Investing in stocks has become increasingly accessible, with beginners able to open an account with little money through a brokerage‘s website or mobile app.
Stock represents an ownership stake in a company as a common shareholder. Common stocks allow shareholders to vote on company issues, with most companies granting one vote per share. Some companies also offer stockholders dividend payouts, giving investors a stream of income on top of the market value of the stock. These payouts typically change based on the company’s profitability.
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Stocks are considered a risk asset that can provide growth and income to an investment portfolio. This means it’s an asset class that carries a high degree of price volatility. With stocks, beginner investors must consider the degree of risk that they can take. Typically, the more risk in an investment, the greater the potential reward. But investors need to be willing to take the risk of losing money in case high returns don’t come. History shows that stocks have been a reliable asset class for strong annual average returns over time.
In 2022, stocks have taken a dive as the highest inflation in 40 years drives steep interest rate increases and stokes fears of an economic downturn. The gloom has ensnared some of the market’s biggest names, particularly tech stocks, which have been pummeled. Facebook parent Meta Platforms Inc. (ticker: META) is down 53% this year through July 14, Apple Inc. (AAPL) stock has shed 16%, and Microsoft Corp. (MSFT) has dropped 24%.
But one need only glance at last year’s market performance for evidence of how quickly things can change in the stock market. The S&P 500, an index of some of the biggest U.S. stocks, climbed 27%, driven by gains in some of the very same companies recording steep losses this year, including Meta Platforms, Apple, Microsoft and Alphabet Inc. (GOOG, GOOGL). If you had invested in these companies or the index as a whole through an index fund, your investments would have increased in value considerably last year.
Here’s what else you need to know about investing in stocks:
— Where to start investing in stocks.
— How much money should you start investing in the stock market?
— Have an investing strategy, especially during market volatility.
— How to choose which investments to make.
— Invest on your own or with a financial advisor?
— Stocks for beginner investors.
— Use dollar-cost averaging.
— When to sell a stock.
Where to Start Investing in Stocks
The first step is for you to open a brokerage account. You need this account to access investments in the stock market.
The next step is to fund your brokerage account by transferring money from your bank account to fill trades of stocks you want to buy. The amount of money you choose to invest depends on your risk tolerance, goals and how much money you’re comfortable potentially losing.
Remember that while, over time, the stock market typically increases in value, there can be short-term market fluctuations, which can put your money at risk.
How Much Money Should You Start Investing in the Stock Market?
Several online brokers such as Betterment don’t charge fees for a $0 account balance, nor do they require a minimum amount to open a trading account. You can start investing through these brokerages with any amount. Some also offer fractional shares, meaning you don’t have to buy an entire share of a company if you can’t afford it.
Discount brokers are a boon for beginners with little money who are often looking to get stock market exposure with smaller portfolios. But a discount broker typically does not provide advice or analysis. Many of these brokers don’t require a minimum amount to start an account, while some have a low beginning threshold of $1,000.
Have an Investing Strategy, Especially During Market Volatility
It is normal for the stock market to experience bouts of volatility. During those periods, stocks, even ones considered relatively safe, experience price fluctuations. This can happen when there is uncertainty in the markets and tends to be short-lived.
“Over the long run, we have seen a 10% or greater downturn in the stock market more frequently than once every two years (on average),” says Daniel Beckerman, president of Beckerman Institutional in Ocean Grove, New Jersey. You should prepare to be invested during these rough periods, Beckerman says, if you expect to do well throughout your investment time horizon.
Volatility can certainly be concerning, especially if you are a beginner who hasn’t experienced it before. That said, you should put your money in companies that can generate consistently growing revenue and profit over a long period. That way, you have confidence in the company despite the stock’s price swings.
“We consider a company’s ability to fend off competition,” Beckerman says. “If a company is hard to compete with, they will be less likely to run into trouble with falling revenue and profits in the future. They are also more likely to be in a position to be able to raise their prices in an inflationary environment, as we have experienced.”
He also notes that volatility can be your friend. Bear markets, like the one that has plagued the markets in the first half of 2022, can be great buying opportunities.
“The tricky part is that we don’t know the date that a bear market is going to end,” Beckerman says. “However, if we take an average of the previous 10 bear markets, the stock market tends to provide positive returns of over 14% a year after having entered the bear market.”
When investors have conviction in a company and its stock price falls, they may see this as an opportunity to buy more of the stock at a better price.
How to Choose Which Investments to Make
Beckerman says that by looking at a company’s metrics, you can gain insight into how companies and industries are performing.
“For example, when price-earnings or price-sales ratios are elevated, we can get some sense as to when certain stocks or industries are priced in bubble territory,” he says. “This was the case in 2021, when many unprofitable technology stocks were trading in what I would think of as overvalued territory.”
Valuation is an important factor when stock picking. Company profitability, earnings growth prospects, quality of management and industry performance are some factors investors must consider when evaluating a stock’s worth to determine whether it is undervalued or overvalued. Stock valuations, Beckerman says, provide investors with some color around the sentiment regarding various industry groups.
A stock’s price can be different from its intrinsic value. To know how to value a stock, investors must dig into the company’s financial reporting history, understand the company’s role in its industry and how it fares among its competitors, among many other factors.
“Avoid stocks that are speculative in nature with no historical performance on growth and management expertise,” says Alex Vela, a portfolio manager at FBB Capital Partners. He says to target companies with at least a five-year track record, and a management team that has clear goals and objectives.
“Equally important is if management is implementing any ESG policies that lead to socially sustainable business practices,” he says, referring to environmental, social and governance initiatives.
There are two ways to secure profits from stock investing: selling shares when their market value goes up and dividend payments. Dividends are payments in either cash or stock made by the company to the shareholder on a monthly, quarterly or annual basis. Dividend payments are a way a publicly traded company shares its wealth with its investors. Investors who want a steady stream of income from their stock portfolios invest in companies that share their profits in the form of dividends.
[SEE: 9 Best Stocks for a Starter Stock Portfolio.]
Dividends are known to be a reliable form of income because they can be distributed even if the company doesn’t make a profit. Investors can either secure dividends as income or reinvest them for a greater return in the long run. Many dividend stocks have an established record of strong cash flows, carry low debt and offer competitive yields.
Invest on Your Own or With a Financial Advisor?
Investing in stocks can be done in many ways, but before you start investing, it’s important to determine what type of investor you are. Decide whether you want to take a do-it-yourself approach or work with a professional financial advisor who can advise you through your wealth management.
Rob Burnette, CEO, financial advisor and professional tax preparer at Outlook Financial Center, says to ask yourself two questions: “First, how much time and resources are you willing to commit to personally managing your accounts? Second, how diligent will you be regarding getting initially educated and continuing that education for life?”
To take the do-it-yourself approach and manage your own investments, you can open an online brokerage account. If you’re unsure about where to start, consider opening an account with a robo advisor, which will do some of the heavy lifting at a lower cost.
“Most advisors won’t work with small accounts even though there is nothing potentially better than speaking with an advisor that is a fiduciary,” Burnette says. “The advice can be more focused, and you can get direct answers to direct questions rather than relying on the person that picks up the phone at a call center.”
He says beginning investors may be able to find a fiduciary advisor with low or no account minimums.
Once you open an online brokerage account, you’re asked questions to determine an investment strategy that will assist in your investment decisions. These questions involve knowing your specific financial goals — such as retirement or a big purchase — and your risk tolerance, which is the degree of market variability you can withstand in your investments.
Define your goals before you start investing. These will drive your decision-making processes.
For example, if early retirement is your goal, you may want to skew your portfolio toward more growth-oriented investments in an effort to generate the highest return possible. But if you’re working toward a goal that’s closer at hand, such as buying your first house, you’d be better off with a more moderate portfolio so you don’t run the risk of your investments losing value when it’s time to make the purchase.
If you’re not sure how to materialize your long-term financial goals and where to start with your investing plan, working with a financial advisor may be right for you.
“Many people choose to hire someone who specializes in the field so they can take advantage of their expertise and so they don’t need to worry about the things they may miss or that they don’t know,” says Jeffrey Wood, an investment advisor and partner at Lift Financial. “It also helps to have a trusted advisor that you can call with questions and concerns.”
Financial advisors can protect you from making decisions that may not work to your benefit. If you want to buy individual stocks, you must understand that they can carry much more risk than other securities such as mutual funds or exchange-traded funds. That said, if you are not sure how much of your money you should allocate toward stocks, you can work with a financial advisor to develop a strategy.
Financial advisors can help with other areas of financial planning, too, such as college planning, tax and estate planning, asset protection and helping loved ones, Beckerman says. “We are finding that investors who started with an online platform are migrating to us once their needs become more sophisticated.”
[See: 10 Best Robo Advisors of 2022]
Stocks for Beginner Investors
Thinking you can consistently beat the market can be a fool’s errand, but investing in high-quality stocks such as blue chips and dividend-yielding companies is often a good strategy for beginners.
One reason investors opt for blue chips is their track record of stability and because they tend to produce dividends. Famous blue-chip companies include Microsoft, Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Coca-Cola, for example, generates a dividend yield of almost 2.8% — meaning an investor would earn 2.8% of their investment level in dividends over the next year at the current dividend rate — and the stock is less volatile, as its share price has hovered between $52 and $67 during the past 52 weeks as of mid-July. Dividends can generate much-needed income for investors.
Long-term investors who take advantage of a buy-and-hold strategy by going long on stocks can reap the benefits of long-term growth in market value. For example, if you bought shares of AT&T Inc. (T) at its initial public offering price of $1.25 in 1984, your investment would be worth far more than what you put in, as the stock now trades at about $20 per share and has been paying dividends for decades.
Use Dollar-Cost Averaging
After choosing what stocks to buy, the question becomes when to buy them. The old adage “buy low, sell high,” is a good one to follow, but it’s hard to know when a stock is at a low.
To alleviate the feeling that you must time the market just right, many beginning investors benefit from a dollar-cost averaging strategy whereby you invest a fixed amount on a regular schedule, regardless of the stock’s current price.
“Many beginning investors may get frustrated with the day-to-day fluctuations and highs-and-lows of the stock market, but dollar-cost averaging over time in a fluctuating — but overall up-trending — market allows an investor to continually invest and buy more shares when the market dips, causing their overall cost basis to average lower in general than their sell value,” Wood says. “Markets are difficult to time, but dollar-cost averaging helps to create savings habits that, over time, have shown to bring about positive results historically.”
That said, some investors do better investing a lump sum all at once. This can work in your favor because it’s generally better to invest money sooner rather than sitting on cash.
“Either dollar-cost averaging or chunk investing when used in longer, multiyear investing strategies tends to give an investor a better chance of positive investment returns than when used during short-term time frames,” Wood says.
When to Sell a Stock
Knowing when to let a stock go — without deciding in a panic — is a key skill for savvy investors.
Burnette says the most impactful piece of advice he received from a Wall Street billion-dollar money manager was to “define the exit before you get in.”
“For example, set a metric that requires you to revisit a stock when it is up 20%, or down 10%,” he says. When your metric is triggered, ask yourself: “Is this still a good investment?” Doing so forces you to look at the stock’s fair market value and the company’s current standing.
Having an exit plan in place will help you keep emotions out of the decision of when to sell. It’s important not to fall in love with a stock because businesses change and companies can fail.
Following the news cycle that surrounds a company’s stock performance can be overwhelming. Instead, experts say to ignore the short-term noise, so you can maintain perspective within your strategy for the long run.
When it comes time to sell, don’t forget to consider the tax implications. “If you retain an investment for more than a one-year period before selling, taxes on the appreciation of that stock will be taxed at a lower long-term capital gains rate rather than a higher short-term capital gains tax rate for investments held less than one year,” Wood says.
Legendary investor Warren Buffett advises people to buy and hold stocks for several decades instead of selling and repurchasing them constantly. At a minimum, a prospective stock should be one that an investor would own for at least 10 years, according to his philosophy.
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How to Invest in Stocks for Beginners originally appeared on usnews.com
Update 07/15/22: This story was published at an earlier date and has been updated with new information.
