How to start investing in stocks

Stock investing can help build wealth by making your money work for you. And you don’t have to be a financial whiz to do it. Although you can eventually dive deep into complex techniques if you want, getting started takes some time, thought, and knowledge of basic concepts.

In this article, we’ll guide you through a step-by-step process to start investing in stocks, including defining some key terms you should know.

Get Motley Fool Stock Advisor – Now $89 for new members

How to start investing in stocks

Investing in stocks doesn’t have to be difficult. Follow these steps to get started today.

1. Choose an investment method

The first step is to decide how you want to manage your investments. How much time do you want to spend on investing? How hands on do you want to be? You have three options to choose from:

• Manage your own portfolio: Also known as active investing, managing your own portfolio leaves all the choices up to you. You decide which stocks to buy and when to trade. This method is best suited for experienced investors who are willing to commit significant time to their investments, so beginners are better off choosing one of the two options below.
• A broker uses: It is a form of passive investing. You rely on an experienced portfolio manager who chooses the best investments for your goals, monitors your portfolio and adjusts it as needed. If you are new to investing, becoming a broker can be a great way to get started.
• A robo-advisor uses: Robo-advisors are another form of passive investing. You identify your investment goals and risk tolerance and the service automatically manages your portfolio for you. Robo-advisors tend to be less expensive than human advisors and are a great option if you want to “set it and forget it.”

Get Motley Fool Stock Advisor – Now $89 for new members

2. Create an investment budget

The next step is to determine how much you want to — and can afford — to spend on the investment. Review your monthly budget to make sure you have enough money to spend on your daily expenses, savings and investments. You don’t have to invest a huge amount. The important thing is to start early so that your investment has more time to grow.

Once you’ve identified your investment budget, you’ll also want to consider asset allocation. It is important to include a mix of asset classes (such as stocks, bonds and gold) in your portfolio to reduce risk. When it comes to what percentage of your portfolio you put in stocks, the rule of thumb is to subtract 100 from your age. So, if you are 40, 60% of your portfolio should be stocks.

No matter how much money you decide to invest, you have plenty of options, from individual stocks (which can cost a few dollars to hundreds of thousands of dollars) to exchange-traded funds (ETFs) (which can cost as little as $100).

3. Open an investment account

Next, it’s time to open an investment account. If you want to actively manage your portfolio, an online brokerage account will allow you to hand-pick your investments. If you prefer to use a broker, a managed broker account lets you leave the work to an investment advisor.

A robo-advisor is a more affordable alternative to a human investment manager. Like traditional brokers, robo-advisors gather information from you to identify your needs and goals, then build and adjust your portfolio. Because their services are automated, their fees are lower than human brokers and they don’t charge commissions. However, if you prefer to speak to someone for more nuanced advice, a broker may be worth it for you.

Get Motley Fool Stock Advisor – Now $89 for new members

4. Choose what to invest

Note: This step is only for DIY investors who choose to actively manage their portfolio.

If you’re going the hands-on route, you should know the different types of investments available to you:

• Personal Stock: When you buy individual stock shares, you are investing in the success of the company in question. Your success directly depends on the company’s success. For this reason, it is essential to research every company you are considering investing in. This is best left to experienced investors.
• Consolidated Capital: Mutual funds are pooled investment funds that allow you to invest in a collection of stocks, diversifying your portfolio across industries, regions and more. Mutual funds are usually actively managed by a professional manager who buys and sells stocks based on their expertise.
• Exchange-Traded Funds (ETFs): ETFs work similarly to mutual funds but are typically passively managed by tracking a major stock index. They can be a great way for beginners to get involved in the stock market because they are generally less expensive and more tax-efficient than mutual funds.

5. Periodically review your portfolio

Whether you’re actively managing your portfolio or using a broker or robo-advisor, it’s important to track your investments to make sure you’re on track to reach your goals. For example, you may decide you want to invest more, diversify into a new industry or sector, or transition to more conservative investments as you approach retirement. So, periodically review the performance of your portfolio to see if it is achieving what you want.

Get Motley Fool Stock Advisor – Now $89 for new members

Bottom line

Investing in stocks doesn’t have to be scary. Start slow, continue to educate yourself, and don’t be afraid to ask questions as you go. There are plenty of resources to tap into to build your knowledge. Consult a financial professional for customized guidance on building a portfolio that meets your needs.