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, etc. etc. and we’re 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.
I was there once. I had no idea what to do and was ignorant about how the stock market works. I didn’t invest for a number of years because I thought it was impossible. I know I’m not alone. I talk with friends, family members and readers on a regular basis, and the most common topic we discuss is how to start investing in stocks.
If you feel overwhelmed by how to start investing in the stock market, this guide is for you. It’s the result of thousands of conversations with investors, friends and family members. 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 goals. Many people want to retire and so beginning to save for retirement becomes an important issue. Others want to help their children pay for college and so saving for that education is an important goal.
It’s certainly possible that neither of these goals are relevant for you, and that’s fine. But you do have goals. A large part of being successful in the stock market is clarifying your long-term goals. Without knowing your goals, you’re likely to be aimless with your investing and not hit your target. That’s not something you want.
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 will help you grow your money in ways that most of those 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, etc. and thus hold back their ability to increase their net worth. That’s right folks; more Americans own cats than stocks.
There are a variety of reasons for that statistic, and some of them genuinely may not be able to invest in the stock market but, in many cases, I think it’s possible to change that statistic for the better. You simply need to know where and how to start.
How to Start Investing in the Stock Market: Step One – 401(k)s
I’m going to jump in the middle of how to start investing and then take a step back in order to explain the best place to start investing. The best option is often right in front of you – through your employer-sponsored 401(k) plan.
The American Benefits Council reports that 80 percent of employers offer access to some sort of retirement plan. In many cases that plan will be a 401(k). A 401(k) works relatively simply. Your employer takes money from your paycheck, on a pre-tax basis, 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 usually 50 percent of up to six percent of your annual salary. So, it would work like this, assuming a salary of $50,000 spread across 24 paychecks per year:
- You contribute six percent, so $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 to that money 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 will list 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 how to start. Take advantage of them if you’re new to investing!
How to Start Investing in the Stock Market: Step Two – Education
Going back to the beginning, educating yourself is the first step to investing. There is one simple 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 decisions that will benefit your portfolio and 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.
- You don’t need to be an expert in finances.
- You don’t need to watch CNBC all the time.
- You do need to find something that will explain investing to you in an understandable way.
Thankfully there are many resources that do just that.
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. Beyond that, there are many other resources.
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, both video and at times in person to help you learn about different facets of investing.
Finally, your 401(k) provider may provide free resources to help you start investing in the stock market.
Don’t let the amount of information overwhelm you. Again, many think they need to be experts to start investing. 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.
How to Start Investing in the Stock Market: Step Three – Money
A common excuse I’ve heard by many who had not started investing was they did 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 times, it simply came 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 investing.
More is better, of course, but that doesn’t mean you can’t start investing in small amounts. Heck, 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 start you off with $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.
There are two main problems in allowing the amount you start with to hold you back. The first and biggest problem is that you’re losing out on time when you delay investing. You might think you can’t start investing with $1,000 or less, but that would be 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 low funds, you only harm yourself in the long run.
By starting now, you’re able to start growing your money quicker which means you can grow it to a more sizable amount in the long run. Don’t be guilty of holding back, as you’ll only hurt yourself in the long run.
The second problem is that investing is a discipline and the longer you wait, the more you delay your personal development in this important area of life. Honestly, this really ties back to the first problem. It takes time to develop an investing philosophy and discipline.
By starting earlier, you develop that discipline sooner and thus help you reach maturity as an investor sooner. This discipline will serve you in later years as you intensify your focus on reaching your goals.
In short, as the Center for Retirement Research notes, you must put away three times as much if you wait until 45 vs. starting to invest at 25 for retirement. It doesn’t matter if you’re starting with little; put the money in the market and watch it grow.
How to Start Investing in the Stock Market: 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 the previous section, time in the stock market is the biggest component of investing.
The more time you spend in the market, the longer your money has to grow. The less time you’re in the market, the less time your money has to grow. You want the former, not the latter.
The underlying reason to this is you want to have a long-term view when you invest. Yes, the stock market will go down. Most anyone can tell you we’ve experienced a lot of that over the past decade. However, the stock market 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 on the losing end of the equation. It seems counterintuitive, but those who think long-term and ride the waves will commonly be ahead of those who follow their emotions and have a short-term mindset.
This isn’t to say that you should flat out ignore your investments, but you shouldn’t look at day-to-day changes – it’s the long-term you care about.
How to Start Investing in the Stock Market: 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 either had accounts or have dealt with a majority of the online brokers in the industry, and I’d typically recommend most investors to consider someone like Vanguard or Fidelity. Unfortunately, you need, in most cases, $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 many that want to start investing. Those brokerages are:
- Ally Invest – Ally Invest has no minimum balance requirement for either retirement or 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 the above three 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 my brokerage reviews section.
How to Start Investing in the Stock Market: Step Six – Robo-Advisors
For many investing in the stock market is overwhelming. They know they need to start but either don’t have the time or confidence to invest.
If that describes you and the idea of managing your own investments through an online 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 for you 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 (which is incredibly important when it comes to investing); even if you’re investing with little money.
This is how a robo-advisor works: you answer 10-12 questions that give them an idea of what kind investor you are. They ask for your goals, timeline and appetite for risk and make a custom portfolio for you. From there they 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. This is a win for many new investors 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; here are the best ones to consider:
- Betterment – Well-known and manages over $9 billion in assets, Betterment lets you open an account with no minimum balance.
- 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 sampling. If you’d like to research other robo-advisor options, check out my best automated retirement programs post.
How to Start Investing in the Stock Market: Step Seven – Checking Your Investments
We all know the stock market fluctuates. It’s a given and not something that can be avoided. 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 is being led by your emotions 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 much the market seems to be bad at whatever the given moment is, 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 to discover 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.
Knowing these two extremes, what is the middle ground? You need to decide what it is for you. Maybe it’s checking in on your investments monthly, quarterly or some other interval.
Personally speaking, I download our Vanguard statements each month, take down the total amount of our portfolio and really only think of looking into 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. Secondly, 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 your portfolio is on track with your goals. There is no set time you should rebalance, though most experts recommend rebalancing either semi-annually or annually.
How to Start Investing in the Stock Market: 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 even starting. That’s obviously 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; so 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 as a whole does, may not be sexy. It’s quite boring, to be honest, but boring is good when it comes to investing as it means you’re doing what you should be doing.
Beyond that, fees 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 their 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.
Regardless of the approach you take, you need to find what fits your needs, not someone else’s. 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 to invest in, robo-advisors do all this work for you and most online brokerages have tools that help you determine which ones to select.
How to Start Investing in the Stock Market: Step Nine – Talking Heads
If you’ve made it this far give yourself a pat on the back. 🙂 I’ve touched on this final point throughout the guide, but I want to give it a devoted section. That point is the importance of ignoring the noise of talking heads and others who try to turn investing into some form of gambling or chasing gains.
Either of 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 needed to last for the long haul.
It may be interesting to listen to the talking heads or what the pundits have to say. 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 you do, it becomes that much simpler to keep your eyes on your goals and let your investments do their thing – grow.
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.
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