1. Decide how you want to invest in stocks
There are several ways to approach stock investing. Choose the option below that best represents how you want to invest, and how hands-on you’d like to be in picking and choosing the stocks you invest in.
2. Open an investing account
Generally speaking, to invest in stocks, you need an investment account. For the hands-on types, this usually means a brokerage account. For those who would like a little help, opening an account through a robo-advisor is a sensible option. We break down both processes below.
Worth noting: A 401(k) is a type of investment account, and if you’re participating in one, you may already be investing in stocks, likely through mutual funds. However, a 401(k) won’t offer you access to individual stocks, and your choice in mutual funds will likely be quite limited. Employer matching dollars make it worth contributing despite a limited investment selection, but once you’re contributing enough to earn that match, you can consider investing through other accounts.
This may sound expensive, but the management fees here are generally a fraction of the cost of what a human investment manager would charge. For this most robo-advisors charge just 0.25% to 0.50% of your assets under management. And yes — you can also get an IRA at a robo-advisor if you wish.
As a bonus, if you open a robo-advisor, you probably needn’t read further in this article — the rest is just for those DIY types. Here are the two overall winners from NerdWallet’s latest robo-advisor comparison: Wealthfront and Betterment.
3. Know the difference between stocks and stock mutual funds
Going the DIY route? Don’t worry. Stock investing doesn’t have to be complicated. For most people, stock market investing means choosing among these two investment types:
Stock mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs are a kind of mutual fund that track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build a diversified portfolio. Note that stock mutual funds are also sometimes called equity mutual funds.
Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.
4. Set a budget for your stock investment
New investors often have two questions in this step of the process:
How much money do I need to start investing in stocks? The amount of money you need to buy an individual stock depends on how expensive the shares are. (Share prices can range from just a few dollars to a few thousand dollars.) If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds often have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price — in some cases, less than $100).
Are stocks a good investment for beginners?
Yes. In fact, everyone — including beginners — should be invested in stocks, as long as you’re comfortable leaving your money invested for at least five years. Why five years? That’s because it is relatively rare for the stock market to experience a downturn that lasts longer than that.
But rather than trading individual stocks, focus on stock mutual funds. With mutual funds, you can purchase a large selection of stocks within one fund.
Is it possible to build a diversified portfolio out of individual stocks instead? Sure. But doing so would be time-consuming — it takes a lot of research and know-how to manage a portfolio. Stock mutual funds — including index funds and ETFs — do that work for you.
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