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The stock market can be daunting or intimidating if you're a novice investor. One of the primary reasons is its inherent volatility — the up-and-down swing of stock or equity prices resulting from changing demand and supply. However, investing in stocks remains one of the most straightforward and efficient approaches to building long-term wealth. While your choice of equity and specific investing strategy determines to a great extent your returns, you also need patience and discipline to excel.
Investing in the stocks of a company implies buying its shares or an ownership stake. A share is the smallest unit of stock. When you invest in a company, you're betting on the company's potential to grow and perform optimally in the future. If that happens, the stock will become more valuable than it was when you bought in, allowing you to sell at a profit. Your earnings can compound significantly, especially if, in addition to your capital, you invest small amounts periodically — weekly, biweekly or monthly.
But how do you start investing in stocks? Well, you can take various approaches. Most people make their first stock investments through an employer-sponsored retirement plan like a 401(k). However, even if you want to invest individually outside such accounts, you can leverage any of the zero-fee online brokerages. Either way, the logistics of investing in the stock market are now relatively easy and inexpensive.
Benzinga reviews the steps you can take to quickly get started with stock market investing, which stocks to buy and what to expect in the stock market long-term.
How Beginners Can Invest in Stocks
While there are no hard and fast rules to stock investing, strategic investing involves following well-laid-out steps to minimize risks. The following steps can make your stock investing hassle-free.
Determine Your Investment Goals
As a novice investor, before you start comparing your investment options, you must ask yourself, "why do I need to invest in stock?" Like all life endeavors, identifying your goals and objectives (the why's) helps you put things in perspective and boosts your success potential.
Are you looking to generate recurring passive income or invest long-term? Are you investing for retirement? A down payment for your first home? Or saving for tuition? If you're starting your career, your goal could involve increasing the money in your account.
If you're getting older, you may want to generate income while also growing and protecting your wealth. When you understand your ultimate goal, you can more appropriately narrow your investment options to those that suit your goals, simplifying the investing process. Knowing your goals and their timelines can help you determine your risk tolerance and which investing account to prioritize.
Determine Your Approach to Stock Market Investing
Once you clarify your goals, you must decide how to invest in the stock market. Do you want to be actively involved in managing your investments, or do you want to set it and forget it? Fortunately, with so many options available, you can flexibly decide which investment approach or style to pursue when investing in stock as a beginner.
It makes sense to self-manage your investment portfolio if you're knowledgeable and confident in your expertise. You can quickly get started by creating an account on any of the best online brokerages for beginners or traditional brokerages like Charles Schwab. Most of these platforms allow you to invest in individual stocks, exchange-traded funds (ETF), index funds and mutual funds. Additionally, they also offer low to zero fees and commissions.
However, despite having an excellent understanding of how to invest in stocks, you may prefer expert help, which makes sense since, as a beginner, you may need more than your limited knowledge to navigate the market. In that case, experienced brokers or financial advisors can assist you with investment decisions, portfolio monitoring and portfolio changes. An even better approach could be to leverage robo-advisors. This automated, hands-off approach is typically less expensive than working with experienced brokers or financial advisors.
A robo-advisor automatically invests for you based on your goals, risk tolerance and other investment details. Most brokerages provide robo-advisory services. A few offer the best robo-advisor for stock investing. Another excellent hands-off approach to investing in stocks is via an employer-sponsored 401(k). A 401(k) plan allows you to make small contributions regularly. It is a long-term approach that can smooth the investing learning curve for you as a beginner.
Typically your approach will change over time with varying goals, risk tolerance and prevailing market or economic situation. Nevertheless, you’ll want to choose a method that meets your present objectives to get started.
Select an Investment Account
Once you've got a clear goal and approach you wish to pursue, the next step is to shop for an investment vehicle or investment account. Suppose you're looking to manage and build your investment portfolio yourself. In that case, you need a taxable brokerage account. As a novice investor, a taxable brokerage account offers you various benefits. Besides stocks, ETFs and mutual funds, you can buy and sell alternative assets, including cryptocurrencies and precious metals like gold. Unlike retirement accounts, there's no cap or limit to how much you can invest and no rules regarding when to withdraw funds.
For tax-advantaged retirement investing, you can open an individual retirement account (IRA) at brokerages or enroll in an employer-sponsored 401(k) plan if your employer offers one. Like a regular taxable brokerage account, these accounts offer you diverse options to invest in stock (ETFs, mutual funds and individual stocks). However, they don't make for flexibility — they come with legally allowable contribution limits and withdrawal ages to avoid penalties. Nevertheless, both offer a great way to maximize your investment dollars and can instill the discipline of regular investing. Their inherent tax advantages also make them appealing to retirement investors.
Another excellent brokerage account option is a robo-advisor, which can be a cost-effective alternative if you have clear-cut and straightforward investment goals. However, suppose your investment goals are more complex, and you prefer a more customized investment alternative. In that case, a robo-advisor may not be ideal for you. Various financial firms offer brokerage accounts, whether taxable, robo-advisory or IRAs. Traditional brokerages like Fidelity, Vanguard and Charles Schwab may offer more account types but may be slower in incorporating new features or niche investment options like cryptocurrency.
Determine How Much You Want to Invest in Stock
Now that you've got a brokerage account, you need to deposit money and invest. An often challenging question among beginner investors is, "how much should I put into the stock market?" Different factors may determine how much you choose to invest in stocks. Such factors may include your investment account types, the equity price, risk tolerance, long- or short-term goals, and more.
If you're a retirement investor, then you're bound by the IRS contribution limit for retirement accounts which differs for IRAs and 401(k)s. Based on the legal limit and your annual salary, you can calculate your income percentage, which you can dedicate to building your stock portfolio. This percentage may be significantly higher if you hope to retire early or start saving late. Nevertheless, starting small is perfectly okay, especially if you live paycheck to paycheck.
The share price of individual stocks may range from a few dollars for penny stocks to hundreds of thousands of dollars, such as the Berkshire Hathaway Inc. Class A (NYSE: BRK-A) shares. Although most brokerages allow you to buy fractional shares, the best strategy may be to invest in low-cost mutual funds and ETFs that offer somewhat less risk, especially if your approach is long-term or you have a low risk tolerance. It's all about trade-offs. Individual stocks offer a high-risk and high return, while stock funds generally offer lower risk but low-to-moderate returns.
It also makes sense to decide whether you'll invest lump sums at once or small but equal amounts over time (dollar cost averaging). Both have their merits. While dollar cost averaging (DCA) allows you to benefit from higher and lower equity prices, it may deliver less robust returns than investing lump sums at once. Nevertheless, DCA can be a valuable means of ensuring you're investing consistently toward a goal, especially if your strategy is medium to long term.
Invest and Prioritize Long Term
Now that you know how much you want to put into stocks, you can deposit money into your brokerage account and then buy the stocks or stock funds of your choice. For clarity, investing happens when you buy the stock. If you deposit funds without using them to buy equities, you have yet to invest, and your fund will remain in the exchange.
While the stock market is a perfect powerhouse for wealth-building, it can be rocky. Volatility is an inherent part of the market. So while it might deliver robust returns some years, at other times, investors may suffer losses when the market swings downwards. Therefore, the market tends to benefit long-term or buy-and-hold investors, unlike short-term investors like day traders, swing traders and scalpers.
Long-term investors (including investors focused on dividends, value, growth and ESG) can withstand short-term turbulence while focusing on long-term returns. Most investors and financial advisors consider the buy-and-hold strategy as the best approach to wealth building in the stock market. However, it requires excellent self-discipline. Otherwise, you'll succumb to the temptation of repeatedly checking and changing portfolios like short-term traders.
Manage Your Portfolio
Why you needn't monitor your investment like short-term investors, it makes sense to review your investments at intervals to ensure they still fit into your overall goal and strategy. Additionally, it can be a good idea to shift some of your stock investments to more conservative, lower-risk, fixed-income offerings as you get older and approach retirement. You should apply diversification by spreading your investments into diverse industrial sectors to cushion risk should a specific industry crash. Geographical diversification should also be implemented via exposure to international stocks mutual funds.
Which Stocks Should Investors Buy?
Selecting stocks to add to your portfolio is a vital first step for a novice investor. However, with thousands of equities available on U.S. and global exchanges, making a choice can take time and effort. Here are a few equities or stocks to consider, although this list should not be construed as investment advice.
High-Valued Tech Stocks: Also referred to as growth stocks, high-valued tech stocks encompass some of the U.S.'s largest technology companies. These include Amazon.com Inc. (NASDAQ: AMZN), Alphabet Inc. (NASDAQ: GOOG), Apple Inc. (NASDAQ: AAPL), Meta Platforms Inc. (NASDAQ: META) and Microsoft Corp. (NASDAQ: MSFT) among the top five. Although these companies' stock got hammered in 2021 as the Fed repeatedly raised interest rates to curtail inflation, they're known to deliver top-ranking revenue numbers and return to investors and are poised to do so in the future.
They also represent some of the world's largest and most profitable companies with their products and services found essential in most aspects of life. These highly innovative companies have the financial muscle to innovate further. Therefore, they're considered to be some of the best stocks you can buy as a beginner if you want to maximize long-term profit.
Growth Stock of Entertainment Conglomerates: The Walt Disney Co. (NYSE: DIS) and Netflix Inc. (NASDAQ: NFLX) are top entertainment conglomerates you might want to consider when investing as a beginner. Beyond its Magic Kingdom, you'll also find Fox, Marvel, ESPN, National Geographic, and many more under Disney's umbrella. Disney's ability to engage with customers of diverse ages, locations and genders worldwide makes it very valuable. Netflix, the streaming giant, already has over 251 million subscribers globally. However, most of these subscribers are from the U.S., meaning it is poised to grow its global subscriber base (which may translate to more revenue), especially as highly populated countries like India modernize their internet infrastructure. As a beginner, adding these entertainment giants to your portfolio will enable you to enjoy some of the upsides as they grow further.
Stocks of Retail Giants: Costco Wholesale Corp. (NASDAQ: COST) is among the top five global retailers, up there with Walmart and Amazon. Whether stocking up on organic foods or paper towels, you can rely on your local Costco store. The company's share is also on a steady upward climb, a testament to its value and future growth potential. Costco has over 123 million cardholders, a number that has consistently increased as the share price rises. The company could increase its annual fee as it continues to push for international expansion in China, France and New Zealand. Its stock could be a potential gold mine as it continues expanding and becoming more profitable. The company has also bumped its dividend by $0.90 per share, which means more money for holding the shares.
Sports and Athletic Mega-Brands: You probably use one of those quality Nike Corp. (NYSE: NKE) shoes for your workout if you're a fitness lover. Nike is a top global supplier of sports equipment and athletic shoes. The company has consistently exceeded $30 billion in revenue since 2016. And as a reflection of its consistent performance, the share price keeps rising. It only makes sense that the stock price will keep growing as the global population surges and more people use the product. So it is an excellent stock to include in your portfolio. Adding a solid dividend-yielding stock like Nike will make for diversification.
Music Streaming and Podcasts Companies: Spotify Technology (NYSE: SPOT) boasts over 229 million premium subscribers globally and 517 million active users on its platform. The platform partnership with reality TV star Kim Kardashian and leading podcaster Joe Rogan in 2020 helped the company stand out from its competitors. While the buzz has faded, the company continues to make excellent decisions. For instance, its exclusive with Michelle Obama was also a bang. However, while the company has a knack for finding new audiences and innovative ways to make money, it's unclear what the future holds for podcasting. Nevertheless, Spotify can be a good bet if you think podcasting has come to stay.
How Beginners Can Diversify Their Portfolios
Diversification involves investing in diverse asset classes or different investments within an asset class. It is a great way to minimize portfolio risk while maximizing returns. To implement diversification, it’s a good idea to spread your money among stocks of diverse industries, including technology, healthcare and retail. Stock funds, including index funds, mutual funds and ETFs, offer low risk and moderate to high long-term returns, so highly prioritize funds in your portfolio.
Investing in international stocks can also be an excellent way to diversify your portfolio. Most vitally, don't focus only on stocks. Ensure to include low-to-moderate risk and low-to-moderate reward investments like money market, high-yield savings, CDs and bonds in your portfolio to enhance diversification further.
Compare Best Stock Brokerages for Beginners
Benzinga reviews, compares and provides insights into various stock brokerages for beginners.
Frequently Asked Questions
How much should I invest in stocks as a beginner?
There is no fixed amount to invest in stocks as a beginner. How much you need to invest will depend on your goals, risk appetite and investment account types, among other factors. It can be as low as $100 or high as millions of dollars.
Is $100 enough to start investing in stocks?
Yes, you can get started with $100 by leveraging index funds and ETFs, which are low-cost funds offering low to moderate rewards and risk.
Where should a beginner start investing?
It is never too early to start investing. It is important for beginners to learn how investing works, study the market and set investment goals before deciding where and how to invest.
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