security features.
Putting together your investment plan and portfolio
Using Fundamental Analysis to Choose Stocks
Looking at key metrics and financial statements
If you want to pick individual stocks, you should learn how to read basic financial statements. Pay attention to how much money you’re making, how much you’re spending, and how much debt you have. Don’t worry about becoming an expert; most investors only need to know the basics.
Looking at a company’s profits, sales growth, and debt levels
Find companies that have steady revenue growth, rising profit margins, and debt levels that are easy to handle. Stay away from businesses that are losing sales or have too much debt that could put them out of business.
Analysis of the industry and evaluation of competitive positioning
Think about how the company stacks up against its competitors in its field. Are there benefits that competitors can’t easily copy? Is the industry getting bigger or smaller?
Principles of Diversification and Asset Allocation
Putting risk across different types of businesses and sectors
Don’t put all of your eggs in one basket. Put your money into a variety of industries, company sizes, and places around the world. This makes it less likely that one bad investment will have a big effect.
Investing in both domestic and international stocks to spread out your risk across different areas
Historically, U.S. stocks have done well, but investing in stocks from other countries can give you more chances and lower your risk. Think about putting 20 to 30 percent of your stock portfolio into international markets.
Finding the right mix of stocks, bonds, and other types of assets
You shouldn’t only invest in stocks. When the stock market is unstable, bonds, real estate, and other assets can help keep your portfolio stable and give you more options.
Different Ways and Methods of Investing
Dollar-cost averaging for steady investing
Dollar-cost averaging means putting money into the market on a regular basis, no matter what the market is doing, instead of all at once. This method makes market timing less important and helps people stay disciplined.
I’ve been using this strategy for years, putting the same amount of money into my investments every month without thinking about it. It takes feelings out of the equation and helps you build wealth steadily over time.
Value investing and growth investing are two different ways to invest.
Value investors look for stocks that are trading for less than their true value. Even if they look expensive right now, growth investors are interested in companies that are likely to grow. Both methods can work, but they need different skills and personalities.
Investing in index funds to get a broad view of the market
Index funds follow market indexes like the S&P 500, which means you can quickly diversify your investments without spending a lot of money. A simple portfolio of broad market index funds is a great way for most investors to get good long-term results with little work.
Taking care of your investments and making sure they last long-term
Keeping an eye on how well your portfolio is doing
Making systems to keep track of your investments
Most brokers offer tools to help you keep track of your portfolio, but you could also use spreadsheets or apps like Personal Capital. Keep an eye on your overall allocation and performance, but don’t worry too much about daily changes.
Understanding how the market changes and keeping your mind on your long-term goals
The markets will change, sometimes in big ways. During the financial crisis of 2008, stocks fell by more than 50%. But investors who stuck with it and kept putting money into the market during the downturn saw great returns in the years that followed.
When to look over your portfolio and make changes to your asset allocation
Check your portfolio every three months and rebalance it every year or when your allocations get too far away from your goals. This means selling investments that have done well and buying those that have done poorly, while keeping the level of risk you want.
Tax Planning and Optimization
How capital gains taxes work when you sell stocks
Long-term capital gains tax rates are lower for profits from stocks held for more than a year. If you hold stocks for less than a year, you pay higher taxes on them as regular income.
Tax-loss harvesting strategies to lower your tax bill
You can lower your tax bill by selling investments that are losing money to make up for gains from investments that are winning. But be careful of the wash sale rule, which says you can’t buy back the same investment within 30 days.
Getting the most out of tax-advantaged account contributions and benefits
Before putting money into taxable accounts, put money into 401(k)s, IRAs, and other tax-advantaged accounts. These accounts offer big tax breaks that get bigger over time.
Things You Shouldn’t Do
Mistakes to avoid when investing emotionally and timing the market
Fear and greed are the worst things that can happen to investors. Don’t sell in a panic when the market goes down or buy hot stocks when the market is up. No matter what happens in the market, stick to your long-term plan.
Risks of too much and too little diversification
It’s important to have a variety of investments, but having too many individual stocks can be hard to keep track of and may lower your returns. On the other hand, putting too much money into a small number of investments makes things riskier than they need to be.
Following market trends and chasing hot stocks without thinking
It is usually too late to make money when everyone is talking about a hot stock. Don’t follow the latest trends; instead, look for companies with strong fundamentals.
In short
Investing in stocks can help you build wealth over time, but you need to learn, be patient, and stick to your plan to be successful. Learn the basics of the market and be honest with yourself about your finances and how much risk you’re willing to take. Pick the right accounts and brokers that fit your needs and style of investing.