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

Daniel Penzing
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Looking to invest in the stock market? Follow these steps to get started!

Look no further if you’re wanting to start investing! The steps to get started in the stock market are actually pretty simple. If you know what you’re doing, it’s an easy avenue to profit. What’s the first step you should take?

Step 1: Choose Your Broker

Generally, you can enroll with your brokerage firm online. You will be given access to the platform, which will give you the ability to trade stock, options, mutual funds, and various other securities. The most popular brokerage firms right now are E*TRADE and Schwab.

Step 2: Enroll With your Favorite Trading Platform

There are plenty of different platforms out there, and it’s important to make sure you pick the right one. Popular ones include Yahoo Finance, Google Finance, and MSN Money. Be sure you can access these platforms from your computer – in fact, you may even want to save the sites to your favorites. Make sure you can access your portfolio or your brokerage account as well.

Most online trading businesses also offer mobile apps. Depending on your phone and which advisor you choose, you will be able to trade from your phone if you choose to.

Step 3: Start Diversifying Your Instruments

The stock market can be a fabulous place to start building wealth.

Learn to Invest in Stocks in 10 Steps

If you’re a novice investor who’s looking for a quick primer on buying stocks, you’ve come to the right place. Let’s get you up to speed on the essentials of stock investing.

Step 1: Determine what kind of stock to buy

What type of stock should you buy? This is a very important question you should ask yourself at the outset. Do you want to purchase the stocks in the underlying company, or do you want to invest in the stock market through investing in an index or mutual fund? Both of the latter options offer you exposure to a variety of companies, but they often have a slightly higher cost than investing in a single stock.

As for the former option, you may be able to experience higher returns, but you also run the risk of losing all of your money if the company goes bankrupt. If you can stomach that risk, this is a good option.

Step 2: Make sure you get the best price

In order to make money buying stocks, you need to purchase them for as little as possible. This is why you should know how to analyze a financial statement and why you should use the Internet to find the best stock prices. If you go in blind and make your purchase solely on gut instinct of the features of the stock, you could end up overpaying.

Step 1. Determine Your Goals

If you have the time and the willpower to research and follow your investments, a lot of professional advisors say it is a good idea to do it this way. But if any of the following statements apply to you, you should consider investing in mutual funds:

  • You tend to make rash decisions and overextend yourself
  • You feel overwhelmed when faced with the responsibilities of researching your investments
  • You are relatively new to the complex financial world
  • You want the investing game to be easy for you
  • You want the security and safety of knowing you are not in it alone
  • Your goals are not personal, but rather something you want to achieve for your family
  • You would like to have the extra comfort of professional help, but would like to pay as little as possible
  • You want to take advantage of the support and educational opportunities that come with investing
  • You don’t want to work hard to have money to spend

Step 2. Put Some Money to the Side

Each day, the stock market opens at 9:30 AM Eastern time and trades until 4 PM ET. This is the easiest time to buy or sell stocks. As you can see, the days between 9:30 AM and 4 PM are the most heavily traded because the markets are open for the longest amount of time and there are more people in the market.

Focus your buying and selling efforts on these hours. If you’re trading options or futures, then you can focus your profits on any time of the day, as it doesn’t have to be during the stock market open or close.

Now for the most important part of the question: saving money. If you’re going to invest in the stock market, you need to put some of your money aside in case you lose it all. It’s important to remember that you could lose all your money. There is no guarantee that you will make it up. If you’re going to invest, put some money aside.

Ideally, you want to be saving at least 15 to 20% of your income into your investment account. If you’re just starting out, it’s probably a good idea to put away 10% or less because you still need to pay your living expenses.

Step 3. Open a Retirement Account

In the introduction we mentioned that you have to pay taxes on any profits you make, in addition to the money you put into the purchase price. In the United States, you have the option to invest in stocks through either a traditional or a Roth account.

It's an important decision since you'll be stuck with it for the rest of your investing life. A Traditional IRA will offer you a tax deduction on your contribution, but allow you to withdraw the money tax-free in retirement. A Roth IRA offers no tax deduction on your contribution, but that money is yours free and clear when you eventually retire.

If you're just starting out and expect your tax rate to be higher when you retire, a Roth IRA is the better choice. On the other hand, if you expect your tax rate to be lower in retirement, a Traditional IRA is a better choice.

If you want to participate in employer-sponsored retirement plans, like a 401(k) or better yet, a company-matched account, you'll have to open your IRA at a brokerage. If you're just getting started, open an IRA with a brokerage you're already invested in. You can open a Traditional IRA with Vanguard, Fidelity, or Charles Schwab, while a Roth IRA is available through all of these firms.

Employer-sponsored Retirement Accounts

Many people today work at companies that offer 401(k) plans. These plans will allow an employee to deposit money into an account that is invested as they see fit. In some companies, the employer makes contributions as well, usually in the form of matching funds.

Most 401(k) plans come with a variety of investment options, and one of the options is usually a fund that invests in stocks. Many of these stocks are similar to the ones issued in IPOs but sometimes companies can offer discounted delistings from already public companies as well.

These investments in stocks are subject to the same market forces that affect other types of stocks, but, unlike IPO stocks, they can have greater liquidity since they are already publicly traded. However, the returns will also be lower due to that liquidity and the lower cost of buying them.

Individual Retirement Accounts (IRAs)

One of the best places to invest in stocks that most people don’t know about are Individual Retirement Accounts. Basically, you can invest in stocks through an IRA.

While you have to meet some requirements to establish an IRA, it’s a relatively easy procedure. We’ll talk about IRA requirements later in the post. So first, let’s take a look at the tax advantages of IRA accounts.

Deduct from federal taxes.

If you meet the requirements for an IRA, you can deduct contributions that you make to your IRA directly from your federal income tax. This can help you pay less in federal income taxes.

Better tax treatment if you withdraw from an IRA.

If you qualify for an IRA, you may qualify for tax-deferred accounts. This means that if you withdraw money from an IRA, then you won’t pay taxes on the withdrawal. You’ll only pay taxes on the money when you withdraw the money later.

This is much better than paying taxes on your money directly. There may also be no limit on how much money you can withdraw in your lifetime. If you withdraw from a standard bank account, there may be limits, so you can’t access all of your money.

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

Many investors opt for low-cost Internet brokerages because they want to start investing quickly and easily. In fact this is how most people start investing.

However, there are certain things to be aware of when selecting and using a stock broker. Make sure you select a broker offering the lowest possible commissions.

Look for a broker that offers low prices for each stock trade. Commissions are also called trading costs in financial speak. Small commissions can make a difference in your ability to stay invested over the long term.

Also look for stock brokerages offering no-fee trading. Having to pay a fee every time you trade stocks is very expensive.

Commissions have even more of an impact on smaller investors. If you can choose between great prices and great service, choose the former.

Use a Robo Advisor

Robo advisors are basically automated financial advisors, or in other words, a computer program that can manage your money without any financial advice.

Basically what it does is scans an online portfolio of stocks and ETFs (Exchange Traded Funds).

They are often cheaper than traditional brokers and can typically save you a lot on fees.

Keep in mind that all online brokerages are a type of advice, whether it’s financial advice or not. Robo advisors are just another way to manage your money. Robo Advisors just do it in a streamlined way.

They can simplify some part of your investment portfolio but make no mistake Robo Advisors are not fully automated. Many companies offer them now would charge you hundreds of dollars a month. And don’t be surprised if you pay even more for a Robo Advisor managed by a certified financial planner who’s using the most advanced and efficient strategies. Robo Advisors are still running computer programs after all.

These tools take most of the high-level decisions out of your hands. That can be helpful if you’re new to investing or if you just don’t want to be bothered doing the legwork.

Use an Online Stock Broker

Stock market investing is not as hard as you may think.

If you’re looking for a reliable broker and platform to trade stocks in India, I’d suggest you to try online trading. Compared to the traditional brick and mortar brokers, this is definitely going to be more convenient and suitable for the home-based investors.

Not to mention you will also get substantial discounts over the trading fees charged by them.

Some of the major benefits of online trading include:

  • You will not need to get up early in the morning to catch a train or do a long drive to and fro work. In fact, you can even invest in stocks at midnight if you wish to.
  • It works well for a trader that has limited time to dedicate every day to trading. You can easily log on and do the trading whenever you have the time to spare.
  • You can easily trade whenever you have access to the Internet on your mobile phone or laptop. This means you can even work on your laptop during your commute to and fro home from office.
  • If you are a beginner, you can get help online on how to trade on the Internet. You can even find a few investing tips on the process to make your trading successful.
  • You will be able to execute trade anytime from anywhere.

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

If you are beginning with stocks for the first time, you should consider mutual funds or exchange traded funds (ETFs) for your first portfolio, however you may find it easier to start with more stocks if you are more experienced.

When you buy stock directly, you purchase partial ownership of the underlying company. If the company does well, your shares will also appreciate in value. When you purchase stock in a mutual fund, you are purchasing a stake in all of the stocks that the fund has chosen to invest in. Shares in funds can be bought at any time during market hours, and all purchases are final, meaning they can’t be sold back to the fund company unless you sell the fund as a whole.

Exchange traded funds, also traded during market hours, can be bought and sold more like a stock (though they still represent partial ownership in underlying assets, rather than stocks). ETFs are great for beginners because they allow you to invest in a wide range of stocks in a single transaction, similar to a mutual fund. They can be set up to mirror the component securities of an index, or they can be actively managed funds that trade stocks with the goal of outperforming the corresponding market index.

Exchange traded funds can be purchased by anyone with a broker account.

Step 6. Stay with Index Funds

When possible, you want to switch to an index fund. An index fund is a mutual fund that replicates, or tracks, a stock market index.

Some brokers will offer index funds, so you’ll need to check with them and see if they have any.

If not, there are many index funds that you can purchase via a discount broker. One of my all-time favorites is the Vanguard 500 Index (VFINX). This fund offers the perfect combination of safety, growth potential, and low fees.

If you’re new to index funds, click on the link and you’ll be taken to more information on this fund.

Step 7. Use Dollar-Cost Averaging

Dollar-cost averaging is a technique used to invest in mutual funds in order to reduce the impact of fluctuating prices on the value of the investment. In general, it involves investing the same amount of money on a regular basis, such as once per month. The investor uses the same amount of money to buy more shares when the price is low and fewer shares when the price is high, thereby reducing the impact of price on the average cost of the shares held.

Dollar-cost averaging is one of the simplest and most effective ways to invest in stocks. In terms of timing the market, dollar-cost averaging can be used to buy either more or fewer assets depending on when prices are high or low. It is best illustrated by looking at three different time periods.

Step 8. Get Some Investment Education

Invest in your own education. If you do your own reading, you’ll become a much more informed investor and make better decisions. Experience is also a big part of becoming a good investor. At this point, you know the basics of investing, and you’ve had some time to practice and learn from your mistakes. Now it’s time to start reading and learning from the experts.

Here’s a list of good books on investing:

How to Make Money in Stocks by William O’Neil. If you’re interested in picking individual stocks, this is one of the best resources out there.

The Millionaire Next Door by Thomas J. Stanley. Great book on how ordinary people turned their lives into extraordinary wealth.

The Intelligent Investor by Benjamin Graham. The godfather of value investing.

Common Stocks and Uncommon Profits by Philip A. Fisher. One of the most famous investor’s out there.

Step 9. Invest in Individual Stocks Gradually

Do not buy a large number of stocks of one company, because there's a good chance you'll lose most of the money. Instead, you should go for a diversified stock portfolio.

Therefore, you should keep this in mind before you begin investing in individual stocks. To keep your portfolio diversified, you should have some stocks in different industries.

To build a diversified portfolio, you should buy stocks of different companies, though you should not invest in a large number of stocks.

You should diversify your holdings as much as possible. You should focus on technology, biotechnology, pharmaceuticals, oil and gas, and retailing.

If you invest in a variety of stock mutual funds, you will also be able to invest in stocks in different industries. You should keep some money in your short-term investments, so you can have money readily available in case you need it.

When you are thinking about investments in individual stocks, you should try to do your homework.

You should figure out the best companies to invest in and the ones which you should avoid. You should also have a long-term view, and you shouldn't focus too much on short-term profits.

Step 10. Don't Forget to Diversify!

Once you've finished reading, you should have a good grasp of the overall investment process. If you have any more questions, you can always surprise me with your questions. I'll help you as much as I can to understand the investment better.

Before you part ways, I'd like to remind you of one particular strategy: diversification.

One way to diversify broadly is by investing in a mutual fund. Mutual funds have a group of stocks, bonds, money market instruments, etc.

So if one stock goes to zero, it won't ruin you. While that is true, it also comes with a downside. The return you get with a mutual fund is much lower than what you'd get if you were to buy a stock directly. That is because of the "management fee" the mutual fund charges.

The management fee is the cost to pay the mutual fund to manage your money. As their investment expert, they want to be compensated for it.

Every mutual fund has different fees and it's important you look carefully at them before investing your money. This is usually called the expense ratio.

You can say that the average size of the fund (often called the net asset value or NAV) is 1 point. If you buy 100 dollars of that fund, 1% of it is taken by the fund and that's what you pay for.

Why You Should Start Investing… NOW

Just like that, the year is over, and you’re probably looking for your next New Year’s Resolution. I’ll save us both some time and get right to the point: start investing.

I know what you’re thinking, what’s so hard about investing? Well, for starters, it’s not as easy as assuming it is. You’re not going to become the next Warren Buffett (at least, not overnight). However, investing is one of the best things you can do to secure your future. And the sooner you start, the better.

To help you get started, we’ve put together this simple guide on how to invest in stocks. Think of this as your Crash Course on stock investing. For the more experienced out there, you’ll still probably get a few pointers to kick-start your portfolio.

I personally began investing in 1999 at the age of 18. After several years of investing, I had collected a pretty hefty sum of money. As a result, I moved on to other ventures, forgetting all about what I had learned along the way. And that’s when I stumbled upon the Stock Market Game.