How to Invest in Stocks: A 10-Step Guide to Master the Market

If you’ve never invested in the stock market before, it can be an intimidating process. Stocks are not like savings accounts, money market funds, or certificates of deposit, in that their principal value can both rise and fall. If you don’t have sufficient knowledge of investing — or emotional control — you can lose most or even all of your investment capital.

Why You Should Start Investing… NOW

Numbers don’t lie, and the truth of the matter is this: The earlier you start investing, the better off you’re likely to be. The longer you keep your money invested, the more time it has to grow. Earlier investors have a better chance of seeing a more significant overall return on their investments by the time they withdraw money from the market.

We’ve made this guide with 10 steps to jumpstart your stock-market investing journey. If you want to get into investing but don’t feel like an expert, read on.

Step 1. Asses Your Financial Baggage and Determine Your Goals

Before you get into investing of any kind, you first have to make sure that your overall financial situation is in a position to accommodate the new activity. Your financial baggage includes everything from income to debt, to your household budget.

Specific considerations include:

• Employment – make sure that both your job and your income are secure enough to allow you to begin investing.
• Debt – if you have a significant amount of outstanding credit, you may want to pay some debt down before you begin investing; you should never invest money you can’t afford to lose, and that’s the position you’ll be in if you have too much debt.
• Family situation – if you just welcomed a baby into the world, you may need all of your available income to help with the new arrival; family situations should be stable before you begin investing.
• Your household budget – you should have some room in your budget to direct cash into your investment ventures.

It’s also helpful to consider your goals and ask yourself why you want to start investing: ‘

• Are these investment accounts for your retirement?
• Is this money for a shorter-term goal, more like 5–6 years away?
• Will anyone else have access to this money?

Using these three questions as the starting point of your investing will help shape the decisions you need to make next. And they require no knowledge of the stock market! These are highly personal questions that each investor needs to answer for themselves. There’s no right answer, just the correct answer for your life and goals.



Investing makes the most sense for the longer term. You generally don’t want to invest money that you need in fewer than five years, as there is a risk of losing that money in a downturn.

Step 2. Put Some Money to the Side

Before you put any of your money at risk, you should first have some put away that will not be subject to any risk whatsoever. A cash reserve equal to at least three months’ living expenses should be the minimum, and it should sit in nothing riskier than certificates of deposit or money market funds.

The purpose of the cash reserve is twofold: to act as an emergency fund in the event of a temporary income disruption or other financial emergencies, and to keep you from panicking should your risk type investments take a sudden dive.

Put some money where you know it will be safe. The following saving accounts are a great way to do that:

Step 3. Open a Retirement Account

Once you have a well-stocked emergency fund set up, the best place to begin investing is in a retirement account. This retirement account can be a 401(k) plan (or its equivalent) through your employer, or an Individual Retirement Account (IRA) if there is no employer plan.

Retirement accounts are an excellent start because they represent long-term investing. Besides, they are tax-sheltered — and can produce immediate tax savings too — and are typically funded through payroll deductions. You can think of them as patient capital, where you have decades to accumulate and grow your money.

One of the best aspects of a retirement account is that you can build up money in the plan without actually investing any money until you’re ready to do so. You can keep it all in a money market account within the plan until you feel comfortable adding stocks and funds to the plan.

There are a lot of retirement investment accounts, and you may or may not have access to all of them. Here’s a quick rundown of the most common retirement accounts you might come across:

• 401(k)
• 403(b)
• Roth IRA
• Traditional IRA
• SEP IRA

There are a lot of differences between these accounts. And you may not be able to open and fund all of them.

Employer-sponsored Retirement Accounts

Generally, your first step would be to find out if your job offers a workplace-sponsored retirement account like a 401(k) or a 403(b). Individual companies may have limits on what you can invest in or how long you have to work at the company before you can begin contributing to the plan.

These accounts may also come with an employer match, which is when an employer contributes the same amount of money or a percentage of what you add to the account. It’s free money for your investments!

Reach out to your HR department and see what retirement plans are offered. Then get the ball rolling on signing up for one. And for our brand new investors, feel free to ask HR a lot of questions about how the plan works. You want to understand as much as you can about your plan when you begin to invest money in it.

Individual Retirement Accounts (IRAs)

After you sign up for a workplace retirement plan, you have the option of opening an IRA for yourself. IRA stands for “individual retirement account.” Anyone over the age of 18 with income can open one for themselves. IRAs are not generally tied to an employer, making them appealing to freelancers and part-time employees.



There are several options for IRAs, and they each have different details to them. There are income limits for a Roth IRA, for example. Do some research on which account is best for you before you open any of them. You can start with our article that compares various retirement accounts.

Here’s a comparison of the top three stock brokers that offer IRAs.

Quick Comparison

Step 4. Start Investing with a Low-Cost Online Service

Once you have a retirement account up and running, it’s time to start investing for your non-retirement investing needs.

Use a Robo Advisor

If you’re not the type of person who wants to DIY their investing accounts, you might be happy using a robo advisor service.

Robo advisors use algorithms to help create the ideal portfolio mix for your needs and risk tolerance. Usually, you don’t get to pick and choose individual stocks or funds — the robo advisor does it all for you. You can truly “set it and forget it.”

Betterment is an excellent robo advisor choice for new investors because:

1. There’s no initial minimum deposit requirement
2. You can build the fund with periodic contributions as low as $100 per month
3. Its fees are among the lowest in the industry.

One disadvantage of a robo advisor such as Betterment is that investing in the account is limited (get our full Betterment review here). You buy into either a basket of stock-related ETFs or a basket of bond ETFs. However, this is not a problem when you’re first starting out.

Still, when you’re ready to spread your capital around the investment universe and particularly into individual stocks, you’ll need to look for a full-service broker to meet your needs.

Use an Online Stock Broker

As opposed to hands-off robo advisors, online stock brokers let you do the trading yourself. That means researching, choosing, buying and selling stocks, options, funds, etc., on your own.

A great broker choice for beginners is Fidelity. One of the largest financial firms in the world, Fidelity, has it all — every conceivable investment choice and a long history of top-caliber customer service to support it.

Fidelity is also commission-free, so you won’t be paying for any stock or options transactions. As well, Fidelity offers access to more than 4,700 funds.



Other brokers you may want to consider are E*TRADE, Ally Invest and TD Ameritrade. Here’s a quick comparison among the four:

Quick Comparison

Step 5. Begin with Mutual Funds or Exchange Traded Funds (ETFs)

When you begin investing, you’ll be far better off with mutual funds and ETFs than plunging right into stocks. Funds are professionally managed, and this will remove the burden of stock selection from your plate. All you need to do is determine how much money you want to put into a given fund or group of funds, and then you’re free to get on with the rest of your life.

One of the advantages of mutual funds is that you also don’t have to worry about diversification. Since each fund holds numerous stocks, diversification will already be built into the fund.

Step 6. Stay with Index Funds

To make mutual fund investing even more hassle-free, stick with index funds. For example, index funds that track the Standard & Poor’s 500 index are invested in the broad market, so your investment performance will track that index precisely. While you’ll never outperform the market in an index fund, you’ll never under-perform it either. As a new investor, this is as it should be.

Step 7. Use Dollar-Cost Averaging

Dollar-cost averaging is the process of buying into your investment positions gradually, rather than all at once. For example, rather than investing $5,000 in a single index fund, you can make periodic contributions of, say, $100 per month into the fund. By doing this, you remove the possibility of buying at the top of the market. Instead, you’re buying into the fund at all different times and continuously. This also eliminates the “when” question, as in when to invest in a given security or fund.

Even better for you, dollar-cost averaging works beautifully with payroll contributions and is a natural fit with mutual funds and ETFs.

Step 8. Get Some Investment Education

We could have made this step number three, with the intention that you have some understanding of investing before doing anything at all. Fortunately, mutual funds and ETFs — with the help of index funds and dollar-cost averaging — remove that necessity. You can begin investing immediately, even if you’re a novice.

But if you want to move beyond funds, payroll contributions, and dollar-cost averaging — and into holding individual stocks — you’ll need to learn all that you can about investing before you do.

While you are accumulating money for investments and piling them into mutual funds and ETFs, you should use this time to educate yourself about the game of investing. Read books, listen to CDs, read The Wall Street Journal, take a course or two at a brokerage firm or even a community college, join investment forums, and regularly visit investment websites, like InvestorJunkie.com.

Come up with an investment strategy that works for you. Are you a risk-averse, conservative investor, or are you going to be aggressively trying to beat the market? Are you investing $5 and planning for the long term, or are you investing $1,000,000 and trying to secure wealth for generations?

To become a good investor, you’ll need to surround yourself with investment experts and learn all that you can. The idea is to become “fluent” in investments before you begin investing with real money.

Still another option is to work with an online broker that offers virtual trading — that is, trading securities on paper only. This provides you with a valuable opportunity to test out investing strategies before actually committing your own money. Several online brokers offer this service, including TD Ameritrade.




The more you know before you begin investing, the lower the amount of risk you’ll be taking on.

Step 9. Invest in Individual Stocks Gradually

When you finally feel comfortable enough to begin investing in stocks, be sure that you do it gradually. You generally don’t have the dollar-cost averaging feature when investing in individual stocks, so you’ll have to develop your method for doing this on a gradual basis.

Since you will already have significant positions in mutual funds and ETFs, you can begin investing in stocks one at a time as you work toward building a portfolio. The fund positions should prevent overexposure to a single stock, as long as you make sure that your position in the stock represents only a small minority of your total portfolio (generally 10% or less).

Never overload in a single stock. When you are starting out, take a minimal position in one stock — generally 100 shares to take advantage of the best pricing — and then move into another stock. Repeat the process until you have several stock positions in your portfolio, in addition to your mutual funds and ETFs.

Step 10. Don’t Forget to Diversify!

If you have set up a cash reserve, a retirement plan, and an investment account, and have begun stocking the retirement and investment accounts with mutual funds and ETFs, you’ve already taken a huge step toward diversifying your portfolio.

Adding individual stocks will further diversify your cash and fund holdings. But while you are building your portfolio, you’ll also need to spread your capital out among various equity sectors.

For example, depending on your age and risk tolerance, you might want to have some of your portfolio invested in bonds, growth and income funds, and international funds. You may also want to consider high dividend stocks among your individual stock holdings. Income earning securities tend to be less volatile than pure growth stocks, particularly in bear markets. You’ll want to develop a balance between your growth assets and your income- or growth and income-holdings.

A good management firm such as Fisher Investments can help maintain the proper diversification and allocation in your investment account.

 

 

Source:investorjunkie.com