Start Investing in Stocks in 2024

To trade stocks, you need to set clear investment goals, determine how much you can invest, decide how much risk you can tolerate, pick an account at a broker that matches your trading style, fund your stock account, and start trading.

Investing in stocks is a powerful way to grow your wealth over time. This beginner’s guide takes you through the essential steps to invest in stocks. Whether you have thousands set aside or can invest a more modest $25 a week, let's get you started.

8-Step Guide to Investing in Stocks

Step 1: Set Clear Investment Goals

Begin by specifying your financial objectives. Clear goals will guide your investment decisions and help you stay focused. Consider both short-term and long-term goals, as they will affect your investment strategy.

You might have short-term goals like saving for a home or a vacation or have long-term objectives like securing a comfortable retirement or funding a child’s education. Your objectives depend on your life stage and ambitions. Younger investors tend to focus more on growth and long-term wealth accumulation, while those closer to retirement typically prefer generating income and capital preservation. The more precise you are, the better.

Tips for Setting Investment Goals

  • Be precise about your objectives: Instead of vague goals like “save for retirement,” aim for specific targets like “accumulate $500,000 in my retirement fund by age 50.”

  • Determine your investment horizon: Assess how long you have to achieve each goal. Longer time horizons often allow for more aggressive investment strategies, while shorter ones may require more conservative approaches. The longer you give yourself, the less conservative you'll need to be early on.

  • Evaluate your finances: Be realistic about how much you can put toward your investment goals, considering your savings, regular income, and any other financial resources.

  • Rank your goals: Most of us balance several goals at once, and we have to prioritize saving for a home down payment, paying for a wedding next year, or preparing for retirement based on urgency and importance. For example, saving for a down payment on a house might take precedence over planning a vacation.

  • Adapt as life changes: The phrase financial planning is best taken as a verb, not a noun. It's an ongoing process that should evolve with your needs and aspirations. You might fall in love or out of it, have many children or none of them, or realize your life’s work means moving cross country. Regularly review and adjust your goals as your life circumstances change.

Step 2: Determine How Much You Can Afford To Invest

How to Calculate How Much You Can Afford to Invest - Experian

Pinpointing how much you can afford to put in stocks requires a clear-eyed assessment of your finances. This step helps ensure that you are investing responsibly without endangering your financial stability.

Tips for Determining Your Investment Amount

  • Review your income sources: Begin by listing all your sources of income. Check if your employer offers investment options with tax benefits or matching funds to amplify your investments.

  • Establish an emergency fund: Ensure you have a solid financial foundation before investing. Solid does not mean perfect. This fund should cover a few months' worth of major expenses, such as mortgage or rent payments and other essential bills.

  • Pay off high-interest debts: Financial planners typically recommend paying down high-interest debts, such as credit card balances. The returns from investing in stocks are unlikely to outweigh the costs of high interest accumulating on these debts. Thus, scrutinize each of your debts similarly, weighing the interest payments against potential investment returns. Likely, your debts will have to come first.

  • Create a budget: Based on your financial assessment, decide how much money you can comfortably invest in stocks. You also want to know if you're starting with a lump sum or smaller amounts put in over time. Your budget should ensure that you are not dipping into funds you need for expenses.

Step 3: Determine Your Tolerance for Risk

Understanding your risk tolerance is a cornerstone of investing. It helps you align your comfort level with the inherent uncertainties of the stock market and financial goals.

Tips for Assessing Your Risk Tolerance

  • Self-assessment: Reflect on your comfort level with the ups and downs of the stock market. Are you willing to accept higher risks for potentially greater returns, or do you prefer stability even if that means potentially less in the end?

  • Consider your time horizon: Your risk tolerance often depends on your investment timeline. Longer horizons allow for more risk since you have time to recover from potential losses. Shorter timelines typically require more conservative investments.

  • Gauge your financial cushion: Assess your finances, including your savings, emergency fund, and other investments. A solid financial cushion can help you take on more risk.

Align investments with risk levels: Choose stocks and other investments that align with your risk tolerance. Examples:

  • Lower risk: Dividend stocks and bonds.

  • Moderate risk: Midcap and large-capitalization stocks, index funds, and exchange-traded funds.

  • High risk: Small-cap stocks, growth stocks, and sector-specific investments.

Adjust over time: Your risk tolerance may change as your finances and goals evolve. Regularly reassess your risk tolerance and adjust your investment strategy accordingly.

Step 4: Determine Your Investing Style

Determine Your Investing Style

Your investing style is crucial in how you approach stock investments. Whether you prefer a hands-on approach or a more passive strategy, understanding your style helps you choose the right investment methods and tools.

Everyone has a different relationship with money. Some prefer an active role, meticulously pouring over every last cell on their portfolio's spreadsheets, while others opt for a set-it-and-forget-it approach. They trust their investments will grow over time if they just leave them alone.

Your style might evolve, but you'll need to start somewhere, even if your choice isn't set in stone.

Tips for Identifying Your Investing Style

Begin with a self-reflection on whether you enjoy researching and analyzing stocks or prefer a more detached approach. Here are your main choices:

1. DYI investing: If you grasp how stocks work and have the confidence to head out with minimal guidance into the market, managing the trades yourself is one option. Even DIY, there are more and less active approaches:

Active: You use your brokerage account to access various investments, including stocks, bonds, and other assets, and trade as you wish. You'll set your goals and choose when to buy and sell.
Passive: You use your brokerage account to buy shares in index ETFs and mutual funds. You still control which funds you purchase, but fund managers do the trading for you.

2. Professional guidance: For those who prefer a more personal approach and want more, an experienced broker or financial advisor is often invaluable. These financial professionals tailor their advice to your life experiences and goals, help you decide among the most promising stock choices, monitor your portfolio, and collaborate with you when things need changing.

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Step 5. Choose an Investment Account

You've figured out your goals, the risk you can tolerate, and how active an investor you want to be. Now, it's time to choose the type of account you'll use. Each has its own features, benefits, and drawbacks. In addition, the type of account you choose can greatly impact your tax situation, investment options, and overall strategy. You'll need to compare different brokers to find the investment account right for you.

Tips for Choosing Your Investment Account

1. Understand the different account types: In the table below, we've listed the differences between regular brokerage accounts, retirement accounts, and managed accounts. You'll want to choose one that'll work for you. We also list special accounts for education and health savings.

2. Consider the tax implications

Taxable accounts: These are the most common if you're trading online. Brokerage accounts don’t offer tax benefits, but there are no restrictions on contributions or withdrawals.
Tax-deferred accounts: Contributions to traditional IRAs and 401(k)s cut taxable income, and taxes are deferred until you withdraw the money.
Tax-free accounts: Roth IRAs and Roth 401(k)s are funded with after-tax dollars, but qualified withdrawals in retirement are tax-free.

3. Evaluate your investment goals: Match your investment account type with your goals. For long-term retirement savings, consider tax-advantaged accounts. For short-term goals or flexible investing, a standard brokerage account might be better.

4. Scrutinize account fees, commissions, and minimums

  • Trading commissions: These are fees brokers charge when you buy or sell securities. Many brokers now offer commission-free trades for particular investments, such as stocks and ETFs.

  • Account maintenance fees: Some brokerage accounts may charge annual or monthly maintenance fees, which depend on the account type and balance.

  • Inactivity fees: Brokers may charge fees if your account has little or no trading activity over a certain period.

  • Subscription-based models: As Generation Zers and Millennials take up a larger share of the investment space, financial advisors, planners, and brokers are adjusting. Instead of paying per transaction or for specific services, you pay a flat monthly or annual fee. Your subscription may include commission-free trades, access to research tools, and other premium support.3

  • Account minimums: Momentous changes in recent years have resulted from immense competition among brokerages. Many online brokers have eliminated account minimums, making it easier for more investors to get started.4 If you have just a few dollars to invest, you can open a brokerage account and begin trading stocks.

Step 6: Fund Your Stock Account

How to Transfer Funds to Your Trading Account | Share India

By this step, you've picked a broker that aligns with your investment goals and preferences or is simply the most convenient. You've also decided whether you're opening a cash account, which requires you to pay for investments in full, or a margin account, which lets you borrow when purchasing securities.

Once you've chosen a brokerage and account type, you'll open your account. This involves providing your personal information: Social Security number, address, employment details, and financial data. This shouldn't take you more than 15 minutes.

Now you'll have to fund it. Here are tips for doing so:

Tips for Funding Your Stock Account

1. Choose how you'll fund it

  • Bank transfer: The most common method is to transfer funds directly from your bank account. This can be done via electronic funds transfer or wire transfer.

  • Check deposit: Some brokers allow you to mail a check to fund your account. This method can take longer but is viable if you prefer not to use electronic transfers.

  • Transfer from another brokerage: If you have an existing brokerage account, you can transfer assets directly to your new account. This process, known as an ACATS transfer, is usually straightforward but may take a few days to complete

2. Set up automatic contributions: Dollar-cost averaging involves investing a fixed amount of money at regular intervals over time, no matter what the market does. This cuts your risk of making bad decisions based on short-term market news. Most brokers let you customize the frequency and amount of your automatic contributions, making it easier to stay within your budget and keep on track with your investment goals.

3. Start investing: Once you've verified the funds are in your account (don't worry: the brokerage won't let you trade otherwise), it's time to start choosing the stocks that best fit your investment goals.

How Much Money Do I Need To Start Investing in Stocks?

The amount needed depends on the brokerage firm and the investments you're interested in. Some online brokerages have no minimum deposit requirements, allowing you to start investing with a small amount of money. However, the price of individual stocks and the minimum investment for certain mutual funds or ETFs might require you to start with more of an initial investment. That said, there are many brokerages and investment options now for those starting with less to invest than there were a decade or two ago.

Are Stock Funds Good for Beginner Investors?

Stock funds, including mutual funds and ETFs that invest in a diversified portfolio of stocks, are a good option for beginner investors. They offer diversification, which helps spread risk across different stocks, and are managed by professional fund managers. In addition, stock funds allow beginners to invest in a broad range of stocks with a single investment, making it easier to get started without having to pick individual stocks. While you watch your mutual fund or ETF investment over time, you will also gain experience about the ebb and flow of the stocks these funds hold, good knowledge that will help you when investing later.