Learning to invest starts with learning how to invest in stocks. Historically, returns on equity investments have outperformed many other assets, making them a powerful tool for those looking to grow their wealth. Our guide will help you understand how to start your investment journey by learning how to buy stocks.
Different ways to invest in stocks
There is more than one way to invest in stocks. You can opt for any one of the following approaches, or use all three. How you buy stocks depends on your investment goals and how actively you want to be involved in managing your portfolio.
Invest in individual stocks: If you enjoy researching and reading about markets and companies, buying individual stocks would be a good way to start investing. Even if the share prices of some companies seem quite high, you can look into buying fractional shares if you are just starting out and only have a modest amount of money.
Invest in stock ETFs: Exchange-traded funds (ETFs) buy many individual stocks to track an underlying index. When you invest in an ETF, it's like buying stocks from a very broad selection of companies that are in the same sector or comprise a stock index like the S&P 500. ETF stocks trade on exchanges like stocks, but provide more diversification than owning an individual stock.
Invest in equity mutual funds. Mutual funds share some similarities with ETFs, but there are important differences. Actively managed mutual funds have managers who select a variety of stocks in an effort to outperform a benchmark index. When you buy shares of a stock mutual fund, your profits come from dividends, interest income and capital gains. Lower-cost index funds are mutual funds that work more like ETFs.
Keep in mind that there is no right or wrong way to invest in stocks. Finding the best mix of individual stocks, ETFs and mutual funds can take some trial and error as you learn to invest and build your portfolio.
Select How to invest in stocks
There are a variety of accounts and platforms that you can use to buy stocks. You can buy stocks yourself through an online brokerage, or you can hire a financial advisor or robo-advisor to buy them for you. The best method will be the one that is consistent with how much effort and guidance you would like to invest in the process of managing your investments.
Open a brokerage account: If you have a basic understanding of investing, you can open an online brokerage account and buy stocks. A brokerage account puts you in the driver's seat when it comes to picking and buying stocks.
Hire a financial advisor: If you'd rather have more advice and guidance on buying stocks and other financial goals, consider hiring a financial advisor. A financial advisor helps you determine your financial goals and then buys and manages your investments for you, including buying stocks. Financial advisors charge fees, which can be a flat annual fee, a per-trade fee or a percentage of the assets they manage.
Choose a robo-advisor: Robo-advisors are a simple, very cheap way to invest in stocks. Most robo-advisors invest your money in various ETF portfolios, buy assets and manage the portfolio for you. They are generally cheaper than financial advisors, but you rarely have the benefit of a live person to answer questions and guide your decisions.
Use the direct stock purchase plan: If you'd rather invest in just a few stocks, many blue-chip companies offer plans that allow you to buy their stock outright. Many programs offer commission-free trades, but may require additional fees when selling or transferring shares.
Keep in mind that no matter how you choose to invest in stocks, at some point you will likely pay fees for buying or selling stocks or for managing your account. Pay attention to the fees and expense ratios of both mutual funds and ETFs. Don't be shy about asking for a fee schedule or speaking with a customer service representative at an online broker or robo-advisor to advise you on the fees you may incur as a customer.
Start investing in stocks
Choose individual stocks, ETFs or mutual funds that match your investment preferences and start investing. If you have decided to work with a robo-advisor, the system will invest the required amount in a pre-planned portfolio that matches your goals. If you go with a financial advisor, they will buy stocks or funds for you after discussing it with you.
Once your order is successfully executed, the securities will be in your account, and you will start enjoying the rewards of the stock market. And yes, your funds will reap dividends and experience losses as the economy changes, but in the long run, you'll be participating in an investment sector that has helped investors grow their wealth for over a century.
Consider enrolling in a Dividend Reinvestment Plan (DRIP) for your first stock purchases. Reinvestment plans take the dividends you earn from individual stocks, mutual funds or ETFs and automatically buy more shares of the funds or stocks you own. You may end up owning fractional shares, but this will keep more of your money working and less sitting in cash.
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