How to Start Investing in the Stock Market: The Ultimate Guide
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Investing in the stock market confuses a lot of people. We hear about stocks, bonds, mutual funds and become paralyzed by fear. The result? We don’t start investing and, as a result, we don’t grow our wealth. Unless a friend or family member teaches you, it can be overwhelming to know where to start.
That was me once. I had no idea about how the stock market works. As a result, I didn’t invest for several years because I thought it was impossible.
Many people deal with the same apprehension and don’t know how to start investing in stocks. Unfortunately, this holds many back from reaching their goals.
If the idea of starting to invest in the stock market overwhelms you, then this guide is for you. You don’t have to be an expert to start investing; you just need a little bit of knowledge and a willingness to start.
Why You Need to Start Investing in the Stock Market
We all have long-term goals, such as:
- Saving for retirement
- Buying a house
- Helping children pay for college
You may have different goals, and that’s fine. However, you need to start investing in the stock market because it’s one of the best means of accomplishing your goals.
There are other important things like avoiding debt, not overspending, and progressing in your career, but investing in the stock market helps grow your money in ways that these other channels simply can’t.
In spite of this reality, a 2015 Bankrate study revealed that 52 percent of Americans do not own any stocks, mutual funds, or other forms of investments and thus decrease their ability to grow their net worth. In fact, more Americans own cats than stocks.
There are a variety of reasons for that statistic. While many people may genuinely not be able to invest in the stock market, I think, in many cases, it’s possible to change that statistic for the better. It’s simply a matter of knowing when and how to start.
Step One – 401(k)s
I know this seems like I’m getting ahead of myself, but I’m going to jump into the middle of explaining how to start investing and then take a step back. It seems confusing but stick with me as I explain the best place to start investing.
I promise it’ll make sense.
Typically, the best and easiest option to use to start investing is right in front of you – your employer-sponsored 401(k) plan. In fact, the American Benefits Council reports that 80 percent of employers offer access to a retirement plan. In many cases that plan is a 401(k).
To get started, all you need to do is sign up. Here’s our guide on how to setup your first 401(k) if you’ve never had one.
A 401(k) works relatively simply. Your employer takes pre-tax money from your paycheck and invests it in your choice of investments from the plan offering.
If you’re lucky, your employer will match your contributions up to a certain amount. The most common matching amount is 50 percent of up to six percent of your annual salary.
Assuming a salary of $50,000 spread across 24 paychecks per year, a 401(k) contribution works like this:
- You contribute six percent, $125 per pay period
- Your employer contributes an additional $62.50 per pay period
That extra $62.50 is free money! They give it to you as a benefit, so it’s foolish, in most cases, to not take advantage.
What happens if you leave your job?
The short answer is nothing if you do nothing. Ideally, you would want to do a 401(k) rollover to your new employer or move it to an Individual Retirement Account (IRA). You will be able to take all of the money you contributed, and it varies from employer to employer what you can do with the money provided through the match.
They may have a vesting schedule that lists the amount you can take based on the number of years you participated in the plan.
**Related – have a 401(k) but think you could be investing better? Check out Blooom. They analyze your plan for free and help you find the right mix of investments within the plan.**
If you don’t know how to invest in stocks, your 401(k) will be the best first option to take as it’s so simple. Many employers will even offer free resources to help educate you on how to start. Take advantage of them if you’re new to investing.
Step Two – Education
Speaking of educating yourself, this is ideally the first step you take when investing in the stock market. There is one reason behind this – the more knowledge you have about investing, the more comfortable and more confident you’ll feel.
The combination of the two will help you make better investment decisions. It will also help you clarify your appetite for risk. This begs the question of where you can go to learn how to invest.
You don’t need to take special classes, be an expert in finance, or continually watch CNBC. You do, however, need to find something or someone that will explain investing to you in an understandable way.
Thankfully there are many resources that do just that.
Where to Learn About Investing
I’ve written about the best investing books for beginners in the past, and many of the books on that list are a great go-to resource to start learning about investing. There are also a number of other resources.
For instance, the internet is full of free resources to help you learn about investing. Many online brokerage firms like Etrade or Ally Invest offer free classes, video and occasionally in-person, to teach you the different facets of investing.
Finally, your 401(k) provider may provide free resources to help you start investing.
Don’t let the amount of information overwhelm you. You might think you need to be an expert to start investing but fortunately, that’s not the case.
All that most investors need is a very basic understanding of how the stock market works. Thankfully, that’s relatively simple to accomplish with a little education.
Step Three – Money
A common excuse many use for why they haven’t started investing is they do not have enough money. I get that concern and for some, it’s a real issue.
For many others, though, it’s only holding them back. Often, it comes down to believing you can’t invest in the stock market with little money and that it takes tens of thousands of dollars to start.
More is better, of course, but that doesn’t mean you can’t start investing in small amounts. You can start with next to nothing if you choose an app like Stash Invest, who allows you to start investing with as little as $5.
When you open an account with Stash Invest, they give you $5 so you can start investing right away.
Stockpile is a great alternative to Stash Invest. Stockpile lets you invest in partial shares of stock and gives you $5 of stock for free when you open an account.
Why the Amount Doesn’t Matter
There are two main problems that occur when the amount of money you have to start with prevents you from investing. The first is that when you delay investing, you lose out on the benefit of time.
You might think you can’t start investing with $1,000 or less, but you can. To think otherwise is missing the point.
Time does to your investments what a greenhouse does for plants – it helps your money grow. If you don’t start investing because of limited funds, you only harm yourself in the long run.
By starting now, regardless of the amount you have to initially invest, you can start growing your money quicker. This allows it to grow it to a more sizable amount in the long run. Don’t hold back because you don’t have a large sum of money to invest; you’ll only hurt yourself.
The second problem is that investing is a discipline and the longer you wait, the more you delay your personal development for investing. This really ties back to the first problem. It takes time to develop an investing philosophy and discipline.
The earlier you start, the sooner you’ll develop the discipline and maturity as an investor. This discipline will serve you late on as you intensify your focus on reaching your goals.
As the Center for Retirement Research notes, you must put away three times as much if you wait until 45 to start investing for retirement vs. 25. It doesn’t matter if you’re starting with little; put the money in the market and watch it grow.
Step Four – Time
A relatively common question I receive is “how long do I need to invest in the stock market?” It’s a simple enough question with a straightforward answer – you should invest as long as you can.
Going back to step three, time in the stock market is the biggest component of investing.
The more time your money spends in the market, the longer it has to grow. The less time it’s in the market, the less time your money has to grow. You want the former, not the latter.
The underlying reason for this is that you want to have a long-term view when you invest. Yes, the stock market will go down. But it also goes up, and has done so quite a bit over the past decade.
Those who have a short-term mindset and sell due to fear often end up losing out. It seems counterintuitive, but those who think long-term and ride the waves commonly come out ahead of those who follow their emotions and have a short-term mindset.
Don’t ignore your investments, but you shouldn’t look at day-to-day changes – it’s the long-term you care about.
Step Five – Place
Finding somewhere to start investing is not as difficult as it might seem. You may need to do a little homework, but you can find somewhere or someone to manage your investing needs.
As I touched on in step one, a company-sponsored 401(k) plan is often the best place to start investing in the stock market.
This section is for those who either are able to invest beyond their 401(k) or don’t have access to one. The best place to do this is through an online broker. There are dozens, if not hundreds, of online brokers to pick from, each with their own unique differences.
The best online brokers combine value with excellent service and resources to help you start investing in the stock market. I’ve had experience with a majority of the online brokers in the industry, and I typically recommend most investors consider someone like Vanguard or Fidelity.
Unfortunately, in most cases you need $1,000 or $2,500 respectively to open accounts with those brokerages.
Thankfully, there are many other brokerages that offer great service and are suitable for those who don’t have a large sum of money to use but want to start investing. Two of my favorite are:
- Ally Invest – Ally Invest has no minimum balance requirement for both retirement and non-retirement accounts. Ally Invest also boasts the lowest commission price in the industry of $4.95 per stock trade.
- E*TRADE – You can open a retirement account with no minimum balance or a non-retirement account for as little as $500. E*TRADE charges $6.95 per stock trade.
There are other brokerages to consider, but these are broad enough that almost anyone would be well-suited by picking one. If you’d like to read in-depth reviews of any of the brokerages, check out our brokerage reviews section.
Step Six – Robo-Advisors
Investing in the stock market is overwhelming to many. They know they need to start but either don’t have the time or the confidence to invest.
If that describes you, and the idea of managing your investments through a broker stokes fear, it can be easy to avoid investing altogether. This is made worse if you don’t have the funds needed to hire a financial advisor.
If you’re in this situation, there is a solution that allows you to start investing and get the guidance and help you want or need.
That solution is using a robo-advisor. Robo-advisors provide professional guidance at an extremely low-cost – even if you’re investing with little money.
How do robo-advisors work?
You answer 10-12 questions that give them an idea of what kind investor you are. They do this to determine your:
- Tolerance for risk
The advisor then uses your answers to make a custom portfolio for you. They also regularly monitor your account, rebalance it, and make sure it’s on track to meet your goals.
As recent as a few years ago, these services were only available to those with a lot of money to invest in stocks. Now, there are a variety of robo-advisors available, even for new investors without a lot of money to invest.
This is a win as it simplifies investing so they can grow their money and have someone help them do it.
There are many robo-advisors to choose from, and these some of the best ones to consider:
- Betterment – Well-known and manages over $15 billion in assets, Betterment lets you open an account with no minimum balance.
- M1 Finance – M1 Finance can manage your investments, and they also let you direct them yourself. You can start investing with M1 Finance with just $100.
- Wealthsimple – Wealthsimple is the major competitor to Betterment, managing over $1 billion in assets. You can open an account with no minimum balance.
The above list is not exhaustive, though does provide a good place to start. If you’d like to research other robo-advisor options, check out our best automated retirement programs post.
Step Seven – Checking Your Investments
We all know the stock market fluctuates. It’s a given and is impossible to avoid. This begs the question of how often you need to check in on your investments.
You obviously want to stay on top of your investments, but there are two extremes that are equally dangerous.
The first extreme is over-checking. That may mean multiple times per day, once a day, or once a week. It doesn’t really matter; the point is you’re obsessing over your investments.
Over-checking can also manifest itself in activities like listening to the talking heads on TV for investment advice. The result of this is letting your emotions control you and making decisions you might not normally make.
I know it’s a challenge not to obsess over your investments when the stock market is going crazy, but I have a secret for you – regardless of how bad the market seems to be at any given moment, it’s going to be okay.
The other extreme is simply ignoring your investments for years. I spoke to countless investors who ignored their portfolio for a decade or more, only to be upset when they discovered that their portfolio, or certain stocks, had dwindled to nothing over that time.
Their ignorance turned into neglect, and some lost significant money as a result.
How often should you check your investments?
Knowing these two extremes, what is the middle ground? You need to decide what it is for you and stick with it.
Personally speaking, I download our Vanguard statements each month, take down the total amount of our portfolio, and only take a close look at our specific investments on a semi-annual basis.
My reason for this is two-fold. First, we invest in a small number of broad-based index funds. So, by knowing what the market is doing in general, I know how our portfolio should be performing.
Secondly, I rebalance our portfolio annually, so I want to get an idea of where we’re at halfway through the year.
The big takeaway is to balance your long-term view with how often you check in on your investments. You want to rebalance your portfolio on a regular basis.
As the stock market goes up and down, your investments will fluctuate and may result in you having too much or too little invested in a certain holding.
Rebalancing your portfolio helps ensure it is on track with your goals. There is no set time you should rebalance, though most experts recommend rebalancing either semi-annually or annually.
Step Eight – Stocks, Mutual Funds & ETFs
Deciding on what to invest in can be overwhelming. There are thousands of stocks, mutual funds, and ETFs to consider. For someone who is new to investing, this can keep them from starting.
That’s not what we want, so it’s important to know what kind of investments to consider.
There are many opinions out there but I agree with the approach suggested by Warren Buffett – broad-based index funds.
An index fund, in simplistic terms, invests in the entire index it tracks. So, for example, an index fund tracking the S&P 500 invests in all 500 stocks in that index.
Buffett believes in them so much that much of his estate directs investments to be held in index funds. And if Warren Buffett believes in it, you know it’s an approach worth considering.
There are two main reasons why index funds serve many investors well:
- They help you stay with the market
- They’re generally lower in fees
Staying with the market, meaning your investments do what the market does as a whole, may not be sexy. It’s boring, to be honest, but boring is good when it comes to investing because it means you’re doing what you should be doing.
Fees also play a significant part in your investing. The more you pay in fees, the less money you have working for you. You earned that money and the last thing you want to do is waste it. Personal Capital is a great tool to monitor fees.
Personal Capital is free to use and allows you to track your investments against benchmarks to make sure you’re not paying too much in fees and not overlooking other opportunities.
As you can see from the picture below, they also allow you to keep track of all of your investments and monitor your net worth – both of which are very helpful.
If the boring index fund approach doesn’t appeal to you, another solid approach is to invest in something you know. You’ll likely find that products and services you use on a regular basis trade on the stock market. In many cases, they may be a reputable stock worth considering.
If you choose to go the individual stock route, Motley Fool Stock Advisor is a great tool to use to choose individual stocks. The service provides bi-weekly reports showing what stocks look to be outperforming the market for the next few years.
Regardless of the approach you take, you must find what fits your needs. Otherwise, the investments you select will not align with your goals.
If you don’t know how to select the right stocks or index funds, robo-advisors do all this work for you, and most online brokerages have tools to help you determine which ones to select.
Step Nine – Talking Heads
Although I’ve touched on this throughout the guide, I wanted to give it its own section. And that is the importance of ignoring talking heads and others who try to turn investing into some form of gambling or chasing gains.
Those may be more exciting, but they should be avoided when you start investing in the stock market. Investing is a marathon, and it will take decades to build the kind of portfolio you need to meet your goals.
You need to keep that in mind as you start investing, so you have the mindset you need for the long haul.
It may be interesting to listen to the talking heads or pundits. It may be exciting and get you thinking. However, they have no knowledge of your goals, needs or timeline. They’re simply trying to get ratings.
There’s nothing necessarily wrong with that, per se, but it’s important to keep that in mind when building your investment portfolio. When you do, it becomes that much simpler to keep your eyes on your goals and let your investments do their thing – grow.
Investing as a beginner does not need to be difficult. There are plenty of free tools to help you confidently grow a portfolio designed to meet your needs. And there’s no time like the present to start investing and working towards reaching your goals.
When did you start investing in the stock market? What’s one thing you’ve seen hold people back from starting to invest? Are you a boring or sexy investor?
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.