Investing

How to Make Money Investing in Stocks for Beginners [2021]

How to Buy Stocks
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This is an in-depth beginner’s guide on how to invest in stocks and make money.

Here’s what we’ll cover:

  • The common misconception about stocks.
  • Questions to ask yourself before making your first investment.
  • A simple five-step strategy for purchasing your first stock.
  • Four common mistakes new investors make.

What Is a Stock?

A stock is a share in the ownership of a company. This simple idea often gets lost on new investors.

“Stock certificates are deeds of ownership in business enterprises and not betting slips.”

— Warren Buffett

As a stockholder in a company, you have a claim on part of the company’s assets and earnings. 

How much a single share of stock is worth at any given time is determined by supply and demand. In other words, there’s no formula to determine a stock’s price. 

This is why stock prices fluctuate wildly over the short-term — because prices are based on emotion and psychology, not logic.

Things to Consider Before Investing in Stocks

Most beginning investors want to rush into buying stocks based on their gut feelings about which companies will do well in the future. 

Think Apple, Amazon and Tesla will only get bigger? If so, then making money is as easy as buying shares of stock in those companies, right?

Not necessarily. 

Here are some things to consider.

#1. What Is Your Long-Term Investing Goal?

There are two primary reasons people become interested in stocks:

  1. To try and outperform the market.
  2. For long-term wealth accumulation/retirement savings.

The first group mainly consists of people looking to purchase shares of a specific company or two they feel will go up. Their approach is based on making short-term gains.

The second group consists of people who view stocks as a way to help them accumulate wealth and save for retirement. They’re not aiming to beat the market; instead, they’re looking to put money into funds composed of stocks that track the entire market (the S&P 500 being one example).

It’s important to know up-front what type of investor you are. While there’s nothing wrong with your particular motivation for wanting to start investing in stocks, it’s important to understand your goals and how they relate to your overall financial plan.

#2. Beating the Market Is Nearly Impossible

92% of investment professionals who actively select individual stocks fail to outperform the S&P 500 over 15 years.

Seeing that anyone can easily invest in the S&P 500 and outperform all but 8% of investment professionals, why try and pick individual stocks? The truth is, many of us shouldn’t. 

But then again, going to a casino doesn’t make financial sense either.

If you’re the type of person that can stick to a passive index-fund-based strategy (i.e., a fund that tracks the entire market), then by all means, you should. Yet, being realistic, the allure of the stock market for many beginners is the chance to invest in the next Apple, Amazon, Google or Tesla.

Investing legend Burton Malkiel, who helped popularize the index fund movement with his classic book A Random Walk Down Wall Street, has sound advice for those looking for instant riches. What surprises many people is that he also can’t stop himself from trying to beat the market by picking individual stocks.

Here’s how he does it:

“How do I square that with sensible investing? You take your serious retirement money and invest it in index funds. Then, if you’ve got a little extra money, go ahead, have fun. I do this myself. Do some homework, do your stock picking and then hold on. It’s like the horse races. From time to time, someone will get the daily double. But over the long haul, you’ll lose. Gambling may be fun — I enjoy the horse races — but I do it for entertainment, not because I think it’s investing.”

Kiplinger

Personally, I use the 10% rule of thumb. I enjoy trying to beat the market but I limit myself to gambling no more than 10% of my investable funds to do so.

#3. Leveraging Tax-Advantaged Accounts Is a Great Idea

Another important consideration is the tax-advantaged accounts you have available to invest in. Investing in a 401(k) or an IRA can help increase your tax return over time. If you have them available, or qualify for these accounts, they’re often the best place to start.

If you have a 401(k) match that you’re not taking advantage of, you’ll definitely want to start there. After all, that’s free money. Depending on your plan, it’s like getting an instant 50% return on your money. You won’t find that anywhere when investing on your own.

Related Reading: Roth Vs. Traditional

How to Invest In Stocks

While many investment apps allow you to start buying shares in minutes, it’s best to approach stock investing more strategically. Here’s how to wisely make that first investment:

Step #1: Pick Your Strategy

The first thing you’ll need to do is decide which type of investor you are. Specifically, are you looking to outperform the market by making your own investments or to use the stock market as a way to build long-term wealth?

If you’re looking to pick individual stocks, it’s important to do so with your overall financial picture in mind. With the track record of individual stock pickers, it’s wise to not bet your ability to retire or save for other important goals on whether you’re able to pick winners.

If you’re looking to capture the returns of the stock market as a whole with a passive approach, you’ll want to consider investing in index funds.

There are two ways to invest in index funds:

  1. Funds and ETFs. You can purchase index funds either through a mutual fund or through an exchange-traded fund (ETF).  The main difference between a mutual fund and an ETF is that you can trade ETF shares on the market, the same way you would trade shares of an individual company. With mutual funds, you have much more limited trading options.
  2. Robo-Advisors. A robo-advisor is similar to a mutual fund, but with the added advantage of being primarily managed by an algorithm. Most robo-advisors offer a customized basket of different ETFs, optimized based on your risk tolerance and goals. Robo-advisors are ideal for the hands-off investor who wants minimal decision-making.

Step #2: Decide How Much to Invest

If you’re looking to save for retirement, we recommend saving a minimum of 15%, and ideally 20%, of your gross income. Keep in mind that that’s the end goal; it’s not required to go from 0% to 20% in a month. It’s more important to start with what you can today.

Most successful investors dollar cost average into the market, during both good times and bad. This is when you’re buying on a regular basis, which means buying more when prices go lower and less when prices go higher. Research shows that people acting on their own tend to do the exact opposite — they buy less when prices are lower and more when prices are higher.

Much of this irrational behavior is due to a concept called loss aversion. What we’ve learned is that humans suffer more from losing money than they do from a comparable gain. In fact, it’s estimated that losses are twice as powerful as gains. As such, we tend to act irrationally — e.g., selling low — when faced with a potential loss. 

Step #3: Open Your Brokerage Account

Finally, you’re ready to open up a brokerage account and start investing.

Here are some of our top picks for beginner investors.

  • Betterment. A robo-advisor, Betterment is ideal for the hands-off investor who wants a customized portfolio based on their goals.
  • M1 Finance. M1 Finance is for the investor who wants to be a bit more hands-on. They have a great selection of portfolios to choose from, as well as the ability to invest in individual stocks. See our M1 Finance review to learn more.
  • Public. A good option for those wanting to purchase individual shares of stock. They also have one of the best bonuses, where you can earn up to $70 in free stock. See our Public review to learn more.
  • SoFi Invest. SoFi has a decent selection of portfolios to invest in, as well as the ability to invest in individual stocks without a fee. What’s unique about SoFi, however, is that anyone who uses SoFi Invest has access to a team of CFPs. So, if you’re looking to run your strategy by a professional, SoFi is a good choice.
  • Vanguard. Vanguard is ideal for the long-term index fund investor who  wants access to a variety of low-cost index funds.

Related reading: Betterment vs. Vanguard.

Step #4: Purchase Stocks, Funds or ETFs

Once you’ve set up your brokerage account, it’s here where you’ll make the actual purchase. If you’ve decided to go with individual stocks, you’ll purchase shares in the company or companies you’re looking to invest in.

While some brokerage accounts allow you to purchase via a credit card, this is something we don’t recommend. Not only do you often pay a fee to invest this way, but it also increases the amount of risk if you’re not able to pay your credit card in full. 

It’s best only to invest with cash you have saved.

Step #5: Set Up a Long-Term Strategy

For the longer-term investors, it’s here where you’ll want to put in a place a strategy to continuously invest. In Step #2, you determined the amount you were looking to invest — now is the time to put that strategy into place.

For the best results, you want to automate your investing. This can be done easily with a 401(k) contribution. If you’re investing on your own, most brokerages allow you to set up automatic transfers on certain days of the month.

Common Mistakes for New Investors

If you’re looking to succeed as an investor, here are the mistakes you want to avoid.

#1. They Wait to Get Started

Smart investors don’t wait until they can save a large percentage of their income to get started. Instead, they start with what they have today, with the goal of saving 15% to 20% of their gross income in the near future. 

#2. They Mistake Investing as a One-Time Event

Investing a one-off $300 and watching that stock double to $600 is fun to tell your friends about. But this one-off investment isn’t going to change your life.

What can change your life? Committing to investing each and every month, in good times and bad. And, as much as possible, automating your investments so you don’t have to think about it.

#3. They Try to Time the Market

Waiting until the perfect time to invest is a surefire way to sabotage your investing strategy. Most people who try and pick the perfect time to buy end up leaving their money sitting, waiting for that moment. 

By methodically investing on a schedule and dollar cost averaging into the market — buying more when prices go lower and less when prices go higher — you’ll build more wealth over time than the person sitting on the sidelines.

#4. They Pay Too Much Attention to Short-Term Results

If you invest right — putting your money into good companies and funds, based on a solid long-term strategy —  there’s no need to worry about the short-term swings of stock prices or the market. 

A common mistake new investors make is constantly checking on their stocks and portfolio. Instead of focusing on what’s in front of them and what they can control — most importantly, their overall savings rate — they’re checking how their investments are doing by the hour. This doesn’t improve results; it only leads to emotional decision-making based on short-term price movements.

Case in point: At one time in 2003, Amazon’s stock price lost over 90% of its value. The people who hung on, despite the negative short-term news, made a fortune.

Stock Investing FAQ

Can you invest in stocks when you’re under 18?

Minors must invest through a custodial account, where the money is controlled by someone else, like a parent or guardian. See our guide on how to start investing as a teenager to learn more.

Why invest in stocks instead of other assets like bonds, real estate or gold?

The stock market has had the highest overall return out of any investment class over the long-term. That’s not to say it will in the future, but owning a share in a business has outperformed any other asset class as a whole.

That said, investing in stocks isn’t always the right choice. Short-term stock market prices fluctuate significantly, so stocks are not a good short-term investment due to their risk.

How much money do you need to start investing in stocks?

You can start investing for as little as $1. Some brokerages even allow you to buy fractional shares in a company, so you don’t have to have enough money to purchase an entire share to get started (seeing that Amazon trades at over $3,000 per share, this is a nice feature). Read our guide on how to invest with little money to learn more.

What’s the best way to learn more about the stock market?

Read! There are many great stock market books for beginners. Reading one or two a year can help you understand more about how the market actually works. If you want to invest in individual stocks, these investment books come recommended by the world’s greatest investors. 

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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