A Simple Guide to Investing in the Stock Market

September 15, 2021
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“Investing” encompasses everything from huge Wall Street firms doing millions of trades per day to teenagers buying a $5 stock on a smartphone app, and it’s easy to feel overwhelmed trying to figure out where on that scale you should land. The average person, though, can succeed in investing without ever diving deeply into the more technical parts of the stock market, making it almost as easy as opening up a new bank account! Here are a few simple steps you can follow to make your first investments.

Step 1: Consider your goals and time frame

Identify the goal of investing in the stock market

The vast majority of people want to start investing for one of the following reasons:

  1. Retirement savings (long-term)
  2. Education or health savings (long/medium-term)
  3. Saving for some other medium or long-term goal
  4. Making extra money (short/medium-term)

Investing in the stock market is best used as a long-term strategy, not a quick way to make money. If you’re saving for retirement 40 years in the future, your investments will have time to bounce back from temporary dips and you’ll come out ahead. If you’re hoping to make a profit and cash out within a year, you risk losing money in a downturn. Most declines recover after one to four months, though one-to-five-year recovery times aren’t unheard of. If you bought the S&P 500 at the beginning of 2008 and sold it at the end of 2008, for example, you’d have been down 37%, and wouldn’t have regained your investment until 2012.

As a general rule, then, you shouldn’t use the money you’ll need in less than three to five years for investing in the stock market. For short-term goals, consider things like CDs, money market accounts, bonds, and other, more stable instruments. 

If you have a goal that’s over three to five years away, a good stock portfolio can generate returns without too much risk. You should make an effort to reduce your risk as the goal approaches, though, by selling some risky investments and buying safer ones, or even converting some stocks to cash in your bank account. Some services, like robo-advisors, will do this for you automatically, so it may be worth finding one of those if doing it manually doesn’t sound like your cup of tea. 

Step 2: Settle on an amount to invest

Determine the ammount of money you are ready to invest in stocks

With many brokerages now offering zero-fee trades, there is essentially now no minimum for getting started with investing in the stock market. You can realistically invest with $5 or less, and if this is what you’re working with, go for it! A start is a start, and beginning with $5 a week and then increasing your investment gradually is a great way to get your feet wet.

However, you’ll only get out a percentage of what you put in, so investing larger amounts if you can is generally a good idea. If you’re using a buy-and-hold strategy, as most long-term investors probably should, time is your best friend—the longer your investments can grow, the more you’ll see the magic of compound growth.

That said, you shouldn’t throw all your money into the market right away. Only invest what you can afford to lose (or at least won’t be needing for a few years). Additionally, starting small while you get comfortable with investing may save you some stress.

If possible, you should try to work your way up to investing at least 10-20% of your income, especially if you’re saving for retirement. Given time, regular investments can net you very significant returns! For example, if you saved $500 a month for 30 years, here’s what you would have at the end depending on the strategy you use:

Cash (0% interest)Bank Account (2% interest)Stock market (7% growth)
$180,000$194,000$437,000

Step 3: Figure out what type of account you should open

This is where the rubber meets the road: you have to actually put your money in the stock market for it to make returns, and this is the most confusing part for a lot of people. 

There are several different types of accounts that let you hold stocks. The only major difference between them is that some of them give you tax benefits for retirement, education, health, etc., while others are fully taxable. Other than that, they all let you do the same basic thing: buy, sell, and hold assets like stocks, bonds, commodities, real estate, et cetera. 

The most common types of accounts, and those that you’ll probably want to get started with, are:

  • IRAs and 401(k)s (retirement)
  • Brokerage accounts (taxable investments)
  • ESAs and 529s (education)
  • HSAs (health)

If your goal is retirement and you have a 401(k) through your employer, investing in that is probably a good idea. Otherwise, get an IRA—Roth if you expect to make more money later, Traditional if you expect to make less. These accounts give you tax breaks, which makes them the absolute best place for your retirement savings. However, your money will mostly be locked up until you reach retirement age. 

Brokerage accounts are not so good for retirement, as your profits will be fully taxed. However, if you want to use your money for non-retirement goals, like buying a car or traveling, a brokerage account gives you the flexibility to withdraw whenever you want. This is also a good option if you’ve maxed out the amount you’re allowed to contribute to your retirement accounts.

ESAs and 529s are specifically intended for education savings and give you a tax break. HSAs are for health spending and also come with tax advantages. It’s worth doing some research before diving into these though, as the rules and benefits surrounding them are a bit more complex.

Step 4: Find a company to open your account with

Open an account to start investing in the stock market

As an individual, you need a way to access the stock market to start investing. That’s where brokerages and investment management firms come in: if you open an account with one of them, they’ll execute trades on your behalf and keep your investments for you. 

There are a lot of different brokerage companies out there, but if you understand what you’re looking for you should be able to choose one relatively easily. Here are some of the main features you may want to look for:

  • The broker should offer the account type(s) you’re looking for. If you want both a brokerage account and an IRA, you can often get both of them with just one company for easier management.
  • Automatic deposits (this is very standard).
  • Low or no-fee trading if you plan to buy and sell stocks with any frequency.
  • A robo-advisor if you want your money to be automatically invested according to your needs—an excellent option if you prefer a set-and-forget strategy. 
  • A good user interface. If it’s hard or annoying to do what you need, you’ll probably be less willing to check and maintain your accounts.
  • Minimum investment requirements that are within your means. 
  • Basic protections, like insurance, privacy, and security. 

For most investors, using a robo-advisor (or a higher-cost human advisor if you need extra help) is one of the best ways to get started. All you’ll need to do is open an account and set up deposits, and your money will automatically be invested in a diverse stock portfolio that is maintained and even risk-adjusted according to your timeline. 

If you want to be more hands-on, buying your own index/mutual funds from a management company or investing in ETFs on the stock market is also a safe strategy. You’ll have to do more of your own investing and balancing, but you have more control this way.

Step 5: What should you invest in?

Choose what to invest in

At this point, you should have a goal, money to invest, and an account to hold your investments. What investments, though? Should you buy some Apple or Chipotle stock? Should you spend hours browsing through companies, checking fundamentals, and looking at graphs? 

Well, you certainly can if you want to, but that’s far from the easiest way to get started. Instead, you should probably look into index funds, mutual funds, and ETFs, which all basically work by wrapping a collection of stocks, bonds, and other assets into a bundle that you can buy a piece of. All these assets are maintained by the company that operates the fund, and the fund’s value varies based on the aggregate performance of all the things it contains. This lets you build a very diverse portfolio with a single purchase rather than hundreds of trades, which in turn helps protect you from any company failing. 

Learning the exact differences between index funds, mutual funds, and ETFs is a bit complex, but for beginning investors, here’s what you need to know:

  1. Index funds are passive, meaning they mirror the value of a list of stocks, like the S&P 500. They typically charge the lowest fees and are probably the simplest way to get started. You buy and sell these through the managing company, not on the stock market.
  2. Active mutual funds are built and constantly adjusted by companies looking to optimize the fund’s profits. They charge higher fees and are a bit more complex than index funds. These are also bought through managing companies.
  3. ETFs (Exchange-traded funds) can be bought and sold like stocks. This makes them the most complex to work with, but they don’t charge fees, so, if you can buy them without a trade commission, they’re probably the cheapest option. 

If you’re not sure what you need, a passive index fund is almost always a good choice. They’re low-cost, easy to manage, and almost run themselves, requiring little to no maintenance on your part aside from steady investing. If you have a larger sum to invest, an active mutual fund may be a good choice, and ETFs are great if you want to get hands-on buying and selling. 

Building your own custom stock/bond portfolios by buying and selling individual company stocks is also a viable way to invest, but you should be confident in your ability to pick reliable stocks and assess their risk. Learning how to build and manage a portfolio isn’t necessarily the simplest thing in the world, so this is only suitable for people who understand the markets and have enough free time to do the legwork. 

Get started in under an hour

The details above are certainly important in getting started with investing in the stock market, but it can all be boiled down to a few essential steps:

  1. Figure out what kind of account you want (IRA for retirement, brokerage for general investing, etc.)
  2. Find a good financial management firm that offers this type of account with good features and low costs. A few minutes on Google will yield plentiful options!
  3. Open an account and deposit some money.
  4. Either set up a robo-advisor or buy a standard index fund. Index funds that follow the S&P 500 are a strong choice, and they’re Warren Buffet-approved
  5. Regularly invest more money, either in the same thing or in something different.

There’s an almost infinite amount you can learn about investing, but that’s optional for the average person. A little work upfront and then some regular maintenance a few times a year are all you need to set you up for a financially secure future! 

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