How to Invest in Stocks: A 10-Step Guide to Stock Investing

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El Paso, Texas. The United States
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10 Years working as an investment project advisor.

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Learn to Invest in Stocks in 10 Steps

Step 1. Determine Your Goals
Step 2. Put Some Money to the Side
Step 3. Open a Retirement Account
Step 4. Start Investing with a Low-Cost Online Service
Step 5. Begin with Mutual Funds or Exchange Traded Funds (ETFs)
Step 6. Stay with Index Funds
Step 7. Use Dollar-Cost Averaging
Step 8. Get Some Investment Education
Step 9. Invest in Individual Stocks Gradually
Step 10. Don’t Forget to Diversify!

Step 1. 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. You can organize your finances for free with our favorite budgeting app, Personal Capital.

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 then certificates of deposit or money market accounts.

The purpose of the cash reserve is twofold:

Act as an emergency fund in the event of a temporary income disruption or other financial emergencies
Keep you from panicking should your risk type investments take a sudden dive.

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 — 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.

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. If you want to get professional assistance, consider using Personal Capital’s retirement planner. We think it’s one of the best retirement calculators out there — paid or free.

Employer-sponsored Retirement Accounts

Generally, your first step would be to find out if your job offers a workplace-sponsored retirements 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.

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.

Robo advisors use algorithms to help create the ideal portfolio mix for your needs and risk tolerance, usually by investing in exchange-traded funds (ETFs). 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:

There’s no initial minimum deposit requirement
You can build the fund with periodic contributions as low as $100 per month
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. 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. If you want to find a financial advisor who can not only help you invest, but also help you plan for the future, you can use a service like Paladin Registry . This service helps you find a registered advisor who is legally required to act in your best interest.

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 stock broker choice for beginners is Merrill Edge. As a subsidiary of Bank of America, you can simplify your finances by having your bank and investing account in one place. Like other stock brokers, stock trades are commission-free, although you will have to pay a small fee for more advanced trades like options and mutual funds. Merrill Edge offers a lot of account options, including IRAs, 529s, and taxable investment accounts.Get Up to $600 When You Invest in a Merrill Edge Self-Directed Account

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:

Open an account with one of the many commission-free ETF trading apps available (such as Public.com)
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. Wealthfront is an excellent robo advisor to handle both your index funds and ETFs.

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. You can set up automatic investments through robo advisor M1 Finance.

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.

Vanguard is another excellent resource and possible investment platform to utilize. They currently offer a Personal Advisory Service for anyone that can invest at least $50,000 to start. The fee for the service is only 0.3% and you’ll be provided all of the 1 on 1 support you can imagine.Sign up for Vanguard Personal Advisor Services

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 and Webull.

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). You can buy individual stocks using E*TRADE, for example.

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.

>> Further reading: How to Trade Stocks

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 you maintain the proper diversification and allocation of your investment account.

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.

Take these steps, and you’ll have the basic foundation to help you in getting started with investing in stocks. Just remember that, as we noted in our how to invest guide, investing is a process, not a destination, so you need to be learning and experimenting on an ongoing basis.