A Guide to Investing in Stocks

If you want to join the 58% of Americans who invested in the stock market in 2022, it’s good to know that these days, it’s easier than ever to get started.¹ It may be a good time to invest in stocks with simple beginner’s strategies. 
 

What makes investing in stocks easy for beginners? Mainly, it’s that more and more institutions provide brokerage accounts – which let you buy and sell individual stocks, stock funds, and various other types of investments – along with multiple levels of services to guide you. But sometimes, all the choices can be overwhelming for a beginning investor. I’m going to take you through the practical steps to get started investing in stocks.

While you may be eager to jump in like a character from the 1987 movie “Wall Street” – one of my husband’s favorites – a good first step when investing in stocks is to take a step back. I mean, make a personal inventory of your goals, your tolerance for risk, and your investment budget. Sounds tedious, but these important personal characteristics can shape every subsequent decision an investor makes. 

• Identify your investment goal. Are you investing to fund a purchase, for future education, for retirement, or something else? Your goal affects your timeline and the type of account to set up. Many experts suggest a minimum investment horizon of five years in order to ride out most market dips.
• Assess your risk tolerance. Will you lose sleep over short-term dips in the market? Investing involves the risk of losing money, at least in the short term. How much money are you willing and able to invest without creating household hardships? Do a serious gut check of your risk tolerance because it influences the type of stocks you’ll pick and may even lead you to investing outside of the stock market.
• Set a realistic budget. You can begin investing in stocks with a small budget and make regular, recurring additions. In fact, “dollar-cost averaging” is a fancy term that suggests investing in small amounts, consistently over time, is a more prudent approach to buying stocks than making one large, lump-sum purchase. The reason is that regular, periodic purchases – say, every week or month – temper your exposure to short-term highs and lows.

Many experts recommend a “set-it-and-forget-it” approach for beginners. Using the budget you established earlier, you can set up automatic transfers from your paycheck into your brokerage account. Regular, consistent investing habits help you stay on track to achieve your goals, support dollar-cost averaging, and reduce the emotion and stress of constant decision-making.  

Before we discuss the mechanics of buying stocks, let’s review a few basic things for beginning investors:

• Stocks (or equities) represent a share of ownership in a company and its income.
• There are two ways to make money from investing in stocks: dividend payments and selling stock at a higher price than you purchased it. 
• Pros say you should never invest in something you don’t understand, no matter how much of a novice you are now or how seasoned you become.
• Reduce emotion. The investor’s saying, “Invest with your head, not over it” urges people to make rational, not emotional investment choices. 

When you begin to pick stocks, consider your level of risk tolerance. In general, stocks of large, well-established companies (aka “blue-chip”) carry less risk than those of smaller or high-growth companies. Blue-chip stocks tend to be from companies that are household names and are often cited as good starter stock picks for beginning investors. Blue-chip stocks tend to provide balance and stability with moderate growth and often pay dividend income. The definition of a blue-chip stock varies, but most often they are those companies included in the Dow Jones Industrial Average.  

In general, experts suggest deferring investments in small company stocks, high-growth stocks, or penny stocks until you’ve become a more seasoned investor because they have higher volatility. Be mindful of diversification as you select your investments. It’s a long-honored strategy that lowers risk by spreading your investments among different industries.