How To Invest in Stocks, Beginners Guide

The amount of information, the language used by professionals, and the real risk of losing your hard earned money can make thinking about investing in the stock market daunting. However, we believe investing is for everyone. With that in mind, we want to take away the obstacles that are stopping you!

This article is broken into the following sections:

Why invest in stocks?
How much you should invest?
Where to start trading?
Conclusion

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Why invest in stocks?

Investing in stocks gives you a way to supplement your current income, prepare for your retirement, and gives you a way to take control of your future.

Even though there is a risk of losing the money you put in the stock market, it is actually riskier not to invest.

Investing also gives you the opportunity to have your money work for you instead of you always working for your money. If you want to reach financial freedom, it is imperative that you use the stock market as a tool to get there.

Compound Interest

The earlier you start putting money in the stock market, the better for you. Time and math combine in the form of compound interest to give your money the kick in the pants it needs to work harder.

Compound Interest is the best friend you never knew you had. Compound interest is interest paid on the initial money you invest plus the money it has made. Think of it like a money snowball that picks up more money while it keeps rolling.

The longer you give compounding time to work, the more it works in your favor.

As this article on Motley Fool shows, compound interest can blow your initial investment through the roof with very little effort on your part.

Below is a graph we created to show you how your money would grow by just investing the amount of a yearly Netflix subscription ($8.99 x 12) = $107.88 for 20 years.

Passive Income

Another good reason for you to invest in the stock market is for passive income or supplemental income.

You can supplement your current income either by buying stocks that pay a dividend.. Dividends are a portion of profits that companies pay out to shareholders. This is the equivalent of receiving a small paycheck outside of work.

Another way to supplement your income through stocks is by buying low and selling high. When you buy stocks you should believe that it will go up in value. If you buy a stock and decide to sell it when it goes up in value you will have made income in the form of capital gains.

Building up other income streams outside of your job gives you more security and reduces your reliance on having a job for money.

How much should you invest?

This is based on 3 things……

Individual Financial Analysis
Risk Tolerance
Financial goals

Individual Financial Analysis (Formula)

Since investing involves the risk of losing all or part of your money, make sure you have your basic needs/bills covered before starting.

Many people have no idea how much money they need to have in order to invest in the market. However, there is no specific dollar amount, it actually just depends on you.

Start by determining how much money you are paid, then subtract how much you need to pay for your monthly bills. Next, save up enough for 6-9 months of savings in an emergency fund to cover your bills. Once you have those bases covered, you can then determine how much you can invest on a consistent basis.

After doing this simple math, you will know the amount of money you can invest.

Before investing, we want you to have enough money saved to cover 6-9 months of expenses before you start investing.

If you are new to saving, we suggest online banking. You can deposit a check from your phone, open multiple accounts with different objectives and set up automatic withdrawals from other accounts to fund them.

Here is a list of a few banks that we find convenient when it comes to ease of use, depositing cash, and interest rates paid on savings:

Capital One 360 – able to make cash deposits at branches and ATMs. No minimum deposit is required.

American Express Savings Account – high-interest rate and good customer service. No minimum deposit is required.

HSBC Direct Savings – high savings rate and some branches so that you can deposit cash. Minimum deposit of $1.

Right now, our favorite is Capital One 360. (We don’t receive any money from recommending this account.) We find the app easy to use and flexible for different saving objectives.

Since no one wants to pay fees for going below minimum balances, Capital One 360 gets bonus points for not requiring account minimums. Truthfully, there are plenty of banks online and they all want your business. Don’t pay fees when they can be avoided. Put that money towards your goals.

Risk Tolerance – Can you stomach the ups and downs of the market?

Since the stock market constantly fluctuates, you shouldn’t consider it the same as putting money in a savings account. On some days your account balance will be higher than your initial investment and on some days it will be lower (sometimes a lot lower.)

However, when there is more risk there is more reward (at least when it comes to investing – not walking down a dark alley. Seriously, don’t walk down a dark alley looking for a reward lol )

Historically, the annual average return of the stock market is 10% or ~8% when adjusted for inflation. Average means some years it returned higher than 10% and sometimes lower.

Compare that to what saving accounts and CDs are paying now (~2.5%), it’s a no-brainer. Bankrate does a good job of listing banks and their rates for either product – Saving Account Rates and CD rates

Frankly, we don’t understand why anyone would buy a CD. Your money is locked up and the interest rate they pay you for your money is no better than the general savings rate – pass, no thank you.

Depending on your ability to stomach the ups and downs of the market – stocks may be the best bet for you. Stocks are the most volatile, which means they have the ability to go up and down in price often, out of the traditional investment products (asset classes).

If you can stay in for the long term, understand what you are investing in, and continuously invest, you can make money in the stock market through stocks.

Financial Goals

Before you invest, there are a few questions you need to answer.

What are your short-term and long-term goals when it comes to investing?

Are you trying to save enough money for a down payment for a house in the next 3-5 years? Do you want to save for a vacation?

Save for retirement or your child/ren college education?

The answers to these questions will help you determine where you place your money, your timeline for reaching these goals, and the amount of risk you are willing to take.

If you need your money in less than a year, maybe a savings account is better for you. You will not earn as much as you would in the market, but the money you have in a savings account is considered safe and easily accessible.

Either way, if you choose to put your money in a savings account or in the market, we recommend you set up an automatic withdrawal. That way you can automatically place money into an account dedicated to your goals.

I know my numbers, my risk tolerance, and my goals. Now what?

Since you can’t go into the stock market and purchase an investment as an individual, you need to find a broker.

Consider a broker your middle man. He’s the guy you give your trading instructions and money for the trade. He also keeps a record of all the trades you make.

Sometimes, these brokers will play the middle man for you for free. Other times, they will charge you a fee for each trade.

Where to start trading – Popular Brokers and Fees

There are lots of brokers out there so the best way to narrow it down is to ask these questions:

What are the fees they charge for each trade?
Do they offer their own products and research tools that are easy to use?
How is their customer service?
Does it take a long time to reach someone knowledgeable?
How easy is it to use their site or app to make a trade? Can you book a trade from your smartphone as easy as you can from your desktop?

Sometimes when we are researching brokers, if their customer service is excellent and they are responsive to our questions, we are willing to pay a higher fee per trade.

For your convenience, we have suggested some popular brokers. This list is based on their ease of use, services, and fees. Knowing this information is critical for beginner investors.

When you open an account, they all will offer promotions. However, the promotions change over time so you have to check their sites for updates.

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Quick Broker Breakdown

Fidelity Investments (Desktop and App) – this is the broker most people use when they have retirement accounts outside of their company.

Fidelity also is a broker for individuals who want to invest in the stock market for purposes other than retirement.

Fidelity Investments charges $4.95 for each stock trade.

Charles Schwab (Desktop and App) – We like Charles Schwab because you can open a checking account and a brokerage account at the same time.

Their interface is pretty easy to use and they provide ways to move money between each account you have with them.

They also have great customer service. Their price per stock trade is $4.95 too.

TD Ameritrade (Desktop and App) – is another brokerage firm where you place trades to buy stock in the market. The fees that TD Ameritrade charges for their stock/equity trades are $6.95 per trade.

TD Ameritrade has a good platform, but in our opinion, it is not as user-friendly as Charles Schwab or Fidelity.

Robinhood (Mobile App) – Good app for beginners to use and doesn’t charge a fee for trading through their app. However, unless you used the paid version of the app, they don’t have as many tools to use as far as researching a stock.

M1 (Mobile App) – https://mbsy.co/BrmMp This mobile app is good for beginners too. It offers commission-free trading. You can also buy fractional shares which is a nice option. Fractional trading allows you to own a percentage of a stock that you are interested in rather than paying a high price for just 1 share.

This is also a robo investor/ broker which means that a lot of things are automated and taken care of by a computer. Therefore, if you have a lot of questions this is probably not the app for you.

However, if you want to invest and not concentrate on more than just funding your account on a regular basis, then this could be a good option.

You pick your portfolio based on ones they have online or create your own. The system will automatically adjust it for you to balance it based on what you initially set up.

Acorns (Mobile App) – If you feel like you just can’t save for investing, then this is the app for you.

They will round up your credit/debit purchases to the nearest dollar and put that amount into your Acorns account. Once it reaches $5 then you can start investing. *You have to hook Acorns up to the credit cards and debit cards you use for purchases.

There are no fees on trades, but there is a $1 fee each month. That seems low, but if you don’t have a lot of money in your account, $1 is a big fee. If you add a retirement account to your Acorn portfolio, then the fee jumps to $2 a month!

You only get to invest in ETFs so your investment options are limited. We say use Acorns if you are not the best at putting money aside for investing.

Even the brokers who charge a fee for stock trading have ETFs that you can trade without paying a commission fee so look around before settling.

Stash (Mobile App) – Good app for people who are beginners and want to learn as they invest. In order to use Stash, you have to start your account with at least $5.

The stock and ETF choices are limited, but they are well known companies and they allow you to buy fractions of a share. They also charge a fee of $1 per month for their most basic service too.

This is very similar to Acorns, but the difference is that they allow you to buy stocks and not just ETFs. You can also fund your account by using the round up feature.

We still think, based on the features you get, the $1 per month fee is expensive. However, if you want to learn information while you are investing, then check this out instead of Acorns.

Stockpile – This is not necessarily an app for beginners, but it’s useful if you want to get your kids to learn how to invest in the stock market. It is also good if you are tired of toys junking up your home after every birthday party or Christmas.

Family and friends can give the gift of stocks to your child as a present. All they have to do is buy a virtual or physical gift card and choose which stock they want the child to buy.

If the child doesn’t want to buy that particular stock, the child can change it to what they want to buy. The fees for buying the stock are paid by the person who bought the gift card so the full amount of the card can be applied to the stock purchase.

The cards have no expiration date and can be bought in big stores like Loews or stockpile.com. They also allow you to buy fractional shares.

If you don’t know what to give as a gift or are a last minute shopper. Stockpile seems like a good alternative to buying toys or Amazon gift cards for presents. (Nadia loves buying gift cards because she never buys a gift in time for a birthday party lol).

If you are nervous about using real money, you can practice paper trading. Think of this as trading with monopoly money. It allows you to practice trading before actually investing. If you are interested in paper trading, here are a couple of apps that may be of interest:

1. ThinkofSwim

2. TradeHero

3. Tradestation

TYPES OF ACCOUNTS YOU CAN OPEN AT A BROKERAGE FIRM

When you find a broker, you will open a brokerage account. In order to open a brokerage account, you must have a bank account and a valid ID. A bank account is needed so that money can be transferred to your brokerage account when you start trading.

It can be any bank as long as you are able to send money from it to the brokerage account. However, if you are under the age of 18, you will need a parent/guardian to open a brokerage account for you.

Additionally, if you are a citizen you should have no trouble opening an account. If you aren’t a citizen, you should probably call the broker to see if there are any restrictions to opening an account.

Trading / Brokerage – An account that you use to buy stocks or other securities. This is an account that is taxed when you sell anything for a profit. This is the primary account you will open when you are trading for purposes other than retirement.

IRA – An account that you use for retirement purposes outside of the one your job provides (401k etc). This account is not taxed when you sell. Taxes are taken out when you withdraw money after 59.5 years old.

If you take out money before 59.5 years old, you will be taxed at that time and with a penalty applied.

Roth IRA – A retirement account you fund with after tax money. After you turn 59.5 years old, the money you earn and the money you withdraw from this account are both tax free.

Instructions to your broker on how to buy stock for you

Once you decide what you want to buy, you have to tell the broker exactly how much you want to buy and when to buy it. Below are the two types of trades beginners should know about:

Market order – When you want to buy a stock at full price you will put in a market order. You are telling to broker “hey, buy this for me now at the price the seller is asking. No negotiations needed”.

The problem with buying stock this way is that you are paying the highest price available and, due to lag time, you can pay more than you expected. Most beginners use market orders because they are unaware of the other ways to buy a stock. Do us a favor, keep reading this post and don’t buy stock this way.

Limit order – An instruction you give your broker to buy at a specific price or lower. You may not be able to buy the stock you want on the day you want, because the price you set to buy may be too low and no sellers accept it.

However, you can always adjust what you are willing to pay. A limit order gives you more control over your money when trading. Think of using a limit order like using a coupon.

Conclusion

We know you work hard for your money so being a new investor can be scary. However, knowing how to manage your own money and grow it, is one of the most satisfying things you can ever learn.

This is a great time to start investing because there are more options available now than ever before. Now, you can also trade either through your phone or your computer.

On top of it all, many brokers have lowered the amount of money you need to start investing. You can start investing with as little as a dollar and not pay any fees.

Just by reading this article, you have learned 4 key points about investing!

How much money to use to start investing?
Where to set up an account to begin investing?
Key accounts for beginners to consider
Instructions to give your broker to buy what you want at the price you want

You also learned some important investing vocabulary. If you are interested in learning more key terms, check out our Life cycle of a Trade flow chart

Keep in mind though, the stock market is not a game you should play before educating and understanding the basics first.

However, when you invest, you also have the opportunity to earn money without having to trade your time for it!

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Do you think you are going to start investing within the next 3 months? If not, what are some things that you feel may hold you back?

How To Invest in Stocks, Beginners Guide

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