Learn how to get started investing in the stock market as a beginner, even if you know nothing about the domain. We explain what you need to know, how to understand stocks, and offer step-by-step instructions for getting started as you learn about stock market investing.
If you plan on building wealth throughout your lifetime, you’ll need to do more with your money than just stick it in a savings account.
Instead, you want to invest your money in places that offer a higher return than your savings account.
Stock market investing lets you invest in a way that builds wealth over your lifetime — and you don’t need to spend years learning it to get started!
In this article, we show you how to get started with stock investing right away — even if you’re an absolute beginner in stock market investing.
Here’s what you’ll learn:
- Understand stocks (what are they?)
- How investors make money
- What is stock trading
- What is the stock market
- What are stockbrokers?
- Stock investing versus stock trading
- Passive investing
- Active investing
- Stock investment options & how index funds work
- How the stock market affects the economy
- 3 Steps to getting started with stock investing (including how to find a stockbroker)
Understanding Stocks for Beginners
Stocks are shares of a company that you can purchase to become part-owner of the company, allowing you to receive a portion of the profits it earns.
When a business does well, more people buy its stocks, causing the stock prices to increase. Likewise, when a company does poorly, fewer people invest in it and its share prices drop.
Eventually, some companies want to take their business to the next level, which costs a lot of money, so they sell some ownership or equity in their company — essentially handing over some ownership to the public — in an initial public offering (IPO).
How Investors Make Money from Stocks?
Successful stocks earn their owners (called “shareholders”) a profit through appreciation and dividends.
Appreciation happens when your stocks increase in value, allowing you to sell them at a profit.
Dividends are quarterly payments made to shareholders when a company is doing well. They can be paid in cash or by providing additional stocks to shareholders.
Successful investing is buying shares in companies that make you money over time.
What is Stock Trading?
Stock trading is the process of buying and selling shares of companies.
For every stock buyer, there is a seller.
For example, you buy stocks from someone who’s selling them or sell to someone who’s buying.
What Is the Stock Market?
The stock market is where people buy and sell shares, investing their money in companies they think will earn profits.
Most people do their stock trading online, but the stock market does have a handful of physical locations across the globe — the largest is the New York Stock Exchange (NYSE), located on Wall Street in New York.
Until September 11, 2001, the NYSE building was a tourist destination where people could go to watch stock traders, but it has been closed to the public since 2001.
What Are Stockbrokers?
You can’t buy stocks at the corner store.
Stocks are bought and sold through licensed professionals called “stockbrokers.” You must use a broker to buy and sell shares.
All financial market transactions must take place through a stockbroker.
Webull is an excellent platform for active investors, and M1 provides trading opportunities for passive investors with the option to purchase fractional shares.
Stock Investing Versus Stock Trading
The first step in understanding the stock market as a beginner is to learn about the basic differences between the two most basic stock market investing practices: stock trading and stock investing.
Passive Stock Investing
Stock investing is generally a more passive activity that takes a long-term approach to building wealth. Passive investors follow strategies that usually involve ignoring short-term losses in exchange for long-term earnings. They’re more focused on the long-term growth potential of a company. Is the company likely to sustain itself over several years? Will it become more profitable over a period of years or even decades? On a basic level, passive investors are betting on a company’s ability to succeed over a long period. So regardless of how the market performs they are likely to hold on to a stock for years. In fact, it’s the best way to grow wealth over the long term.
As a passive investor, it requires persistence and strength of mind to remain committed to your resolve to hold on to a stock, even in the most turbulent times. It’s important to have a carefully designed plan to buy and sell your holdings in order to gain maximum returns from long term stock market investments.
Find out everything you need to know about stock investing before you get started and learn how to open an account with a reputable stockbroker.
If you’re interested in passive stock investing, you’ll want to check out M1 Finance. M1 offers customizable, free investing with pie-based software that makes investing easy to understand.
Active Stock Investing
Stock trading is an active form of investing.
Trading means investors use short-term strategies (daily, monthly, or annually) to maximize their returns. In other words, traders look for stocks they can purchase at low prices so they can turn around and sell them at higher prices later.
Active investing is for people who want to immerse themselves in the market and trade stocks directly.
Stock traders study the technical attributes of a stock to predict which direction a stock will go over a short course of time. Will the stock go up or down? They aren’t interested in the long-term potential of a company as are investors. Stock traders are looking for ways to take advantage of the market ups and downs along with how a stock performs over a period of weeks, days, hours, or even minutes. In addition they also take advantage of mispricings in the stock market. Some events, whether political or others, can drive these mispricings, influencing a stock’s price. Traders closely monitor these happenings in the market to gain maximum leverage from the fluctuations.
If you’re interested in becoming an active stock trader, consider opening an account at Webull.
Webull offers commission-free trading and a blog with helpful resources for people who want to learn the ins and outs of stock trading.
Stock Investment Options
There are several types of stock investment products you can purchase, including:
- Stocks: shares that you purchase in specific companies
- Bonds: a loan you grant to a company or the government that’s paid back to you with interest
- Mutual Funds: a large collection of investments paid for with money pooled from multiple investors, managed by a professional.
- Index Funds: passive investments whose rise and fall follows an index (like the S&P 500)
- Exchange-Traded Funds (ETFs): a type of fund that has a stock ticker symbol and can be traded electronically (on the stock market). Most popular index funds are ETFs.
- Options: a high-risk investment that involves a contract agreeing to buy and sell stock by a specific date
Index funds are one of the easiest, most inexpensive ways to begin investing because a new investor won’t have to spend hours researching and analyzing individual companies.
Instead, index funds provide a low-risk method of building wealth over time by diversifying your investment across a large collection of stocks.
How Index Funds Work?
If someone doesn’t want to put in the work to find the best stocks/companies to invest in, they can look into investing in index funds.
An index fund is a group of stocks that you put your money into that will mimic the returns of general markets.
Index funds come with lower fees because they don’t require the services of a professional manager, so they’re less expensive to own.
Index funds are a lower-risk form of investing. However, their earning potential is also lower since their wins and losses are averaged together.
The most popular index fund is called the S&P 500. If you invest in the S&P 500 (through the common ETFs VOO or SPY), your money will experience profits or losses according to what the biggest 500 companies in America do.
On the contrary, if you put all your investments into one company and that company fails, or if their shares drop, you lose all your $$$.
Even though index funds carry lower risk, that doesn’t mean you can’t lose money.
For example, in 2008, the entire market dropped more than 50%.
The market, by nature, goes up and down, which means you’ll experience both gains and losses over time — which is why it’s essential to have an investing strategy.
When markets bounce up and down, people tend to buy and sell based on what they think will happen next. That makes market highs and lows an emotional experience for many people.
How the Stock Market Gets Emotional And What You Can Do About It?
The stock market is a place where investors go to bet their money on what they think will happen in the economy.
You might assume that bad news about the economy would push stock prices lower. Sometimes, though, the opposite is true. As a beginner in stock market investing, it’s one of the most important things to learn.
Looming recessions can sometimes cause investors to purchase more stocks, thinking they’ll buy low now and sell high later.
This emotional buying and selling is part of why the stock market is unpredictable.
So before a beginner can start trading stocks, it’d be prudent to first learn a bit about how the stock market operates. And when you invest in the stock market, it’s essential that you don’t allow your emotions to distract you from making good financial decisions. This doesn’t mean you can’t take advantage of market activity, but that when you do, you should do it with a plan.
Please note: The following examples are for educational purposes only, and are not a recommendation of what you should buy.
For example, drip buying is one strategy that can help investors make rational buying decisions, even when the stock market becomes highly emotional.
What is drip buying? Drip buying means you stagger your purchases. DRIP stands for Dividend Reinvestment Plan. As the name suggests, the cash dividends that an investor earns after investing in the stocks of a company are reinvested to buy more shares. It’s how an investor can increase their investment in a given company by buying shares directly from the company itself, without actually putting in any more outside money. The shares are bought from the company’s own reserve as opposed to from the stock exchange. So a DRIP eliminates the need for investors to pay any brokerage fees. So in essence a DRIP allows investors the opportunity to purchase additional shares at a lower cost. In addition with the help of the dollar-cost averaging technique, the price of the stock is averaged out.
Here’s an example of how it works:
If you keep a list of the companies you’d like to invest in, and the economy takes a nosedive, you might ask yourself “Which of these companies are still going to be a good investment 10 years from now?”
You might consider purchasing some shares from those companies when the market drops and their share prices go down.
Then, if stock prices drop even lower, you might purchase a few more shares of those companies.
Staggering your purchases like this, with drip buying, helps you avoid “going all in” and losing all of your money when emotions enter into the picture.
Investing in index funds, such as VOO or SPY, is another way to avoid making emotionally-influenced financial decisions.
Index funds help take the emotion out of stock investing because you’re buying into a group of stocks with the intention of hanging onto them through all the market’s ups and downs.
Emotion can play a significant role in people’s stock investing decisions. On occasion, this can pay off with high profits. Most of the time, though, it results in people losing a lot of money.
One crucial tip for stock market investing for beginners is this: Don’t treat the stock market like a Las Vegas casino.
Instead, develop a plan for how you’ll handle your investments when emotions come into play, tempting you to go for a “big win” or pull out entirely due to fear.
If you’re a beginner in stock market investing, consider investing in index funds to lower your risk. You can open an account today at M1 Finance, and start investing with a commission-free account that doesn’t have a minimum deposit requirement.
How to Get Started Investing in Stocks?
Investing in the stock market as a beginner is easier than you might think. Before you begin investing, you should:
- Have a $2000 emergency savings fund set aside
- Pay off your high-interest debt and consider refinancing your student loans
- Understand how to allocate your earnings properly
Once you’ve completed these three steps, you’re ready to begin investing in the stock market.
Step #1: Decide Whether You Want To Invest Actively Or Passively
The very first step a beginner can take when investing in stocksis to decide between the passive and active investment mode. Passive investors usually allow their investments to build wealth over time, and purchasing index funds is an easy way for passive investors to get started.
Passive investing requires very little time and allows you money to grow while you’re doing other things.
Active investors buy and sell stocks based on when they think shares will rise and fall. Active investing requires a lot of learning and often takes years to master the concepts. However, no amount of mastery or understanding guarantees wealth or promises that you won’t lose money.
Who you choose to act as your stockbroker is influenced by whether you decide to become an active or passive investor.
Step #2: Find a Stockbroker
For getting started in stocks, you need a stockbroker (financial company) to be able to buy and sell stocks.
We recommend M1 Financing for passive investing and Webull for active investing.
M1 Financing provides pie-based software that makes it super-easy to invest in the stock market for beginners.
At M1 Financing, you choose the companies or funds you want to invest in. And, if you want to invest in one of your favorite companies whose stock prices are too high, you can purchase fractional shares instead of full shares.
Or, you can choose from professionally-designed pies to meet specific goals and risk factors or even invest in a particular industry.
Best of all, you pay no commission fees when you sign up with M1 Finance. So, it’s easy and affordable for investing in the stock market for beginners.
Webull for active investors: Webull is an excellent option for people who want to invest in stocks actively.
Webull offers several advantages:
- ZERO commissions
- No minimum deposit
- Extended trading hours
- Free access to Webull Desktop
- Webull Desktop allows you to consolidate watchlists, analyze charts, place orders, and check your positions across all of Webull’s platforms (mobile, PC, and web).
Once you sign up for an account, you’re ready to get started investing!
Step #3: Invest Regularly
Once you’ve started investing in the stock market as a beginner, you’ll want to continue investing on a steady basis for many years.
The more money you invest, and the longer you keep your money invested, the more money you’ll earn.
Consider automating your investments, so you contribute a specific portion of your income every month.
Building Wealth through Long-Term Stock Investing
By allocating a portion of your earnings to stock investing, you can build wealth over time — even if you don’t have much time to put into it.
To commence your journey in the stock market as a beginner, start by opening an investing account with a reputable financial company. Then, build your portfolio and consider automating your contributions.