How to Invest in Stocks When You Do Not Know Where to Start
As I have shared before, I had the pleasure or mis-pleasure of working in the online brokerage industry for a number of years. I learned many things while in that role, but what I saw more than any circumstance or event was investors not knowing how to invest in stocks and ultimately derailing their investing goals or their retirement planning as a whole.
I don’t necessarily blame investors for their ignorance. No matter what we know, there’s always more to learn when it comes to investing and, if you haven’t been fortunate to have a parent, relative or boss teach you how to invest in stocks, how would you know where to start?
Lord knows I have my own weaknesses, so I can empathize with investors who just don’t know what they don’t know. However, I have come to realize that knowing how to invest in stocks is not really difficult, per se, but just requires a bit of homework.
If you are new to investing in stocks and would like a primer then I recommend you checking out my learning to invest page as it has a number of posts all geared towards helping get you started investing in the stock market. For now though, let’s cover how to invest in stocks when you don’t know where to start.
Learning How to Invest in Stocks Starts With Education
The primary problem I saw with many retail investors was a lack of knowledge. Many peoples’ eyes glaze over when investing is mentioned, our society doesn’t really champion it and our primary and secondary schools don’t really teach it, so finding good and clear how-to’s on investing is vital.
The first two places I point investors to when it comes to learning how to put their money in the stock market is two books – A Random Walk Down Wall Street by Burton Malkiel and The Essays of Warren Buffett.
A Random Walk has been around for 40 years and is considered by many to be the source to go to for investing education. Malkiel breaks down many complex investing strategies and philosophies simply so that anyone can understand them.
The second book is a collection of Warren Buffett’s annual letters organized thematically for easier reading. Buffett, as well, has a good style and talks in a way that makes investing easier for many to understand. If you’re looking for other books on investing then make sure to check out my post on the best investing books for beginners for some other solid options.
Open a Brokerage Account
Once you’ve educated yourself on how to invest in stocks and are ready to put some skin into the game, the next thing to do is to open an online brokerage account. It’s likely that you won’t be investing with a full service broker who’ll manage the funds for you and thus will need an avenue to do that yourself.
There are many online brokerages out there and many will claim to be the best online brokerage but few actually fit that bill. There are a variety of options to consider, so make sure to check out my best online brokerages page to find one that fits your needs.
As someone who likes to be frugal, I am always mindful of fees. You really should not be paying more than $7 per stock trade and you want to avoid any hidden fees. I personally invest with Scottrade and Optionshouse as they’re $7 and $4.95, respectively, per trade. Many brokerages try to sell to you as it’s a very competitive market. Don’t allow yourself to get bamboozled into services you don’t need or products you don’t understand.
If you’re new to investing in the stock market a nice bonus to get is using a brokerage that offers paper trading which will allow you to dabble in investing without using your own money. That is a great way to get your feet wet in the stock market and build up your confidence executing “practice trades” before you put your money on the line in real ones.
Look Around Your House and Daily Habits
If education is the primary problem of many retail investors, then knowing what stocks to invest in comes in as a close second. I assume that the two sort of go hand in hand, but I spoke with investors on a daily basis who did not know what stocks to invest in.
This is actually a very easy problem to solve, relatively speaking. Buffett argues that we should buy what we know and I could not agree more. Explore your house and examine your daily habits and you will find that many of the products you buy are made by generally very solid companies who have been around for decades.
Beyond that, many of those companies are likely strong dividend paying stocks which means they return money to you, usually quarterly, for owning their stock. If you find yourself wanting to know how to invest in stocks, this is likely one of the easiest ways to determine which ones to invest in.
Invest With the Market
As you’re learning how to invest in stocks, you will find many who argue it’s possible to beat the market or at the very least time it. Let me spare you some pain by saying what proponents of that method won’t tell you – it’s a fool’s errand and will generally only result in you losing money either in the form of exorbitant trading costs or losses in your portfolio.
In the end, the people who promise you their strategy will make you rich never tell you the secret to their success; it’s not timing the market or following the big boys, it’s taking your money and making you think you’ve gotten something valuable in return.
Instead of trying to time the market, or deal with the headache of determining what individual stocks to invest in, invest in index funds.
An index fund is either an ETF (Exchange Traded Fund) or a mutual fund which is intended to track a number of indices such as the Dow Jones or the S & P 500. There is ongoing debate in terms of if you should invest in an ETF or mutual fund and at the end of the day a good ole’ index fund will meet the needs for many investors that want a hands off approach to their investing.
They allow you, generally, to go with the market and not waste time and energy trying to beat it. If you do go this route, just make sure you are not paying more in fees than you ought be. One of my favorite, and free tools, to do this is Morningstar. Once you have a few funds in mind to invest in, you can use the “Fees and Expenses” section of Morningstar to see what each fund will cost you to own.
Set Your Goals and Check on them Regularly
As you’re learning how to invest in stocks, you’ll want to determine the goals you have for your investing. Is this the beginnings of you saving for retirement or is this intended to start funding for children’s college education? Whatever your goal is, you want to make sure you stay on top of it. Make sure that you check on your investments on a regular basis, whether that be monthly, quarterly, or some other interval.
Find what works best for you and do it religiously. One of the greatest investing sins I saw many investors make was to invest in a certain stock or mutual fund only to then ignore it for years. I wish I had a dollar for every time I spoke to someone who invested in a stock and left it alone for 10+ years and ended up losing their shirt because they ignored it for so long.
If you do one thing while investing in the stock market please make sure you’re aware of what’s going on with your portfolio so you do not find yourself losing your shirt because of ignoring your money.
This can be done relatively easily through using a service like Personal Capital which allows you to keep track of all your investment accounts in one place in addition to a free portfolio review. I personally use Personal Capital as they provide a great way to stay on top of my finances for free while also making sure my investments are doing as they should.
add some diversity
One final option to consider if you’re not wanting to invest in stocks but still wanting to invest, there are other options out there for you and often in small amounts. This can be done through Peer to Peer Lending with either Prosper or Lending Club.
If you go with either of these options you can invest in notes for as low as $25 and both claim anywhere from a 7 to 12 percent return. Assuming you don’t want to invest in stocks something like this can be a justifiable option to consider. On the other hand, if you are in the stock market, this can provide some nice diversity to what you’re already doing.
Are you looking for ways of how to invest in stocks? If not, how did you get started in investing? Would you ever consider Peer to Peer Lending as an investment option?
Additional resource: If you’re looking for somewhere to invest with little money, you can open a Motif Investing account for as little as $250. I personally use Motif as they offer a great way to get started as well as allowing for instant diversification, not to mention promotions when you open a new account with them.