Best Ways to Invest in Stocks

Take advantage of the best ways to invest with Interactive Brokers or Robinhood.

When most amateur investors think about the stock market, they imagine the fast pace and million-dollar trades that take place within hedge funds and on the floor of the New York Stock Exchange. However, the truth is that you don’t need to be a millionaire or an investing professional to increase your net worth by investing in stocks. Let’s take a deep dive into the best way to invest in stocks based on your needs and skill level. 

Benefits of Growing Your Investment Portfolio with Stocks

Investing in stocks comes with a number of benefits over other types of investment options (like precious metals, real estate or bonds). Some of the reasons why you might want to consider investing in stocks include the following.

Easy to Buy and Sell

Contrary to popular belief, it’s easy to get started buying and selling shares of stock. Most brokers now allow you to open a stock portfolio from the comfort of your home in just a few minutes. When you decide it’s time to sell, you can place an order through your brokerage platform, which will then execute it according to your specifications.

Higher Rates of Return

If you’re putting off investing to hold your funds in a bank account, you’re missing out on significantly higher return potential. In the past 10 years, the average annual rate of return of the S&P 500 (an index that tracks the 500 largest companies in the U.S.) was 9.2%. Compare this to the average rate of return you’d earn through interest in a savings account (0.04% per year) and it’s easy to see the missed opportunity when you don’t invest.

Many Tax Advantages are Available

If you invest through a special type of retirement account (like a 401(k) or a traditional IRA) you’re usually able to deduct any money you invest from your annual taxable income. Some employers even incentivize you to invest in these types of accounts by matching any contribution that you make into your account, essentially allowing you to double your contribution at no extra expense to you.

Potential for Dividend Income

Some types of stocks pay dividends, which are shares of a company’s profit paid out to investors. If you own a stock that pays a dividend, you’ll receive income simply for holding this stock in your account.

Depending on your goals, you can buy stocks as a vehicle to save for retirement, supplement your income or save toward a major life purchase. 

6 Best Ways to Invest in Stocks

Now that you understand some of the benefits that come with investing in the stock market, let’s take a look at a few of the many methods that you can use to start your investing journey. 

Consider What Kind of Investor You Are

When you open your first brokerage account, you’ll need to decide what type of investing strategy you want to use. As you apply for an account, you’ll answer a few questions about your experience investing and the type of securities that you’d like to invest in.

This makes it particularly important to think about your personal level of risk tolerance before you begin investing in the stock market. The risk tolerance you should take on will vary depending on your investing goals. For example, if you’re investing to save toward retirement, you’ll want to invest in more conservative, long-term funds. If you’re planning on supplementing your income through investing, you may want to take on more risk to improve your potential for returns. 

Set It and Forget It

If you’re investing toward a long-term goal like retirement, it’s usually a good idea to take a “set it and forget it” approach to investing. This means investing in index funds, mutual funds and exchange-traded funds (ETFs) that have traditionally performed well over the long term. It also means taking a more passive role in investing by holding onto your investments through market fluctuations.

Passive investing is ideal for beginner investors who are looking for a lower-risk way to get started in stock trading. Though you won’t see a massive windfall of cash using this investment strategy, it limits your risk by using a high level of diversification to spread your investments into varying classes — a strategy that has traditionally performed well over long periods of time. 

Use an Online Broker

If you’d like to take a more active role in your investing, you might want to tackle your own investments using a budget online broker. Online brokerage platforms (like Robinhood, E*TRADE and Charles Schwab) execute trades as directed by you on your behalf. Most of these brokerages allow you to buy and sell shares of stocks, ETFs and select funds.

Online brokerages can provide you with a simple and affordable way to buy and sell equities online. However, the specific stocks and equities that you’ll have access to will vary by platform. For example, most discount brokers don’t provide access to a diverse range of mutual funds. They may also charge fees, which you’ll need to take into consideration when you buy and sell.

You might also want to work with a full-service online broker. Full-service brokers provide an enhanced range of assistance when investing, including account management and financial advice. Working with a professional may help to improve your returns over time, especially if you have multiple complex financial goals that you’re working toward. However, these types of brokers usually limit their services to high-value clients by requiring minimum initial deposits of $25,000 or more. They also typically charge high annual fees. 

Why Not Robo-Advisors?

A relatively new investment option, robo-advisors provide you with a more affordable way to invest with professional guidance. When you open an account with a robo-advisor like Betterment, you’ll begin by answering a few questions about your income, age, investing goals and risk tolerance. Your robo-advisor will then select a custom asset allocation based on your unique needs.

When you make a deposit, your robo-advisor will automatically split your deposit among investments based on your allocation. Robo-advisors are more affordable than human financial advisors but provide you with limited control over the specific funds and stocks you invest in. 

Take Advantage of Employer-Based Investments

If your workplace offers retirement benefits, like the ability to open a 401(k) account, begin investing by taking advantage of salary deferrals. You can contribute as little as 1% of your salary to your employer-sponsored retirement account, which is deducted directly from your paycheck and invested in the employer’s chosen assets (usually a series of mutual funds).

Depending on the employer, you may also have access to employee match contributions that allow you to double your investment without taking any more of your paycheck. For example, if your employer offers a match program, and you contribute 2% of your salary to your retirement account, your employer will also contribute the equivalent of 2% of your salary to your account as well. While you won’t have much control over the assets invested in your account when you invest through your employer, match programs are worth taking advantage of because they’re essentially free money for you.  

Investigate Day Trading

If you’re looking to supplement your regular income through investing, you may want to consider day trading. Day traders buy and sell stocks frequently (sometimes multiple times a day) to make a profit on the differences between prices. Day traders use fundamental and technical analysis tools to determine the ideal times to buy and sell securities.

Although it is possible to earn money day trading, it is not recommended for beginner investors or those who are saving toward retirement. Day trading can be difficult, and there is no guarantee that the assets you purchase will increase in value. You must also be aware of the pattern day trader rule if you have less than $25,000 worth of assets in your account. 

Diversify Your Investments

Have you ever heard the phrase, “Don’t put all of your eggs in one basket?” This applies very heavily to the world of investing. As you start buying and selling stocks, be sure that you’re diversifying your investments by investing in multiple types of companies, sectors and asset classes. Diversification helps reduce your financial risk because if a select sector or company sees a massive downturn, you won’t lose all of your investment funds.

An easy way to diversify your investment is to invest in mutual funds or ETFs instead of individual stocks. When you invest in a fund, you’re investing in a “basket” of stocks within a particular category. For example, when you invest in an S&P 500 mutual fund, you’re investing in a small part of all of the companies that make up the S&P 500 index with the goal of mimicking its performance. 

Who Benefits from Investing in Stocks?

Everyone can benefit from investing in the stock market, no matter who they are. If you’re younger and you begin investing early, you’ll have more money saved for retirement when compared to your peers. Older men and women have the opportunity to take advantage of higher retirement account maximums as they approach age 65. Everyone can also benefit from dividends, which compound over time if they are reinvested as you gain them.    

Best Online Stock Brokers

If you’re taking a DIY approach to investing, your first step to invest is to choose where you want to open a brokerage account. Choosing the right broker can help ensure that you have access to the investment management and analysis tools that you need and that you can predict what you’ll pay in commissions and account fees.

Not sure where to begin your search for the right broker? Consider starting with the following reliable and beginner-friendly brokers. 

Getting Started with Stock Trading 

No matter if you’re going to take a buy-and-hold approach to investing or you plan to actively manage your account, the key to stress-free investing is to do your research before getting started. After opening a brokerage account, return to Benzinga for daily stock tips and news updates.  

Frequently Asked Questions