Beginner’s Guide To Investing In Stocks: Our Best Tips and Tricks

Investing is one of the smartest financial decisions you can make. In fact, we believe it’s so important that we don’t consider it optional. 

Updated February 2024
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Fact checked by Cathy Gresham
Beginner’s Guide To Investing In Stocks

Most experts will insist that you should start investing as early as possible when you are young, in order to see compounding returns and build wealth. However, you can start investing whenever you want and if you haven’t started already, the time is now.

Investing is a way to maximize your life and have more freedom to do what you want, when you want. Investing can also be a means of creating a retirement plan for the future and in some cases can even offer some tax benefits too. But, you likely already know about the power of investing, but you are just unsure how to get started.

This is where our guide will come in handy. Here, we can offer you a comprehensive guide to getting started investing in stocks, whether you want to learn more about the stock market, how much you should be investing, the costs involved, or how to get started creating your own portfolio.

What Is The Stock Market

So, What Exactly Is The Stock Market?

Let’s start with the basics, with an overview of the stock market- what it is, what its purpose is, and what you need to know.

Over 58% of Americans have invested in the stock market, with this figure set to rise over the coming years. We’re actually shocked this percentage is so low and would have thought it should be much closer to 100%

So, what is the stock market? The term stock market or stock exchange is what we use to refer to several exchanges in which shares of public companies are sold, bought, and traded. Stock markets are therefore the venues in which buyers and sellers meet in order to exchange equity shares of publicly traded corporations.

The leading stock exchange in the United States is the New York Stock Exchange. It is also the world’s largest stock exchange, offering entrepreneurs the opportunity to raise capital with industry-leading technology and the help of experienced traders. The Nasdaq is the second largest exchange. While these two are by far the most important, there is a smattering of other exchanges as well, notably, there’s also the CBOE, where options are exchanged. Additionally, there are many other stock exchanges across the world. 

The stock market has an even bigger value to society. Stock markets allow for price discovery for shares of companies and corporations, and they also serve as a sort of barometer for the overall economy. Additionally, they provide liquidity for everyone from individual investors to early entrepreneurs and employees.

Stock exchanges help both sellers and buyers get a fair price, mitigate counterparty risks, and create a high degree of liquidity in the open market. You may see that stocks are offered on a primary or secondary basis. The vast majority of investing that most people do is in what’s called the secondary market. Now, if you are unsure what this means, we can break it down for you.

Being a primary offering means that corporations and companies are able to sell their shares to the public for the first time through the concept of IPO which means initial public offering. This is just one way companies can gain the capital that they need from investors. It’s also a way that the founders and employees can finally get liquidity from the shares they may have held for many years.

During a primary offering, or IPO, the company or corporation is therefore divided into several shares (often millions or even billions of shares), those shares are then sold to the public at a price per share. The stock market then acts as a marketplace for these shares to be sold to the public. A listed company on the stock market can then offer additional shares later through ‘follow-on offerings’, and ‘rights issues.’ They are also able to buy back shares or delist their shares.

Those who have invested in these company shares do so under the impression that the value of the shares will either rise, or they will receive dividend payments for those shares, or ideally, both. While IPOs (primary offerings) get a lot of attention, the vast majority of the time investors use the stock market to trade on what’s called the secondary market. The secondary market is just where investors are able to sell and buy securities that have already been issued for the first time.

Therefore, within a stock exchange, investors can also buy and sell shares and securities that they already own as part of the secondary market. The stock market is essential in stock investing because it ensures that there is liquidity, price discovery, and price transparency. It is a guarantee that all those interested in investing or selling stocks have access to accurate, clear data to buy and sell securities.

If you want to build wealth, then investing in stocks is the way forward. Stocks offer investors some of the greatest potential for capital appreciation and growth over the long term.

Now that you have an overview of the stock market and its function, you may be wondering how to get started with your own investments. The first thing you will need to consider is how much money you will need behind you to start investing in stocks for yourself.

How Much Money Do I Need To Start Investing In Stocks

How Much Money Do I Need To Start Investing In Stocks?

When individuals are new to investing, most have two questions in mind. These are ‘How much money do I need to start investing in stocks?’ and ‘How much money should I be investing in stocks?’. 

Many people are under the impression that they need thousands of dollars to start investing in stocks, but this is not the case. You do not actually need a lot of money to start investing. You can start with as little as $5-$10 thanks to fractional shares and zero-fee brokerages. 

So there is no real minimum sum of money that you need to invest in stocks, but it probably makes sense to have around $200 at least to $1,000 before it’s worth your time to get started. 

Many brokerages today have no minimums needed in order to open an account to start buying stocks. Therefore, at many institutions, you could theoretically open a brokerage account with just $1!

If you want to get started, then your first step is to consider buying a single share of stock. There are many penny stocks that trade for under a dollar, but these are incredibly high-risk investments. Most people are likely better off starting with fractional shares of ETFs, like VOO.  

Fractional shares are when you own less than one whole share of a company. These shares allow you to invest in stocks based on a dollar amount rather than a share amount and can be bought for as cheap as $5. For instance, you can buy a fractional share of a large company for around $5 instead of spending over $1,000 on a single, whole share. 

Fractional shares are the way to go if you want to start investing with little money, and you are new to the game. You may not be confident investing large sums of money, but you could have found some stocks that you want to invest in. 

Exchange Traded Funds (ETFs), function in much the same way as stocks do, but instead of being just one company, they are a fund of many companies. The fund buys shares in multiple companies (often hundreds) and you can in turn buy a share of the fund, thus owning a slice of many, many companies, but through only having to purchase a single share. 

Another method new investors particularly like is dollar-cost averaging. This is when you invest the same amount of money in a stock or ETF periodically, whether the price is going up or going down. 

Thereby, your dollar cost average in the position, since over time, when the price is high you buy relatively fewer shares and when the price is low you buy relatively more shares. 

Dollar-cost averaging also makes investing simpler and less emotional. To complete this strategy, you should invest the same amount of money, at a regular pace over a certain amount of time. It doesn’t matter what the price is, you simply keep investing. Because your money is spread out, you reduce the impact of volatility

Dollar-cost averaging also makes purchasing stocks more automatic. This method is a great way to start your investment plan, as it’s low effort, and helps avoid emotion-led mistakes.

How Much Should You Save Vs. Invest

How Much Should You Save Vs. Invest?

Many personal finance gurus will tell you to always have at least three months’ wages saved in a savings account should you fall on difficult times or lose financial security. So, how much of your finances should you be saving and how much should you be investing? 

Many people act under the assumption that they need to have a savings account at all times for emergencies and liquidity. 

Savings accounts are actually not the smartest financial option. Leaving your money idle, or earning a very small interest rate, will likely cause it to lose value constantly due to inflation, and you could be setting yourself up for a loss. 

Instead, it is a far better idea to put your money to work. Instead of having savings to fall back on, you should be investing the money that you would have put into a savings account. Interest rates in savings accounts are often not that great, so leaving a large chunk of money in a savings account is not going to earn you anything. 

If you invest that money in stocks, you can make far better returns and build up your wealth instead. And, you can still access the money if you need to in a pinch. Stocks “settle” in 3 days, so you can get access to your money quickly if you need to. Of course, investments can go down in value, including to zero, so it’s wise to invest in a broadly diversified portfolio. 

Your next question is likely ‘How much money should I invest?’. Well, this depends on your personal finances and your preference. 

We like to suggest shooting for as close to 50% of your after-tax income as you can get. The other 50% is for living – rent, clothes, food, vacations, education, etc. But if you’re not investing ~50% of your after-tax income, it is going to take you a very, very long time before you’re financially independent to a point where you can maintain your current lifestyle. We’re working on a longer form post on the math behind this, so watch out for that to come out soon. 

We also strongly suggest that you automate the process. Automated investing is one of the easiest and smartest ways to make the wealth-building process much simpler. When the process is automated, you are less likely to miss any funds from your paycheck that are automatically put into your investment account. 

Unsure what automating is? Well, for example- one of the simplest automatic investment options is a workplace retirement plan such as a 401(k). Companies may offer this benefit and you can try to maximize your contribution so that the company matches it.  

Many brokerage accounts also allow you to set up automatic investment plans. One of the best ways that you can do this is through a low-cost index fund that will track stock market indexes such as the S&P 500. That way, automatic transfers are invested quickly and easily into a well-diversified portfolio of stocks. 

So, now you have a more rounded idea of investing in stocks, how much money you need, and what steps to take, we’ll take you through the first steps to start investing.

How Can I Get Started With Automatic Investing?

To automate your investments, there are a few first steps to take:

  1. Set up an investment (brokerage) account.
  2. Choose the type of account you want, such as an IRA account or a taxable investment account.
  3. Choose your assets, decide on your goals, and comfort level when it comes to risks and time frame, and the platform can select assets for you, or you can choose your own. You can select assets from thousands of stocks, ETFs, mutual funds, or bonds.
  4. Link your account to a source of funds. This might mean setting up your paycheck to automatically deposit a certain amount. Or it might mean linking to a checking account. You will need to select how often the money will be transferred and automatically invested.
  5. Set to automatically invest extra cash. Once your funds are set to automatically deposit in your investment/brokerage account, you’ll need to set that account to automatically invest extra cash into your portfolio at some periodicity. 

Investing First Steps:

Now, when you are ready to start investing, we can take you through the basics. Whether you want to invest $1,000 or you just want to start investing a few extra bucks per week, you can start building your portfolio and wealth. 

Define Your Tolerance For Risk

Investing your money is all about putting it to work instead of leaving it in a savings account so that it can grow over time, but investing does come with the risk of losses. Therefore, it is vital that you consider what your tolerance for risk is. 

Stocks come in all shapes and sizes, from aggressive growth stocks to value stocks. Each type comes with its own level of risk. Once you know what your tolerance for risk is, you will know what kinds of stocks and investments you are comfortable with and willing to make. 

Decide On Your Investment Goals

In most cases, when you open an investment account, you will be asked a series of questions about your overall investment goals. These could be to build your wealth if you are starting out, or to protect your wealth if you already have built up some. Other goals could be to make enough money for a large purchase such as a home, or for your retirement. 

Ensure that you define your investment goals, as this can also help you determine the level of risk you are willing to take, and what sorts of investments you need to consider. 

Determine Your Investing Style

You also need to consider your investing style. Some more experienced investors will already have knowledge of the market, and they may want to manage their own investments. 

Other investors prefer to automate it and forget about it! If you are a beginner, then it could be worth getting help from a financial advisor or a broker to help you make the right financial investment decisions that work for your goals. If you do go the advisor route, make sure to find one who is a fee-only, fiduciary. 

You also need to think about what investments you want to make. You do not just have to invest in stocks, you can invest in mutual funds, index funds, alternatives, bonds, and exchange-traded funds or ETFs for short. 

For beginners, we like low or no cost, broad based, ETFs, like VOO, IVV, or QQQ. 

Introduction

Understand The Difference Between Investing In Stocks And Funds

If you do decide to invest yourself, and not take advice from a broker or financial advisor, then you will need to know the difference between investing in stocks and funds such as mutual funds or ETFs. 

Mutual Funds Or Exchange-Traded Funds

Mutual funds allow you to purchase small parts of various different stocks as part of a fund administered by a professional manager. Due to their high fees and poor record, we do not recommend investing in mutual funds.

Index ETFs on the other hand, tend to be relatively inexpensive, can be available through robo-advisors and in normal brokerages, and many are often less risky than investing in individual stocks. They also invest automatically in an index of stocks, unlike mutual funds which have money managers trying to guess which stocks are best (their record shows that they’re not very good at this). 

By investing in an index fund, you will own smaller parts of many different companies. These index funds are then put together to create a more diversified portfolio. 

If you are new to investing, then low or no-cost index fund ETFs can be the right choice for you. 

However, be sure to make your first selections carefully, as these statements are not true of every ETF. You can also find risky, aggressive, and high-fee ETFs, which can be the right choice if you know you want that risk and exposure, but are probably best left to more advanced investors. 

Individual Stocks

On the other hand, you have individual stocks. These are for just one specific company. If you are interested in buying stocks for a specific corporation, rather than multiple companies, then you can buy a single share or multiple shares for that company. 

While buying individual stocks can be profitable, funds are more diversified, which lessens the risk. For most investors, a diversified portfolio of mutual funds or ETFs is a better choice.

The Costs Of Investing In Stocks

As mentioned above, you do not need a lot of money to start investing in stocks. Stocks can range from a few dollars to hundreds of thousands of dollars to purchase (see Berkshire Hathaway Class A shares), but these are not the only costs involved when it comes to investing. 

Commissions And Fees

Brokerages make money in different ways. Historically, inventors faced high fees to make trades. However, the brokerage business has become more competitive and it’s now easy to find a brokerage that offer low or no-fee trading on many securities. Even if they don’t offer free trades on all trades, many offer free trading on the most popular index fund ETFs. 

Trading fees can range from small sums such as $1 or $2, but others can charge as high as over $10. While this does not sound like much, if you are trading a lot, then this can quickly add up and reduce the amount of money that you have and want to invest. 

Mutual Fund Loads

Mutual funds are managed by professionals, as these investments are in various companies and markets. As a result, there are high fees for this service. For instance, there is a Management Expense Ratio (MER), which is the fee paid by those who hold the shares of a mutual fund. This fee goes towards managing the fund. 

If a fund has a high MER, then this can affect the potential overall return of the fund. The management expense ratio can vary from very low percentages such as 0.05% all the way up to 1-3% every year. ~2% is common. These expenses have been demonstrated to have a surprisingly high drag on overall returns. 

You may also find that mutual funds have charges called loads. These are made up of front-end loads and back-end loads. These loads are similar to commissions paid, since you have to pay them as you’re buying into the position (front-end) or exiting (back-end). These are additional fees to the management expenses. While management expenses are charged on a periodic, ongoing basis, loads are often only charged once. 

ETFs also have loads but they are generally less than mutual funds loads. Nowadays, it is also much easier to find a no-load ETF, reducing your costs and maximizing your potential gains.

Choose your brokerage

Choose Your Brokerage 

The next step is to choose your brokerage for your investments. The broker you choose depends on your investing style and goals. Nowadays, there are ample opportunities to invest due to the number of online brokers. 

Brokers will either be a full-service or discount brokerage. A full-service brokerage offers a more comprehensive suite of financial services and advice for various investment opportunities, including estate planning, life events, financial planning, or retirement planning. Often they are helping put all of these services together in a comprehensive way for their client.

These services are often customized to the investor, with a lot of advice and help to make the process smoother. As you can imagine, these brokerage services tend to have higher fees for the service, which tend to range from 1-2% of assets under management. 

Full-service brokers tend to have fees for transactions, commissions on the number of transactions, for assets, and even membership fees. Yes, that’s on top of the 1-2% they’re already taking for managing your finances. 

On the other hand, discount brokers are a little different. These offer guidance and tools to help you make your own investment decisions and trade. They may have how-to guides and informational resources on their websites and apps for beginners, but they do not offer the full services that a full-service brokerage would. Essentially, they are the DIY option. 

You can select your own stocks and investments, and make decisions yourself. As a result, they tend to have very low fees, no minimum deposit or account restrictions and often offer robo-advisors that can make financial decisions for you. 

Robo-advisors work with algorithms to help make the best investments and use an index to help you make investment decisions that work for your goals and investing style. 

While we think each person’s situation is different and requires thoughtfulness around that, we tend to default to either discount brokerages and/or robo advisors. There are situations when you may want to use a full-service advisor, such as if you have a very high net worth and/or complicated citation, or if you’re unable or unwilling to manage your own portfolio, for whatever reason. 

It’s also worth noting that the lines between the 3 options noted above have blurred in recent years. For example, while our primary brokerage is famous as one of the largest and original brokerages, they also now offer robo investing, and advisor services for higher net worth clients who want them.

Personally, for brokerages, we like Fidelity and M1 Finance

Create A Diversified Portfolio

Create A Diversified Portfolio

If you want to be successful in your stock investing, then you have to have a diversified portfolio. This means investing in a variety of stocks rather than just one company. By investing in multiple companies, if one starts to do badly, then others may do well and you will limit your losses. 

You can also diversify your portfolio by ensuring that you have investments across several geographical areas. Diversification has been proven to increase risk-adjusted long term returns as it helps mitigate the risk to you should a company go bankrupt or do badly on the market. 

You have to keep in mind that stocks are just one type of asset, and you should be investing in a variety of assets to keep your portfolio diversified. You can diversify your portfolio across various asset classes including stocks, bonds, cash alternatives, real estate, or other commodities like gold and coal, as this offers you the greatest opportunity for growth.

Avoid Short-Term Trading

Be Prepared For A Downturn

Once you have started investing, you have to mentally prepare yourself for a downturn. Take a long term outlook rather than focusing on what is happening every day. It is best not to check the stock market every day or you could become too focused on compulsively checking in on your investments and start making quick, not-thoughtful decisions. 

Studies have shown that humans are more motivated to avoid a loss than they are to earn gains, so you really have to fight off your natural instincts when things are going badly. If you see red, it doesn’t mean that you should start selling right away. 

The nature of the stock market is that it fluctuates, and sometimes stocks may fall and sometimes they rise. If you are aware of your portfolio, what your options are, and how to manage it- then you can take a look at the wider picture before making any decisions.

Try A Stock Market Simulator Before Investing Real Money

If you are still a little unsure, as a beginner new to investing in stocks, you can try a stock market simulator. This can help you gather experience and practice investing without using real money. 

Stock market simulators can help you learn how to invest in a portfolio of stocks, ETFs and other securities. The simulator will track price changes of investments, show dividend payouts and get you used to the notion of fees. 

With a stock market simulator, you can make virtual trades without using real money. This can give you the experience you need to make investment decisions without risking any money yourself.

Avoid Short-Term Trading

Stock market investments are best done over the long-term. Investing in stocks is one of the optimal ways to grow long-term wealth, rather than focusing on the day to day or year to year as it can fluctuate. 

Some years the stock market may go up, and others it will go down. You have to play the long game. Short term trading should be avoided, as it can be risky and unpredictable as the stock market can be volatile in nature at times.

Monitor And Rebalance Your Portfolio Over Time

Monitor And Rebalance Your Portfolio Over Time

As mentioned above, you need to focus on the long-term goal rather than short term decisions. Monitoring your portfolio every day will not help you or change the health of your portfolio. The stock market will rise and fall over time, so you have to wait it out. 

It is best to buy individual stocks, mutual funds and ETFs over time, so you only need to revisit and edit your portfolio a couple of times per year to ensure that you are meeting your investment goals. 

However, if time has passed and you are thinking about retiring or moving your investments to more fixed-income investments, then you may have to monitor and rebalance your portfolio. 

This is where diversification plays a key role, because if your investments are in the same sector, then you will need to buy other stocks to keep your portfolio diversified and reduce risk.

Continue Learning

While trading is one of the best ways to learn more about the stock market and stock investing, you can always try to continue your education. We suggest starting with our article describing our favorite Personal Finance Books For Beginners: 4 Picks To Get You Started.

You can also hire a coach or mentor to help you narrow down your goals and investments, teach you how to monitor your portfolio, and make the right financial decisions that lead to gains rather than losses. You may also learn risk management techniques and help you build a diverse portfolio that can do well over time.

Summary

Summary

To summarize, if you are a beginner to investing in stocks, it can be overwhelming at first. Here, we have covered everything you could need to know to get started. For instance, you don’t actually need to have a lot of money to start investing in stocks. There are many options available with low or no fees to help you get into the game. 

With this guide, experience, and maybe even the help of a financial advisor or broker, you can put your money to work instead of leaving it resting in a savings account! 

As long as you consider your tolerance for risk, your overall investment goals, the costs you will incur, and which type of investments you want to make, you can make a smart decision about investing, and start building your wealth today.

Sources

Editor's Note:

At Personal Finance Guru, we want to help you maximize your lifestyle through personal finance. You can trust the integrity of our independent financial advice. Our opinions are our own and have not been provided, reviewed, approved, or endorsed by any advertiser or financial product provider. To support and grow the site, however, we may receive compensation from the issuers of some products.

Meet the Author:

Cody Beecham

Cody Beecham

Founder/Owner/Editor/Author

Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School. 

After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.

Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income. 

He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?

Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.