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How to Invest in Stocks When You Do Not Know Where to Start

Stock Market

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. As I began writing this post, I realized that there’s more information than I can squeeze into one piece so I’ll likely turn this into a mini-series on how to invest in stocks. Whether you’re a seasoned veteran or are preparing to make your first stock trade, buckle in and hang on, because you’re guaranteed to learn something you didn’t know before.

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.

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.

As someone who likes to be frugal, I am always mindful of the fees. You really should not be paying more than $7 per stock trade and you want to avoid any hidden fees. 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, generally 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 you’ll have the opportunity to make a nice little return over time if you own their stocks. 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. There is ongoing debate in terms of ETF vs 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.

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.

Are you looking for ways of how to invest in stocks? If not, how did you get started in investing?

 

Photo courtesy of: 401(k) 2013

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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66 Comments

  • I found the best way I learned was by asking others who were in the market and by having practice runs with pretend shares in an excel spreadsheet. I did pretend investing for about 6-8 months before I entered with real money. I’m not sure how much it helped, but I seem to do OK.
    Glen @ Monster Piggy Bank recently posted…Teenage Pregnancy and AdoptionMy Profile

  • I trading for about 6 to a year on paper before I actually started investing. At one point it was great because it made me understand the concept of what if I lost the money…could I stand the pain and did I have the emotions for the up and down. Be sure to take profits with the gains. Don’t think the market will always go up and start by investing in companies you already own products with.
    Your Daily Finance recently posted…Personal Finances for Everyone – Even YOU!My Profile

    • John says:

      That’s a great point! It really can be a challenge to separate those emotions, but it’s vital to making sure you can have long term growth in your portfolio.

  • Matt Becker says:

    Really terrific tips. Good investing is really simple. Not always easy, but simple. I will say that there are ways to get access to many of the best index funds out there without any trading fees, namely by investing directly with someone like Vanguard. And whatever your strategy, accurately track your performance and compare it, including costs and taxes, to a relevant benchmark.
    Matt Becker recently posted…My Life Insurance MistakeMy Profile

    • John says:

      Thanks Matt! I agree, solid investing really can be simple and I am actually planning a post on that topic. Great point on getting access to some of those index funds, if you can get them commission free than it’s a no brainer to take a hard look at some of them.

  • Thanks for the tips! No doubt education in investing is important, I think the real challenge comes in facing the emotions in the investing world. Experience is one integral aspect in determining success as well.
    Janice @ Whiz Silver recently posted…7 Great Habits That Lead You Towards A Blissfully Debt-Free LifeMy Profile

  • Investing in the stock market is something that is definitely underutilized as a way of building wealth. I don’t think it even really should be taught in schools, but it’s not really even mentioned. I have learned all I know about investing from blogs!
    Daisy @ Prairie Eco Thrifter recently posted…11 Fast, Cheap Ways to Look YoungerMy Profile

    • John says:

      That’s a great point Daisy. There’s very little of it taught in schools, which is a real shame. There’s some simple basics that could be taught that could help out a great many.

  • I’d like to suggest one more book to your investing education reading list: “Why Stocks Are Riskier Than You Think,” by Drs. Zvi Bodie and Rachelle Taqqu.
    Kurt @ Money Counselor recently posted…Wacky Video and Thanks, Week Ending 01 June 2013My Profile

  • I have done some trading in a fake money account, but haven’t really spent much time doing it in the past year or so. I track some stocks, particularly health insurance and health-related stocks on a fairly frequent basis. As you said in the post, it’s easy to think of stocks to invest in (or at least research and track) because the products and services we use on a daily or weekly basis are usually tied to a larger corporation, if not made by a publicly traded company.
    DC @ Young Adult Money recently posted…How to Organize Coupons Using a Database in Excel [With Download]My Profile

  • I always liked the concept of buying what you know. It’s really true that if you use it, likely many others do as well. I think if you listen to Warren, it’s really hard to go wrong money wise.
    Kim@Eyesonthedollar recently posted…Say No To Your Children Now So You Won’t Have to LaterMy Profile

    • John says:

      I could not agree more Kim. I know that we hold a stock or two of things we use nearly every day. It’s not fool proof, but has the potential to do very well, over time, for many investors.

  • While I haven’t gotten into investing yet, I plan to start at the beginning on 2014. I read Millionaire Teacher a few months ago and that really helped me get my head around the basics, but I definitely want to get my hands on a copy of A Random Walk Down Wall Street because I’ve heard that it’s an excellent read for a beginner like me. I think when I do start, I’ll begin with index funds.
    Jordann @ My Alternate Life recently posted…June 1st NETWORTH Update!My Profile

  • Debt Blag says:

    That’s interesting that you mention that. In my grade school and high school education, the stock market was the *only* aspect of personal finance that was mentioned — nothing about bonds, the money markets, real estate…
    Debt Blag recently posted…June 2013 net worth update, up $21,200!My Profile

    • John says:

      I know some schools will do a stock picking game. I know I did in my school, but it lasted a week or two and was basically a game to pick the stocks you know…so many were investing in DIS or KO – mind you not bad stocks at all. I would like to see a little more in terms of basics though as opposed to just picking a stock or two.

  • Investing was a little scary when I first started, but there are so many resources online to help you learn more. If you take the time, you can get a wealth of knowledge. I agree with you about not getting bamboozled with online brokerages. Only pay for what you need.
    Grayson @ Debt RoundUp recently posted…Have You Audited Your Automated Payments Recently?My Profile

    • John says:

      It was for me as well Grayson and I think it is for many. You’re completely right though, there are many resources available out there & many are free. :)

  • Jake Erickson says:

    These are all great tips. As someone who will begin investing within the next year, I will take these lessons and try to apply them to my own portfolio. I think the biggest thing is to have a long-term investing plan and stick to it regardless of whether the market is increasing or decreasing.
    Jake Erickson recently posted…Why I Canceled Our Satellite TelevisionMy Profile

    • John says:

      Thanks Jake! Having that long term view is vital, as well as separating your emotions from the investing. It’s easier said than done at times though. ;)

  • This is one of my weakest areas when it comes to personal finance. I have an old 401k and I have my money in an investment account that someone else manages (per my dad’s suggestion years ago), but I lose focus on it and don’t to much to actively participate. It’s one of my goals this year.
    Budget and the Beach recently posted…Trying to Solve the Mysteries of the UniverseMy Profile

    • John says:

      I think it is for many Tonya which I think largely goes back to not knowing where to start. The great thing is that there is a wealth of resources available and much of it’s free.

  • Jai Catalano says:

    I started with conservative mutual funds. Then i went to ETF’s. Then I bought stocks and sold covered calls. I don’t own stocks outright because I love options trading.

    • John says:

      Options trading really can be addicting, especially if you know what you’re doing. I have started doing more this year with straddles and spreads. I want to do more of it, I just lack the time to actively manage it.

  • Stock market games that use real quotes and market fluctuations are great crash courses, I’ve found.

  • Greg@Thriftgenuity says:

    John, looks like we were on the same page today as I wrote about a similar topic in staying educated about the market. I really like that you are pointing out the goal is to stay with the market not beat it. I think that is a much better way to gauge how your investments are doing and people that promise more are likely not being genuine.
    Greg@Thriftgenuity recently posted…Learn the Lessons of the PastMy Profile

    • John says:

      Yes, I was thinking that as I read your post Greg. :) I could not agree more, I think we really do need to focus on what the market is doing as opposed to wasting time, energy and money trying to beat it.

  • Michelle says:

    This is a great list! Will have to show it to my sister.
    Michelle recently posted…$7,641 in May Extra Income – Side Hustles!My Profile

  • I can’t really think about investing until my debt is paid off in 4-5 years, but with great tips on great blogs like yours John, I’m not intimidated :)
    Girl Meets Debt recently posted…Life Update: Getting Past DisappointmentMy Profile

  • I was extremely hesitant to invest. I even delayed my 401k for 2 yrs (no match) because I couldn’t figure this thing out. Then I created a mock portfolio and invested to get my feet wet. Even after that my first investment was S&P 500. I never pick individual stock even now. I stick to index funds, but not my portfolio is much more diversified.
    Suba @ Wealth Informatics recently posted…How can I afford everything I want? Should I stop wanting?My Profile

    • John says:

      You’re not alone Suba, many are in that same spot. You have to go with what works for you and having that diversification you have is key.

  • Starting with index fund is a great idea. A new investor just need to keep adding money and he/she will see that it would pay off in the long run. It’s the easiest way to invest. You can always diversify more later.
    Midlife Finance recently posted…Making Credit Cards Work For YouMy Profile

    • John says:

      I completely agree, especially as you’re starting out. That can be a great way to get your feet wet and stay with the market.

  • I think the piece that a lot of people miss is that no matter how much you educate yourself beforehand, eventually you just have to jump in and start doing it. When I started investing, I read a lot on investing. It wasn’t until I actually started doing it that everything I read started to make sense to me.
    Nick @ ayoungpro.com recently posted…“2% or Skim?” and Other Inane Questions I Asked to Earn a LivingMy Profile

    • John says:

      That’s a great point Nick! I think a lot of that goes back to determining how much risk you want to take on and being comfortable with the idea of losing money.

  • Wonderful tips, John. These days you really don’t have a choice but to be an investor and so many people are unprepared to fulfill that role for themselves. Education is key and I know it’s a subject that make some people really sleepy but boy, will you be wide awake when retirement nears and you realize you can’t stop working. It’s worth figuring out. The other mistake I see frequently (and I’m sure you did too) is how emotional people become when handling their money. They have knee-jerk reactions to a bad day at the market or they giddily follow someone who told them they just made a killing on “said’ stock. Education goes a long ways in helping you make informed and not emotional decisions.
    Shannon @ The Heavy Purse recently posted…The Power of Money Conversations with KidsMy Profile

    • John says:

      Great insight Shannon & I could not agree more. I know investing makes many peoples eyes glaze over, but it’s so important to have even a basic grasp on. Yes, I saw people make emotional decisions all the time and I just wanted to shake them half the time. I think a lot of times it did come down to that lack of education as well as allowing those emotions stay in the driver’s seat.

  • Pauline says:

    I really don’t know much about stocks, but a $7 trade order seems high indeed. In forex it is free but then you have the spread between buy and sell, about 0.2% so you really need to trade high to get to $7.
    Pauline recently posted…Little house in Guatemala, week 26-30My Profile

    • John says:

      Actually, $7 per stock trade is very competitive and is a pretty good price. There are a few places that can beat it, but they usually do not offer a lot of value for their price.

  • I would recommend deciding at the outset if you want to be an investor (long term) or a trader (short term). Both have very different goals, strategies, and risks associated with them. I would also advise everyone regardless of whether they favor a long or short term holding period to write up an investment plan that spells out the conditions under which they will consider buying or selling a stock.
    My Financial Independence Journey recently posted…Ameriprise Financial (AMP) Dividend Stock AnalysisMy Profile

    • John says:

      Those are all great points MFIJ, especially the investor vs. trader aspect. I have written on several of your other points exclusively in previous posts. :)

  • I found the best way to learn about investing is to lose a lot of money haha. Everyone thinks their a great investor during a bull market but their feelings may change when every stock they pick is losing money.

    • John says:

      Lol, that’s one way to learn. ;) I know, all the “experts” come out during the bull runs and then, all of a sudden, they’re quiet once the bears come out.

  • If you are not totally comfortable with investing then mutual funds are the way to go. The fund managers do all of the work for you. You just need to pick out the good performers and make sure they don;t charge high fees.
    Sean @ One Smart Dollar recently posted…Who is USAA?My Profile

  • Thanks for the starter information! I’m going to need it in a few months when I get started!
    femmefrugality recently posted…ABCMouse Review and GiveawayMy Profile

  • Untemplater says:

    It really does start with education. Most graduates aren’t even totally sure what stocks and bonds are and the stock market can seem totally foreign and intimidating. I agree that there’s an endless amount of things to learn when it comes with investing but it’s never too late to start learning the basics.
    Untemplater recently posted…15 Solutions If You’re Feeling Unappreciated At WorkMy Profile

    • John says:

      I completely agree Sydney. I don’t think it’s ever too late really to start learning the basics, especially as that can really help with the overwhelming feeling many can experience.

  • John, wonderful post!!! Did you write this one for me? :-) . Can’t wait to read the Buffet book. Rick and I have been seriously contemplating starting in stock investing, and this was just the info I needed to learn how to start. Thank you!!!
    Laurie @thefrugalfarmer recently posted…Recipe of the Week: Cheese QuicheMy Profile

    • John says:

      Thanks Laurie! I appreciate that as I was wanting it to be more personal since investing can be so dry for many. Glad to be of help. :)

  • My investing journey started when I got married. My wife came into our marriage with a small mutual fund account that was set up for her by her grandmother. Cool I thought…I get the girl and the money! :) Actually, what I felt was a tremendous responsibility to learn so that I didn’t blow it. Since then, it’s just been a slow process of learning from successes and mistakes, understanding my risk tolerance (which I think many don’t take time to properly assess), and monitoring my emotions over our money.
    Brian @ Luke1428 recently posted…The Secret Goal Only Two People KnewMy Profile

    • John says:

      Lol, that’s awesome Brian! I think that’s how many of us should learn and agree that risk tolerance issue is one that all too many do not heed at all.

  • CashRebel says:

    It sounds like I need to get A Random Walk Down Wallstreet out of the library. I’ve read quite a bit about index investing and what has worked in the past, but I keep seeing this book come up. When I first started investing, I didn’t really have a goal. Now I understand what risk tolerance I can stand.

    • John says:

      I could not recommend it enough Ross. I think even if you’re a seasoned investor you’re likely to get something out of it. The fact that Buffett wrote the foreward for it and it’s recommended by virtually every one is good reasoning in my opinion.

  • Elle P. says:

    Bookmarked for future reference. You mentioned that this post is going to be part of a series. Are the other posts up? If you have time, I recommend to add links of the series to the end of each post. Your site can get stickier by prospective stock enthusiasts like me! :)

    • John says:

      Thanks Elle! Yes I did… I have to get back to that. :) I am still forming my thoughts on where I’ll be taking this series – but I do definitely plan on adding more to this. Great suggestion on linking to the series at the end of each respective post.

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