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Paying off debt and saving money are two great ways to solidify your financial stability, but you can’t save your way to real wealth.
In this day and age, you need money that can grow in spite of inflation. Whether you want a sizable nest egg for retirement or just want to put your money to work, investing in stocks is a great way to build wealth.
Investing in stocks will make your money work for you. Instead of allowing your cash to sit in a bank account unused, you can invest in a handful of stocks today with a payoff down the road.
Of course, investing is complex. To me, it was a totally foreign idea and I was scared of it. Most of us know we should invest, but confusion and fear often get in the way.
As a former stock newbie, I get it! So here’s the ultimate guide on how to invest in stocks as a beginner in 2022, courtesy of a former investing newbie.
What Are Stocks?
Money makes the world go ‘round, so when a public company needs extra cash to grow, it often uses stocks to raise money.
Stocks are interests that investors (like you!) buy in a company. Every stock is sold in one unit called a “share” and the more shares you have, the more of a single company you hold an interest in.
When you buy a single share of stock, you have an interest in how that company performs. If the company does well, you make money. But if the company isn’t doing well, you can lose the money you put in, so this is why stocks can be risky.
How Do Stocks Make Me Money?
Investors like buying stocks because they can bring in passive income. There are two ways you can make money with stocks:
- You buy shares in a stock at a low price, wait a few years, and then sell the stock once it’s increased in price. For example, if you bought stock for $5 a share and it later sells at $70 a share, you can sell it off and pocket the difference.
- You earn quarterly dividends from your investments. These payments are the company’s way of rewarding you for allowing them to basically “borrow” your money.
Businesses use your money to launch new products, hire employees, and do any other capital-intensive tasks. As an investor, you hope that the money you put in today will become even more down the line when the company is larger and more profitable.
The Two Types Of Stocks
The two major types of stocks you’ll encounter are:
- Common: With common stock, you’re able to earn interest on your shares and vote in shareholder meetings. Fun fact: I hold common stock in Amazon, which means I get to wreak havoc at their annual shareholder meetings, which I do with great relish.
- Preferred: You don’t usually get voting rights with preferred stock. However, a lot of people like this type of stock because you get dividends paid out before everyone else. If the company goes bankrupt, it means you will potentially get your money back while everyone else gets nada.
I usually go for common stock because I enjoy voting rights, but this depends on your preferences. If you don’t care about voting rights and want more secure payout options, you can always go for preferred stocks instead.
Since the stock market is basically a giant auction house, plenty of factors play into how much you’ll pay to buy a share of stock. The price changes based on:
- Time of year
- Whether the company is in the news (good or bad)
- The health of the economy
Ideally, you want to buy stock when it’s cheap (usually during a recession or a company’s IPO) and then sell it later once it’s increased in value.
How To Invest In Stocks For Beginners 2022
Yes, there are other ways to invest your money, but stocks are a popular option for investors to grow their wealth. Here’s a simple six-step guide on how to invest in stocks for beginners in 2022.
Step 1: Define your financial goals
Like everything in personal finance, buying stocks is personal. Not everyone invests in the same way because their goals are different. Before you even think about buying stock, ask yourself:
- What kind of investor do you want to be?
- Why are you investing?
- How risk-tolerant are you?
- Do you want a set-it-and-forget-it deal or do you want to actively manage your investments?
For example, if you know you want to buy stocks as a way to save for retirement, that’s going to affect how you invest. For example, you might choose to be more conservative so you don’t risk your life’s savings. Let your risk tolerance and financial goals be your guiding star so you choose the right setup.
Step 2: Pick an investing approach
The cool thing about investing in stocks is that there are so many ways to do it. Everyone is different, but these are the most common ways you can start buying stocks.
- Pick your own stocks: This isn’t a beginner-friendly option, but you should know that you have the power to pick and manage your own stocks. Frankly, I’ve never had the time to do this, but if you’re really into investing and want to be hands-on with your wealth management, you can always DIY your investments.
- Use a broker: With a broker, you hire a human expert to manage which stocks you buy or sell. A full-service broker is great for people who have a ton of assets, but as a beginner, you would want to use a discount broker to guide you without the sky-high fees. No matter what kind of broker you use, they typically charge a lot of fees that can eat into your profits, which is why a lot of investors don’t like this option.
- Use a robo-advisor: A robo-advisor is basically an algorithm on an investing platform that guides you through buying and selling stocks. I love this option for beginners because you’re able to get a little help without paying a broker’s crazy fees. Robo-advisors will charge you a fee, but they’re still much cheaper than a broker.
- Sign up for your employer’s retirement plan: If retirement is your ultimate goal, try buying stocks through a 401(k) if it’s available to you. As long as you know that this money is for retiring and not for, say, a goal 10 years down the line, this will give you an easy way to start investing. Plus, if your employer offers a match on your contributions, it’s essentially free money that helps you buy more stocks! Your employer will take a percentage of your pay to contribute to investments, so this is a great way to invest in stocks on autopilot.
In my case, I opted for a combined approach to stocks. I maxed out my retirement contributions at work before signing up for a platform with a robo-advisor.
Step 3: Create an investing budget
Now that you know your investment goals and have a defined approach, figure out how much money you have to invest.
Remember, stocks are long-term money. Don’t invest any money if you think you’ll need it in the next five years. Yes, some people get rich with day-trading, but that isn’t a safe option when you’re just starting out.
So, how much money do you need to begin investing in stocks? It depends on what you want to buy!
- Individual stocks: If you want to buy a few shares of a specific stock, you’ll need at least enough money to buy a single share. So if stock in Crayola is $50 a share, you’ll need at least $50. However, as you’ll see in the next step, investment platforms have investing minimums. In this case, you might need as much as $1,000 to get started.
- ETFs or funds: If you go for a fund instead of specific stocks, you can usually get started for $100 or less. This is the preferable route for beginners, especially if you don’t have a lot of money. For example, I spent just $200 on my first contribution to a Vanguard ETF back in 2017.
Depending on how you want to invest and what you buy, you’ll need $100 – $1,000 to start investing in stocks.
Some people prefer to invest regularly every month, while others contribute only once every quarter or annually. I invest every month with automatic payments, but when I first got started, I could only invest once a year after receiving a bonus at work. As long as you meet your platform or broker’s minimum requirements, you’ll be good to go.
Step 4: Set up a brokerage account
A stock exchange is a place where you can buy different stocks. You’ll need a brokerage account to buy stocks on different exchanges. A brokerage account is a special account that holds your money and funnels it into different stocks (and no, you can’t use your regular bank account for this).
Which brokerage account should I choose?
The big question here is, “Which brokerage account is the best?” But the better question is, “What’s the best brokerage account for me?”
Some people go for traditional brokerage accounts with providers like:
Many of these platforms have a minimum investment amount and fees, though, so read the fine print carefully.
I’m a big fan of investing apps as an alternative. Some of my personal favorites include:
I recommend comparing a few traditional brokerage accounts against your favorite investing apps. Pay attention to how user-friendly they are, their features, and their costs to find the right account for you.
Once you find a brokerage account you like, fill out an application. When the provider approves your application, they’ll ask you to fund the account by either wiring money from your checking account or mailing a check.
Step 5: Pick stocks
Phew! At this point, it might feel like you’ve done a lot of hard work, but this is where the fun begins! Once you set up a brokerage account and fund it, it’s time to pick stocks.
Everybody chooses stocks differently, but they all claim that their way is the best. I can’t tell you which stocks are the best to pick in 2022, but I can tell you that these rules still hold true for beginners.
- Diversify where you put your money: Never put all of your money into one company. If I put all of my money into Amazon and it disappears tomorrow, I lose all of my money. Always split up your money among different companies, industries, and investments to hedge your bets. This way, if one performs poorly, you don’t lose all of your money. At a minimum, you should have at least 10 different stocks to safely diversify.
- Avoid high-risk stocks: It’s tempting to invest in new, unproven, and risky stocks, hoping for a huge payoff. I recommend staying away from risky stocks until you have more experience.
- Analyze individual stocks: Look at the company’s historical performance. If a stock is over-hyped (and over-priced) it might not be a good time to invest because it’s unlikely you’ll earn a profit when you sell.
- Choose Blue Chip companies: Blue Chip companies are known for being reputable, big-name industry leaders. In 2022, this includes brands like Microsoft and Coca-Cola. Warren Buffett is a huge fan of buying and holding Blue Chip stock over the long term because it’s lower-risk.
- Invest in ETFs: Exchange-traded funds are a type of mutual fund that lets you buy a collection of stocks all at once. There are multiple stocks in one ETF, which cherry-picks a bunch of stocks for you based on a goal. For example, I invest in an aggressive Vanguard ETF for growth, as well as a socially conscious ETF. Providers like Vanguard or iShare are great places to find beginner-friendly ETFs that make a lot of the tough decisions for you.
Step 6: Manage your portfolio over the long-term
When you invest in stocks, you’re looking at long-term wealth. On average, the stock market returns just under 10%, so with the right approach, you can make more money over the course of many years.
Once you’re happy with your stocks, regularly check up on them to stay on track. In practice, this means:
- Checking up on your investment health: Look at how your stocks are performing once a month or every quarter. Are any investments doing poorly historically? Are others generating higher returns? Have your goals changed? Has your financial situation changed? Do you need to be more conservative? More aggressive?
- Continuing to fund investments: The more stocks you purchase, the greater your chances are of generating bigger returns down the road. If you can afford it, keep funding your brokerage account and buying stocks. In my case, I invest automatically every month but I also put extra money into certain stocks when I get a bonus at work.
- Selling stock (as needed): Generally speaking, it’s a good idea to buy stock and hold it for several years, but that isn’t a rule across the board. Sometimes you might need to free up cash to buy a car, or you need to sell stocks so you can rebalance your portfolio. Remember that you’re allowed to sell stock as needed to meet your goals!
Regular maintenance is important, but please don’t obsess over your investments every day. If you panic and pull all of your money out when the markets perform badly, you’ll lose out on so many opportunities. Stay the course and remember your goals!
2022: A Promising Year To Learn How To Invest In Stocks
Investing is inherently risky and there’s never a guarantee that you’ll make your money back. Sometimes people let the fear of losing prevent them from investing altogether, but there’s never been a better time to start than right now.
Follow this six-step process to wisely invest in stocks. No matter your goals, risk tolerance, or budget, you have the know-how to invest in stocks successfully.
Need more help with investments or stocks? Check out Minority Mindset’s Rethinking The Stock Market resources to become the savvy investor you’ve always wanted to be.